Virginia prepares for commercial marijuana market
A dusty floor, lumber piles and strewn tools mark the signs of active construction in the future showroom of Pure Shenandoah LLC.
CEO Tanner Johnson stands in the front room of the historic, renovated Casey Jones building in Elkton and describes the experience of a future customer.
“You’ll come in right here to a cool circle welcome desk,” Johnson says. “There’ll be a big bar there with some of the smokables and [age] 21-plus products. A divider here — maybe even hemp bales — separates a workshop area where we do a lot of education. There’ll be a spot here where we highlight farmers, from CBD to the fiber side. Right here, we’ll have all the in-home grow technology. And then cool visual stuff.”
Pure Shenandoah plans to offer tours of its facility to the public, including guests from the nearby Massanutten Resort.
“Everyone’s been on a brewery tour, but there aren’t really cannabis tours anywhere,” Johnson says. “Most people in the cannabis market like to guard what they’re doing. We’re the opposite. Everyone’s going to be interested in it, just because it’s been in the shadows for so long.”
Those shadows began to be lifted when the federal government removed hemp from its controlled substances list in 2018, opening the door for cultivating industrial hemp and the production of cannabinoid products such as CBD oils, which don’t intoxicate users. In 2020, Virginia lawmakers legalized medical cannabis through five licenses awarded to companies across the commonwealth.
Then, earlier this year, Virginia became the 16th state in the U.S. — and the first in the South — to legalize recreational marijuana. Lawmakers made it legal for people older than 21 to cultivate and possess limited amounts of marijuana, and they also started the process of writing regulations for a commercial market to open in 2024.
Legalization in Virginia has opened a vast, uncertain new industry that still faces many unknowns. Entrepreneurs, including the four brothers behind Pure Shenandoah, are scrambling to engage the market. Johnson says marijuana was “always in the back of our minds” when they founded Pure Shenandoah.
“Some of that’s out of our control,” he notes, “but the way the laws came down, it couldn’t have been any better.”
Marijuana represents only one of three new, potentially giant industries for the commonwealth.
“I genuinely thought that being at the forefront of solar and renewable [energy] was a once-in-a-lifetime opportunity to be on the front end of a multibillion-dollar industry,” says Greg Habeeb, president of Richmond-based Gentry Locke Consulting, a lobbying, communications and marketing business started by the Roanoke law firm. “Then a year later, it’s the same thing with casinos and online gaming, and the next year, it’s the same with cannabis.”
A 2020 study by Virginia’s Joint Legislative Audit and Review Commission (JLARC) found that marijuana legalization could generate between $31 million and $62 million in tax revenue during its first full year of sales, and between $154 million and $308 million by the fifth year of commercial sales. By comparison, Colorado, an early legalizer, collected $387.4 million in state taxes and fees in 2020 on an industry that recorded $2.2 billion in annual sales last year, according to The Denver Post.
Virginia’s new law will create up to 400 retail licenses, 450 cultivation licenses, 60 processing or manufacturing licenses and 25 wholesale licenses. (The state ruled out an ABC store model for marijuana retail sales because it would have required state employees to do something federally illegal, experts say, and also because the Northam administration and legislators wanted to make social equity a priority in awarding retail licenses.)
But state-level legalization of marijuana has broader implications for businesses stretching far beyond license holders.
“You have a hard time finding a business that can’t be directly or indirectly affected,” Habeeb says. “We were having a hard time coming up with one that couldn’t find a way to be involved with cannabis. Transportation, technology, security, everything — there was always a way, if they wanted to, to be involved in this industry.”
That can also include marketing, human resources and HVAC services.
“Often with legalization, the focus is directed toward cannabis business licensing opportunities, but the economic opportunity afforded by legalization is so much greater than that,” says Jenn Michelle Pedini, development director for the National Organization for the Reform of Marijuana Laws and executive director of Virginia NORML. “Cannabis businesses need all of the same services that any business needs. Not only do businesses need these ancillary services, so do consumers.”
Take Lockgreen, a Suffolk-based family business that sells lockboxes for marijuana users to safely transport cannabis in compliance with state law, which requires marijuana to be in a sealed container while transporting it in a vehicle and not to be consumed by the driver or passengers. Husband and wife Ron and Sarah Kiah Morton see their endeavor both as a way to enter the burgeoning industry but also to educate communities that have traditionally been punished under earlier drug statutes.
“We always have our face in the book of the law with regard to cannabis, and our ear to the street,” says Sarah Morton. “We are painfully aware of the disproportionate arrests and marijuana convictions in the Black community. Blacks are 3.4 times more likely to be arrested for marijuana.” According to a JLARC report, Black people in Virginia were nearly four times as likely to be convicted as white people charged with marijuana possession from 2010 to 2019.
Even with legalization of adult possession and use, the Mortons saw how legal provisions mirroring bans on driving with an open container of alcohol could still be a source of continued arrests. The answer? Lockable stash boxes that meet Virginia’s requirements and bear a commemorative design celebrating state legalization.
“We wanted something that people could be proud of that also protects them,” Sarah Morton says.
The lockboxes also represent a step toward participation in the future commercial market. Ron Morton has worked for the past decade in marijuana enterprises across Colorado, Maryland and now Virginia, while Sarah has been engaged with the Hampton Roads business community since 2007, while also serving on Virginia NORML’s board.
Lockgreen gives the University of Virginia alums a chance to educate and engage with the emerging marijuana industry. With a business that directly addresses still-existing gray areas about recreational use, they’re also positioning themselves as participants in the still-to-be-developed commercial market.
“We intend to enter into the commercial cannabis market, or at least to apply,” says Ron Morton. “The aspect we’re coming from — educational and spreading the information, being a proponent of the community — that’s the right way to approach it. If you’re filling that gap, everything else will fit around it.”
Sarah Morton adds, “We want to shape the culture in Virginia.”
Details up in the air
Virginia’s legalization of adult recreational use and home cultivation of marijuana this year marked just the first step in a process that still requires years of additional legislation and regulatory work.
Next year’s General Assembly must reenact the law passed this year. Then the Cannabis Control Authority, a state board advised by a health advisory council, will develop regulations including a social equity program intended to restore communities adversely affected by decades of marijuana prohibitions — primarily people of color. The authority will also license participants in the commercial market, with specific policies that are still being developed.
The commercial market is scheduled to launch in 2024, although lawmakers can decide to move the date earlier.
Regardless, there’s a lot of uncertainty about what legal marijuana will look like in Virginia.
“Cannabis regulation looks different in every single state and territory in the U.S. that has adopted such a measure,” NORML’s Pedini says.
Virginia has the advantage of following other states that have tried legalization. These include Washington and Colorado, which both legalized marijuana in 2012, as well as Illinois, which considered social equity as a priority but has largely failed to attain its goals.
“Virginia is one of the single most prepared states when it comes to undertaking a legalization effort,” Pedini says, adding, however, that “it was a heavy lift in 2021 and will be a heavy lift in 2022.”
However, they note, “I don’t think legislation in and of itself can ensure a good outcome. What Virginia has done thus far is outline in legislation some initial criteria for social equity licensing and funding, and [it] has established a cannabis equity reinvestment board.”
JLARC already has issued recommendations for 2022. It recommends tightening the path for currently registered hemp processors to obtain licenses to produce marijuana, eliminating special treatment. The watchdog group also recommends reducing the number of retail locations for medical marijuana licensees from five to three, which would somewhat curtail their advantages in a recreational market.
The General Assembly implemented 80% of the commission’s recommendations from its 2020 report, but there’s no guarantee lawmakers will follow all of these suggestions. Adding greater uncertainty are this month’s elections for governor and party control of the House of Delegates.
“Marijuana legalization really is on the ballot in Virginia,” says Pedini, “not with a referendum, but for whom you cast your votes.”
Democratic former Gov. Terry McAuliffe, running for a second, nonconsecutive term as governor, openly supports marijuana legalization, while Republican Glenn Youngkin told Virginia Business that he would not push to reverse the law if elected.
But there’s no question that the creation of a commercial market and other aspects of the law’s implementation would look different under Democratic and Republican administrations. Just how different? That depends on who holds a majority in the House of Delegates in January, but for starters, Republicans are less likely to focus as much on social equity as Democrats. It’s also unclear whether a Republican-controlled House would approve a commercial marijuana market, complete with a new slate of regulations.
Even beyond partisan control in Richmond, plenty of uncertainty remains over commercializing marijuana in Virginia, in part because marijuana is still considered a controlled substance under federal law.
Farmers who are already growing hemp are now considering growing marijuana, but Ben Rowe, national affairs coordinator of the Virginia Farm Bureau, says this has inherent risks.
Currently, federal law requires farmers growing the Cannabis sativa L. plant as industrial hemp to keep it below the 0.3% threshold for THC, the compound found in cannabis plants that gives marijuana its psychoactive properties.
“If a farmer is out of compliance with federal law, they risk losing access to federal programs like crop insurance, guaranteed loans and conservation programs, regardless of what the law is at the state level,” Rowe says.
The Farm Bureau also is concerned that smaller-scale farmers will be pushed out of the industry by “out-of-state, large-scale producers” unless state policymakers ensure that agricultural interests are represented in their discussions, Rowe adds.
Additionally, employers are grappling with whether they can — or should — screen employees for marijuana use. For many companies, drug screens are a standard part of onboarding new employees. Virginia’s legalization of recreational marijuana doesn’t prohibit workplace drug testing, but employers may lose out on hires amid a tight labor market in which many workers are more willing to leave jobs.
“Just because there’s legalization doesn’t mean you have to let your people consume marijuana,” says Habeeb of Gentry Locke. “But the concern is that [could conflict with] one of the strangest labor markets we’ve ever seen in our lives, where people are choosing not to work or choosing not to return to their job. Today, it’s a killer when employees walk out the door.”
Some companies — including Henrico County-based Altria Group Inc. and Amazon.com Inc., which is building its HQ2 East Coast headquarters in Arlington — didn’t screen for marijuana use even before legalization. As with raising minimum wage, the market is ahead of the law in some cases.
Of course, drug testing remains important for jobs that involve public safety or require high alertness or federal government clearances, and researchers still are trying to develop more targeted tests to measure impairment.
Another challenge related to federal marijuana prohibition is taxing cannabis businesses. The IRS prohibits tax deductions for any business that “consists of trafficking in controlled substances” like marijuana.
Habeeb calls federal taxes “really screwy on this. If you’ve got $30,000 a month in overhead and $60,000 a month in revenue, in most businesses, that means you made $30,000, and you pay taxes on $30,000. In cannabis, you pay taxes on $60,000. You can pretty quickly get squeezed on the revenue side.”
Federal law also restricts banks’ ability to engage with marijuana businesses, even those that are complying with state law.
The emerging industry’s “access to the banking network is very limited,” says Bobby Herndon, senior vice president and director of treasury management at Charlottesville-based Blue Ridge Bank, which began working with Virginia cannabis businesses when hemp was legalized federally. “Most federally regulated banks do not want to jump into that space because of the gray area. Even though [marijuana] is legal at the state level, we still have audits and regulation at the national level.”
As a result, legal marijuana companies unable to use banks accumulate large amounts of cash while otherwise operating normally. Herndon says Blue Ridge Bank supports passage of the federal Secure and Fair Enforcement (SAFE) Banking Act, which would allow state-licensed marijuana businesses to work with banks and other financial institutions. The House of Representatives passed the act in September as a rider on its annual defense spending bill, but it appears stalled in the Senate.
Moving into position
On the ground, businesses are working to position themselves for the commercial marijuana market. A lot of this comes down to paperwork.
Pure Shenandoah is seeking to acquire a medical marijuana license approved by the Virginia Board of Pharmacy, covering the northwest region of the state. The matter is tied up in court with multistate cannabis dispensary operator MedMen Enterprises Inc., which is fighting to keep its license.
Meanwhile, Pure Shenandoah is taking other steps toward meeting medical requirements, including maintaining batch manufacturing records, traceability and test results. Even if it doesn’t receive the state license, company officials see these as steps to prepare for the commercial market.
Other hemp processors are taking a more cautious approach. Golden Piedmont Labs in South Boston intends to pursue a processing license to continue its mission of working with Southern Virginia’s agricultural community as farmers transition from hemp to marijuana.
Rick Gregory, principal at Golden Piedmont Labs, and friend Sterling Edmunds co-founded the company to assist farmers who were adversely affected by tobacco’s decline as a crop.
“We decided we would get more benefit for our contributions if we set up a company that would help turn around or assist the agricultural community in Southern Virginia,” Gregory says. “We decided to found Golden Piedmont Labs because the [hemp] industry was just starting to grow, but there weren’t any extraction industries for Virginia and North Carolina farmers on the boundary.”
As more farmers think about moving to marijuana when retail sales will become legal, Gregory says Golden Piedmont will adapt to meet their needs. In the meantime, it is waiting as lawmakers and regulators continue to build the framework for commercial marijuana sales. Even with prospects for a vast new industry, Gregory doesn’t think marijuana will ever come close to tobacco’s former dominance as an economic and cultural power.
“Remember, we were growing tobacco for the world,” Gregory says. “Here, you’re talking about marijuana for Virginia. That’s not to say it won’t have some impact, but the hemp crop will have more because it’s going to be much more difficult and regulated to grow anything in fields more than 1% THC. Marijuana will not change the world here.”
Grassroots vs. ‘Big Marijuana’
Perhaps the largest uncertainty for Virginia’s marijuana industry is what will happen when federal prohibition ends. It’s likely to cause an earthquake in the industry.
“While you will hear from activists and even legislators shaking their fist about ‘Big Marijuana,’ they haven’t seen ‘big’ yet,” says Pedini of NORML. “‘Big’ is brands like Constellation [Brands] and Altria. It will be the end of federal prohibition that opens the floodgates for these truly ‘big’ companies.
“What we’re doing in Virginia right now is ensuring that we have our own regulatory structure in place prior to the end of federal prohibition. So, Virginia is deciding how Virginia regulates cannabis, rather than Virginia being beholden to … behemoths like Altria that will undeniably have a hand in the end of federal prohibition.”
Altria Group — which owns the nation’s largest cigarette manufacturer, Philip Morris USA — has been making headway in the industry during the past few years, viewing it as a natural progression from tobacco products. In 2018, Altria spent $1.8 billion for a 45% equity stake in Canadian multi-national cannabis corporation Cronos Group Inc. It also has filed patents and purchased marijuana vaporizer technology.
“Altria supports an appropriate federal regulatory framework for cannabis,” Altria spokesman George Parman says. “States are shaping policy frameworks for regulation and legalization, and it will be important that federal policy is, whenever possible, complementary to those efforts. In both cases, we want to ensure this process is done in a way that establishes a transparent, responsible and equitable operating environment for stakeholders in the commonwealth.”
Meanwhile, Constellation Brands Inc., which owns Corona beer and Svedka Vodka, among other alcohol brands, also has invested in Canopy Growth Corp., another marijuana company based in Canada, where federal legalization was enacted in 2018.
The entrance of huge corporations into the nascent industry has grassroots organizers and legislators concerned, after decades of pushing for federal prohibition to end.
Many worry that big corporations and out-of-state products from states like Oregon and California could overwhelm smaller and minority-owned businesses, not to mention social equity programs that aim to empower communities previously damaged by marijuana prohibition.
In Elkton, Pure Shenandoah continues to look to the future, hoping to secure a foothold in Virginia’s rapidly evolving landscape. Johnson, the company’s CEO, says he is looking particularly closely at processing, which emerged as a bottleneck during the first years of hemp production in Virginia.
Meanwhile, Pure Shenandoah raced to finish up work on its retail front for a ribbon-cutting in early October. “We’ve been so internal,” Johnson says. “Now, we’re saying, ‘Look at what we’re doing.’”
In mid-September, Pure Shenandoah’s showroom was empty, but not for long. Like the void in Virginia’s still to-be-determined commercial marijuana market, it will soon be filled.