November 3, 2022
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Cannabiz Media Director of Regulatory Research, Jason Kikel, joins Ed Keating on the Cannacurio podcast to talk about consumption licenses in the cannabis industry today and what we can expect to see in the future.
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Ed Keating:
Welcome to the Cannacurio Podcast, powered by Cannabiz Media. I'm your host, Ed Keating, and on today's show, I'm joined by my colleague, Jason Kikel, our director of regulatory research. Jason, welcome back.
Jason Kikel:
Thanks, Ed.
Ed Keating:
So today we are going to talk about a topic that Jason and I have studied a lot. It's consumption lounges, specifically, what are they, who gets them, where they can be found, and much more.
Just as a point of reference, before we started today, I went and looked at our Database to see, yeah, how many are there compared to other licenses? So we have approximately 17,000 cultivation facilities in the database and 17 lounges.
So, obviously, there's a long way to go as these start to come onto the market, but that's what we're going to talk about today. So, Jason, you've really dug deep into this topic since they've been issuing these. So, let's start at the beginning. What are consumption licenses?
Jason Kikel:
Consumption licenses are not one of the more widely available licenses as you hinted at. I think we're really ahead of the curve. We're in the early days of seeing consumption lounge licenses start to pop up.
But in general, there are two types of consumption licenses, and they come from two different places. To answer the question of what are consumption licenses – these are licenses for facilities where cannabis can be consumed publicly. This is frequently an afterthought when now with measures to legalize are written up. Supporters frequently didn't want to talk about this, didn't want to create the Amsterdamization of the market, turning dispensaries – where you leave with product – into places where you linger and consume.
At the same time, there are other spaces where cannabis is not sold. You're bringing your own, similar to a BYOB, bring your own beer or alcohol establishment. And those are now getting licensed for consumers to bring their own cannabis in with them. They're not able to sell on their own, They don't participate in track and trace or some of the other state regulations, but they are licensed facilities for consumption.
Ed Keating:
Got it. Got it. So in terms of the selling and whatnot, some of the things that we've talked about, and I think this is a place to dig into it, is some of those interesting restrictions they have, such as not to be sold where alcohol is consumed and whatnot. Does that factor in at all?
Jason Kikel:
Some of the states have gone back and clarified; some of these conversations have happened. Cannabis consumption lounges cannot have an alcohol permit. That's a pretty common one in some of these emerging states. Also, maybe no gambling, perhaps a prohibition on having lottery available.
Some other overlap of regulated activities from different state agencies. They're keeping them separate, but there have been an emergence of hotels considering consumption lounges more in the category of bringing around as opposed to having a dispensary on site.
Ed Keating:
Got it. Now, as we have studied licenses over all these years, there are a lot of factors that come in as essentially complications: zoning, land use, vertical integration, MSOs coming in too, sort of a market factor. What do you see as some of the challenges? And maybe that's just a starter list.
Jason Kikel:
Sure. Yeah, that's a great list of considerations. Early on when some of the states started considering what to do with consumption, and how to get from, this is an idea to this is being executed, land use, building safety, health, those were kind of at the heart of it. Some of the cities and states had to amend their indoor air acts and air quality restrictions.
Ed Keating:
Yeah.
Jason Kikel:
After a long window of states moving to completely prohibit indoor smoking, they have to go back and say, “Okay, we're going to prohibit indoor smoking except for cannabis if it's under a license.” And then some of the cities, notably Anchorage, they were one of the ones at the beginning, and I think Denver's gone through this. They've worked on their HVAC requirements, and updated with more stringent restrictions. Keeping in mind that there are employees that work in these particularly onsite dispensaries with a consumption lounge, they're trying to keep employee health and safety in mind as well.
Ed Keating:
Yeah, interesting. It makes sense though. One of the other discussions we have whenever we cover anything definitional in the cannabis space is an analogy of how this is something else. So when we were putting together the concepts for this, there's this notion of a tasting room, like MIT for wine or for cannabis delivery. People talk about is it a pizza truck model, or an ice cream truck model? Is it like a microbrewery, where somebody can grow it, and then you can consume it? Which ones make sense for these tasting rooms, Jason, if any?
Jason Kikel:
Yeah, I think that some of the states have had different approaches to how they treat that. The tasting room approach, that was language that was really adopted by Colorado's legislators and Governor polls. They were really talking about, we want to allow tasting rooms.
That was kind of an add-on where manufacturers and growers, maybe in the past, they did not have a dispensary. They weren't completely integrated. There were some that were involved just distribution, working with other stores and other businesses around the state.
At least a few of those hospitality and retail licenses early on were awarded to companies that had manufacturing. And they were able to welcome customers into their facility after making some minor building adjustments and improvements. They weren't just going right onto the floor of the extraction lab or anything, and they were able to now, directly sell.
This could be a trend down the road, or a lot of companies may not choose to engage in it. There are already many dispensaries in some of these markets, so this might not be a widespread trend.
Ed Keating:
That's a great point. So now that we've talked a little bit about what are they – what are some of the attributes? Let's dig into who typically applies for them. And we just touched on that, so this is a good segue, but one of the topics we wondered about, is it a mom and pop thing, or is it a big cannabis thing? Because as I think you and I discussed this in the past, you can make a view as to whether it's an asset or a liability in terms of how it may help your business.
Jason Kikel:
Absolutely. That's a great question. To date, after our analysis of who has these licenses, these tend to skew more toward mom and pop, smaller businesses, not your MSOs, not your larger operators. There are a handful, Planet 13 in Las Vegas. They have their flagship location, they also have other locations, and they're now a publicly traded multi-state operator. They're probably the one that's generated the most noise as far as the MSOs, “Hey, we intend to have these consumption lounges.”
I think some of their other markets, Illinois is adult use. It's opening up. That's one where the state is not touching consumption, leaving that one to local governments. Chicago is probably going to be all in on consumption lounges in the next two to three years.
Ed Keating:
I was there last week, and it seemed like there were consumption lounges everywhere I walked, but maybe that was just outdoor. So.
Jason Kikel:
You never know. But it's interesting about Planet 13. They also acquired Harvest's license after their merger with Trulieve in Florida. And while Florida is a very successful medical market, the political will in the legislature is not there for them to act on moving to adult use. And the voters will likely approve it in 2024. But that's two years out. And I think that Florida may not be ready for onsite consumption, but I think onsite consumption is ready for Florida.
Ed Keating:
Well said.
Jason Kikel:
We’re never too far off from spring break, Ed.
Ed Keating:
Yeah, that's right. That's right. Well, and the interesting thing about Planet 13, I think, is just as you said, where they’re located. Las Vegas, gigantic tourist market. Florida, gigantic tourist market. I mean, I don't think we're going to see them setting up a shop inside Disney World or Epcot Center, but as you were saying before, looking ahead, who knows how it's going to play out.
But continue on the location discussion. As I mentioned earlier, 17 facilities out there in the Database now, which states have them, and are they running into any NIMBY issues as well as they start to figure this stuff out?
Jason Kikel:
Yeah, I think as far as the states that have them and how we're approaching tracking them, there are two ways that these licenses are regulated and broken down. The first way is, who is the regulator?
So as I mentioned, Illinois is one of those states where the legislature kind of punted the local governments, your municipality, either your town, your city, your county. You're engaging with them, you have either a new retail license, or a legacy license from the regulator, and you're now able to work with the city and say, “Hey, we want to add a thousand square feet of consumption space.”
California is in a very similar position. It's very hard to identify where these consumption lounges are, because the Department of Cannabis Control excluded themselves from regulating this.
Ed Keating:
I want to poke in on that for a second, because the thought that occurred to me is when the state punts, it suddenly gets really hard, I would think, for an operator to really expand quickly, because as we know from our work in California years ago, there's 538 license issuing jurisdictions. Many of them will not issue licenses. So you're not going to cover the state, you're not going to be able to Starbucks this across.
So do you think that's why the state does it, or it's just a headache they don't want to deal with, and they'll kick the can down to the locals to figure it out, and so that each town gets to decide what the type of town they want to become or remain?
Jason Kikel:
Yeah, I think those are two valid reasons that are likely occurring at the same time. If you're at the headquarters of an MSO, and you're in New York or Boston, the last thing on your mind is poking into zoning meeting minutes from Palm Springs, Sacramento. And so some of these towns have emerged as leaders within California or down the road, the same thing will likely happen in Illinois where they're working at the local level to permit consumption lounges.
There are also consumption lounges occurring in popping up, they're not onsite. They're just consumption only BYOC premises. There are a handful of those scattered around. That's a liability. You're not going to be thinking about that if you're an MSO.
But at the same time, some of these mom and pop owned dispensaries obviously have some kind of leverage, because there has been a lot of M&A activity. MSOs are getting into California, and they're acquiring existing stores instead of new ones. And some of these stores with lounges, they're not getting bought up.
So there might be some kind of discussion. There might be a pro/con, asset versus liability discussion when they're looking at these stores, and these licenses to buy up to make them part of their brand, and they might just be ignoring them for now.
Ed Keating:
Yeah. And it might just be a long game kind of thing as people try and figure this out, as cannabis just becomes more normalized. I mean, we had President Biden's announcement last week, and that certainly brought it back up to the national level. So it'll be curious to see how that plays out.
But one other point, and an excellent one that you made is, once again, going back to the analogies, what's happening in the psychedelic space, and treatment facilities like ketamine, clinics, things like that. Is that a model or is it just another thing
Jason Kikel:
In our wonky day-to-day world where we're watching this way more closely than most normal people probably would, I'm seeing an analogy already start to emerge, but at the same time, Oregon still hasn't begun licensing for psilocybin treatment centers. So it's really hard to make that comparison without actually seeing the rubber hit the road in any of these markets.
I know in next month's selection, Colorado is going to be voting on a drastically different psychedelics measure. It's not very similar to what Oregon voters approved two years ago. And there will be a treatment center model, and from the sound of it, patients would be bringing their own psychedelics, psilocybin, other related products.
So that could be a roadmap a few years down the way for states to think about cannabis consumption in public spaces, or in more therapeutic spaces, not just a lounge with an arcade.
Ed Keating:
Yeah. Well, who knows where it'll land? I just got a headline from the Economist magazine, where they are challenging the United States to legalize cocaine. So who knows what we'll be doing on the podcast next year, Jason.
But digging into some more of the details, now that we know sort of where they are or who they are, some of the challenges, one challenge is often fees and what are they like? Are they similar to what you see with other licenses? Or is it every state, every town is going to be totally different and good luck, God speed?
Jason Kikel:
Looking more at the states where the state is the regulator and the arbiter of consumption lounges.
Ed Keating:
Yeah. Yeah.
Jason Kikel:
We'll ignore local for now. Again, they fall into the two categories. If you're bringing your own cannabis, that's going to be a lower fee. A lot of these are businesses, particularly Colorado, some of these are art galleries, other entertainment related spaces. They're keeping the license fee low. Some of these can be as low as a thousand to $2,000. And that's something that's affordable for a business that has to lure people in to buy something that they're selling.
And they're not selling cannabis. For dispensaries that are getting an onsite consumption lounge permit, in some of the states, it could be as low as $5,000. Today was the launch of the application window for Nevada. Nevada's probably the most closely watched consumption lounge landscape in the entire national industry. For retail stores applying for onsite consumption, that fee is $100,000. That's one of the higher licensed fees, just nationwide.
Ed Keating:
And let us not forget, almost exactly a year ago, we were on the phone with the regulators, and you said, next year, in 2022, when we come out here, will the lounges be ready?. And they said, well, we hope so. We appreciate your thinking about it in 2022 instead of 2021. But looks like they haven't quite met that goal yet.
Jason Kikel:
And with Nevada, the conversation started to come up in 2017 when the state opened up early adult use sales using their medical infrastructure. And as they got licensing up and running leading into 2019, Clark County, home of the Vegas Strip, they were ready to openly permit consumption as a local passage, a local measure. And the state put a moratorium in place and said, “We want to put in a two-year window to do a study on this. And the legislature will come back, review the findings.”
And in 2021, they decided what that was going to look like. The structure limiting the number of onsite consumption lounges to about 45, and then also including social equity provisions. After they solicited public input, there will be 20 more offsite lounge licenses. Those could go to gyms, arcades, spas. It's possible that a spa in the Vegas areas somewhere near the strip might pursue one of these licenses for consumption.
But 10 of those are reserved for social equity. So not every license is going to be $100,000 in Nevada. Some of them will be $10,000, and then the social equity ones will be 2,500.
Ed Keating:
Well, let's dig into some of the other states that you've researched and studied. You made some interesting points about Alaska putting these things in places, basically, to lure in the cruise ship passengers and others. So what's the story in Alaska?
Jason Kikel:
Yeah, Alaska was really one of the first states where statewide regulators were thinking about this. A lot of the attorneys in Alaska probably loved this, because they had a lot of work to sit down and think this through before some of the other states had model legislation to look to.
But Alaska's been a long time tourism hub. You have the Pacific Coast, some of the port cities or cruise ship stops, and there were already existing dispensaries, Ketchikan, Juneau, Seward, some of the other cities along the coast. And I think, they were realizing they were missing out on a lot of revenue, because cruise ship passengers might be at port for the day or for overnight.
Ed Keating:
Right. Right. Yeah.
Jason Kikel:
And you can't take cannabis back on a boat, going back in the international waters or risking a run in with the Coast Guard. So they decided, you know what? We're going to take the spaces that we have at the dispensaries, open it up for consumption, still make nice tourism revenue and money, and send them on their way.
Ed Keating:
Wow.
Jason Kikel:
What happened first after a regulatory development period, which is usually the trend in most of these states, early 2020 was when they started awarding these licenses. And early 2020 was when the pandemic started, and a lot of businesses were forced to shut down or minimize public gatherings.
So you see the cannabis industry now being labeled an essential business, but consumption operations, those that were licensed, were not taking off. So there's been a long time to recover for not only Alaska, but all of these states as rates have gone down and vaccinations have been given.
Ed Keating:
Yeah, yeah. Now, what about Colorado? I thought I remember them being kind of an early one, and I thought the initial licenses were local, like Denver, but I may not be remembering that correctly.
Jason Kikel:
Colorado relies on local authorization like they did with all of their other license types. That was another one where the pandemic got in the way. There were a lot of businesses that had plans, a few had applied. And early on in the pandemic, I wasn't sure how long things were going to be closed. Things were going to be restricted.
There were some licenses that were awarded. To date, Colorado has awarded about a dozen hospitality licenses. That's for no sales, just consumption, and only three that include sales. Out of their 15 that have been awarded to date, the majority of them have either expired, lapsed, or have been surrendered.
So onsite consumption and even offsite consumption are not very large features of Colorado's cannabis market right now. I think to date, in various markets in the state delivery has a higher presence, a higher number of licenses awarded, and is a higher revenue driver than consumption lounges.
Ed Keating:
Interesting. And you've highlighted there's a couple of other small markets. I was surprised with the data you shared about Michigan, where there are so few licenses there, given the long sort of heritage of cannabis in Michigan and the eruption of licenses there in the last two years.
Jason Kikel:
Yeah, I think in the coming years, so there will be more of these that emerge. The presence of the consumption lounge license in Michigan, it's called a Designated Consumption Establishment. And that might have been an afterthought that regulators did not initially approve when they started regulating adult use. I think that one came along a little bit later.
And a lot of towns have to revisit some of their local control and their local ordinances to allow for those businesses to pursue that license. I know Detroit is starting to heat up as a market. They're now moving into adult use licensing, and I think there will be numerous consumption lounge licenses popping up in that market.
Ed Keating:
Got it. And I just want to circle back to Nevada and make sure we've sort of tied the bow on that one. From what you've researched and shared, that looks to be a place where there's going to be more of these kind of licenses than anywhere else, where they're accepting applications for, it's like up to 65, I think. And that's a pretty large number based on the fact that there's only 17 nationwide now. So.
Jason Kikel:
Yeah, I think Nevada is quickly going to become a national leader in consumption licensing. And Nevada is in a really interesting spot, because Nevada's not accepting applications for any other license type right now. If you were not currently operating in Nevada, and you wanted to go into Nevada, you would have to acquire a business that holds a license. You were not able to apply for a manufacturer license on its own. Now, if you already have licenses, you can apply for additional ones.
So there's a narrow applicant pool that could be applying for an onsite consumption. Either that pile of 45 that will be available, those other 20 are going to be open to other businesses and other entrepreneurs. So again, those are not onsite. Those are just BYOC. Bring your own cannabis. And that's where the social equity component is going to be present in Nevada. That's going to be the only social equity program as a future of Nevada's market.
Ed Keating:
Well, we've sort of hop scotched around the country with California, Alaska, Michigan, and elsewhere. Let's go to my neck of the woods, what's going on in the East Coast. We've got New Jersey, New York, Massachusetts. Certainly a lot of interest in the beast of the east, as we like to call it, although, slow to come together. But there's a lot of factors that are impacting that. I think so.
Jason Kikel:
Absolutely. Yeah. I think that consumption lounges as a nationwide trend will be marching eastward from the west. The East coast states are going to have an opportunity to improve on the legislation. One thing that's kind of up in the air are East Coast States going to aim more for local control and do the big punt? Or are they going to handle it through the same regulator that all the other licenses were going through?
Ed Keating:
So I want to program that one for a second, because there was a recent study released that we've talked about, where an economist pointed out, if you let too many towns say, no, to cannabis, that is a big invitation for the black market to support that town.
So I'm thinking if towns start allowing consumption lounges, what is going to be the source of the cannabis that those people are bringing in there? If it's a bring your own, you could just be creating a great opportunity for sell your own, bring your own kind of situation if you're not careful.
Jason Kikel:
Yeah, that's a great point. One that I had not thought of. The markets that are looking at adopting consumption lounges on the East Coast, I think the biggest one is New York, followed by New Jersey. A handful of states right now at different phases in the process. Within the past two weeks, Vermont opened up their adult use program, their sales launched. I think they already ran into a shortage, dispensaries ran out a product on the first day, which is a good problem to have.
Ed Keating:
Not even ski season yet. Oh, it's leaf season. That's why everybody's-
Jason Kikel:
Yeah. And again, right now, late October, Rhode Island is preparing to accept applications, or they're already accepting hybrid applications for their dispensary to convert over. Connecticut's in the midst of a licensing process. Some of these states haven't had the consumption lounge discussion. It's not on their roadmap for implementing the industry launch.
But New York has generated the most noise. There are already over 250 growers that have been growing, and they're expecting about 200 stores to be licensed by mid-summer. There's been a conversation in their ongoing listening tour and public comment series. There have been a lot of comments and some input on consumption. Somebody with the regulator at one point suggested that they might allow a consumption endorsement. This would be an offsite consumption, not part of a retailer, but they might allow restaurants to participate in that.
I haven't heard much more on that idea floated out there, but there might be a lot of pizza places that are willing to pivot and be a consumption plus pizza establishment. There's also other ideas out there similar to those very few in Nevada where consumption spaces could include gyms, yoga studios, other workout environments, smoking, yoga, something like that.
Ed Keating:
Smoking and-
Jason Kikel:
And other entertainment spaces, art galleries, movie theaters, concert venues.
Ed Keating:
True. So, I mean, you sort of touched on one of the other topics we have, which is, what are the points of differentiation, and why do states embark upon this? So the state reason might be different than how other people do it, but obviously tourism, you talked about social equity. What are the other kind of drivers and benefits and that you see that might drive this trend into more businesses?
Jason Kikel:
Yeah, I think good economic policy, seeing more positive results from places that allow onsite consumption, either explicitly seeing good outcomes, or just seeing a lack of bad outcomes might be enough.
But it could be a good business practice. It could be beneficial to businesses that are struggling on Main Street in so many states, allowing the regulator to go back and add, even if it's a limited number of offsite consumption. That's something that a lot of businesses might integrate into their business, and their practice. And then onsite consumption will likely become more widespread. Dispensaries will want to add that.
Ed Keating:
Makes sense. Now, one observation that we made in preparing for this was the point that if you think about it, an event license also sort of rare, or really consumption lounges for a day, a week, a weekend, whatever, where people have a contest or picking the best bud, whatever. But it's really a consumption lounge for a day in a way. You see a lot of this in the liquor industry where I know Connecticut has dozens of different kinds of liquor licenses for all sorts of for on a boat for this, that, the other. So are places that have, let's say, already blessed event licenses like to do consumption, because I'm pretty sure, I know California has been big in the event licenses, but I can't think of the other states. I think there's like one or two more.
Jason Kikel:
I think to date, Michigan is the only state that has both consumption and events. Illinois, again, they've punted to local government on consumption. They don't have event licenses. And California regulates event licenses, but they have their local governments regulate consumption.
So some of the cannabis events like cannabis farmers markets, some of the other events where they're allowing license owners to show up to a premises other than their own business, and sell cannabis. Technically, they may not be able to allow consumption, although, it's likely happening. It's not really part of the business where they're regulatory liability,
Ed Keating:
Not sanctioned. So what we want to do, we always want to look out at what the future holds. And since you've been really digging into this topic, where should we be looking for the next wave of perhaps innovation or first licensure moving from 17 to 27, let's say, is it Vegas, New York, LA, Chicago, or someplace else?
Jason Kikel:
Yeah, I think that to start, Nevada being in this application window right now, Nevada will probably emerge as the national leader. Despite having zero right now, they're quickly going to eclipse some of the other markets, and some of the other states. Las Vegas, will probably be at the heart of that. There will be interactive shows, other activities to do, not just a room with a dirty bong sitting on a table. It's going to be much, much more. We have a Vegas experience at some of those lounges.
But beyond that, Illinois is setting the groundwork for a great regulatory environment. Chicago could emerge as a leader nationally. California, despite all of their challenges and trouble in the past five years, they're also allowing for local governments to emerge and innovate in lounges. So while Los Angeles has not permitted lounges and consumption spaces yet, their smaller neighbor, West Hollywood, has already emerged with individual restaurants, onsite consumption with restaurants, and pretty advanced menus, edible and infused items on the menu.
Looking on the East coast, New York will probably mimic Las Vegas and pick up pretty quickly. And there might be some other surprises in there as well. In some of these other cities, Denver could always pick up and become a key player in this as well.
Ed Keating:
So looking ahead even bigger, will this be a national thing? Are we going to see Cresco go and start buying up hookah lounges around the country and build up a giant network of consumption lounges?
Jason Kikel:
I definitely don't see this being an immediate trend to take off.
Ed Keating:
Yeah.
Jason Kikel:
I think before you know it, Nevada's going to launch. I'm sure there will be national either morning news or nightly news coverage talking about what's going on in Nevada, because it's so out of the ordinary, just from the license count perspective.
Ed Keating:
Of course, there'll be the story when the Girl Scout cookies set up for sale outside the lounge, and then it's national news.
Jason Kikel:
Absolutely. So I think that consumers are going to start to speak up and say, “Hey, we'd love to see this in our town or in our state.” And patient advocates still have a lot of value in the conversation. This is still a social equity issue as well.
So I think that 10 years from now, at least 25 to 30 states will probably have some type of presence. Some of the states might say, “You know what? We don't want to deal with this, but counties, cities, if you want to take this on, that's for you.”
And there might be some cities, you never know, New Orleans might emerge as one of those cities. But on the flip side, Charleston, South Carolina might say, “We'll pass.” And allowing the cities to make that decision will probably be the way that the majority of states go. And there will always be some states that likely won't allow for lounges. Yeah. Or the ones that don't have medical right now. So.
Ed Keating:
Well, Jason, I always enjoy hearing your prognostications on things like this. And if any of our listeners who'd like to hear more, Jason and I will be out in Las Vegas at MJBizCon this year. So feel free to stop by the booth, seek us out, and we'd love to nerd out on cannabis with you. So, thanks for coming aboard, Jason.
Jason Kikel:
Looking forward to it
Ed Keating:
Same here.
Jason Kikel:
Thanks, Ed.
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