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Ohio’s medical marijuana dispensary expansion creates real estate and probability frenzy

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Posted at 1:12 PM, Jan 17, 2022

CLEVELAND — More than 200 current and potential Ohio medical marijuana companies are holding their breath, waiting for the Ohio Board of Pharmacy lottery to announce who will win the right to open up medical marijuana dispensaries in the Buckeye State. The lottery drawing is scheduled for Thursday, Jan. 27.

Where the program sits today

The 57 operating dispensary licenses were awarded when the Ohio Medical Marijuana Control Program launched in 2018. Those licenses were awarded through a competitive scoring process, where each application was scored and the highest scores received licenses. Since then, patients often complained that the state’s highly regulated program didn’t give them the choice in products they wanted and that dispensaries were too far away.

In September, the Department of Commerce, which oversees medical marijuana cultivation, processing, and testing, and the board of pharmacy, which oversees dispensaries, announced existing cultivators would be allowed to apply to expand their space and that 73 more dispensary licenses would be awarded in a lottery system. Instead of using competitive scoring, the lottery puts all qualified applications into a pool and randomly selects the winning bids.

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The 57 dispensaries that are currently open in Ohio will eventually be joined by 73 more, bringing the state's total to 130.

That approach drew concern from medical marijuana company advocates.

“Our concern is we have to keep the standards high,” said Ohio Medical Cannabis Industry Association (OMCIA) Executive Director Matt Close. “It has to be competitive.”

The board of pharmacy split Ohio into 31 dispensary districts, allowing it to chart where the state’s existing dispensaries with permission to operate already exist. There are a limited number of new dispensary licenses allowed in each district and the new process would cap the state’s dispensaries at 130. The number of dispensaries a company can operate is currently capped at five.

The mad dash for applications

The limited number of dispensary licenses has created an environment in which companies with varying levels of resources are investing large sums of money to hedge their bets.

“73 is quite a bit,” said Klutch Cannabis founder and CEO Adam Thomarios in his company’s Akron location, referring to his number of dispensary applications.

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Thomarios shows the map in his office where Klutch's medical marijuana dispensary application are marked with red pieces of paper showing where and how many applications they've submitted. Klutch predicts it will get either three or four dispensaries once the state's vetting process is finished.

Right now, Klutch has cultivation and processing licenses but didn’t get a dispensary license during the original process in 2018.

Its bid for a dispensary is still locked up in litigation.

This time around, Thomarios wanted to give Klutch the best chance possible to be successful in the lottery. His original goal to submit 40 applications eventually turned into 73 submissions all across the state of Ohio.

“The only way that we could be competitive in that kind of process was to be very aggressive and finding good real estate that was valuable and we believe we accomplished that,” said Thomarios.

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Klutch is already growing and processing medical marijuana in Ohio. The next step is getting permission to sell their products and flower to customers.

Since each application costs $5,000 to submit, that meant Klutch spent $365,000 just on the paperwork, before factoring in the team of lawyers and architects needed to work through the details of the submissions. Even that kind of investment doesn’t guarantee success because of the five-dispensary cap and limits within each dispensary district on how many new licenses are up for grabs in the first place.

It’s the large potential payoff that makes the upfront investment worth it.

“It’s a new industry right,” said Thomarios. “It’s very rare that you're ever going to have something like this happen in a lifetime.”

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This map shows how many dispensaries are currently operating in each of the 31 dispensary districts across the state. The 73 new applications are an attempt to make more dispensaries accessable to more of the state.

Klutch is hardly alone in submitting multiple applications, even if most other companies don’t even approach 70.

Just among the companies that have submitted to operate dispensaries in Northeast Ohio, it’s not uncommon for one company to have submitted between 15 and 35 applications, knowing that the majority of that effort will be in vain.

Cannabis industry consultant and Quantum 9 CEO Michael Mayes says the lottery system is generally used for awarding licenses because it theoretically levels the playing field and allows more potential operators to have a chance to be picked.

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Klutch's flower and products are sold throughout Ohio now in other company's dispensaries. Thomarios is hoping to be able to grow, process, and sell his own product soon.

But, since the only limit on the number of applications that can be submitted is how many a company can pay for, even this system advantages bigger or richer companies.

“Obviously if you can submit more applications, your odds increase but all those carrying costs can cripple a company if you haven’t planned for that effectively,” said Mayes. “The larger the wallet, the more licenses you can submit for, so the probability does get skewed in that sense.”

A real estate problem

Part of sorting through maximizing an advantage in the lottery is finding a place to put the medical marijuana dispensaries.

Dispensaries need to be at least 500 feet away from schools, churches, public libraries, public playgrounds, and public parks. Mayes says Ohio applicants struggled to find locations that complied.

“In Ohio, unlike other markets, real estate was really limited,” said Mayes. “So much so that they made it a law that applicants can submit on a parcel that other applicants are submitting on as well.”

Clubhouse Dispensary
Strict rules govern where medical marijuana dispensaries are allowed to be built and who is allowed inside. Now that the program is up and running, people who aren't patients or cannabis industry employees aren't allowed inside active dispensaries.

That makes it a ripe market for cannabis development developers like CannDev which identify compliant properties and secure them for cannabis companies either through acquisition or agreements to buy them if a license application is selected.

News 5 got in touch with two property owners who are involved in agreements like that one. Neither wanted to be part of this story but both confirmed that there are agreements in place to purchase their properties if one of the handfuls of dispensaries planned for their location is selected in the lottery.

“The goal would be to, number 1, identify the property’s secure it and then get a notarized statement from the landlord that it will be used for cannabis,” said Mayes.

The Payoff

Why risk so much money on so many applications for so few locations when a long list of circumstances could invalidate tens or hundreds of thousands of dollars of investment?

Mayes says just an awarded dispensary license can be worth between $3-6 million depending on the state and the cannabis market even before the dispensary opens. Once it starts doing business, he says some operations can make $3-5 million annually. Bigger operations can pull in $10-20 million every year selling medical marijuana.

When states adopt or pass adult use/recreational marijuana laws, Mayes says those operations tend to get even more profitable either for the original owner to continue to operate, or for them to sell to a larger cannabis company after a predetermined amount of time.

How it benefits the patient

Besides providing greater access and choice to Ohio’s Medical Marijuana Patients, the chance to open up dispensary operations gives cultivators and processors like Klutch the ability to talk directly to patients about their products.

“It is very important I think to be vertically integrated,” said Thomarios, meaning that with a dispensary, Klutch would grow, process, and sell medical marijuana. “We talked upstairs about being able to promote our brand and talk directly to the patients about our project and what we believe is the best way to help their ailments and conditions .”

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Klutch has licensing agreements with established cannabis brands in other states allowing Klutch to create their product in Ohio, using compliant cannabis plants and combining them with proprietary edible recipes.

Klutch is in nearly all of the nearly-60 operating dispensaries in Ohio already, but it doesn’t have its own employees interacting directly with patients. Thomarios says that kind of direct contact could help them better direct patients on how to best use their products, and get better feedback about what products patients are looking for.

That’s important for many cannabis businesses in Ohio because they are very limited in how they can reach out to patients and potential customers. Running a dispensary is one-way cultivation and processing companies can help foster the relatively-new industry they’re trying to grow.

“If we’re not proactive in trying to give more awareness to potential patients in the program, then we’re out of business,” said Thomarios.

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