InSight

Can I run a canna-business in an Opportunity Zone?

Financial Planning Dentist

Like many things in life, the answer here is “it’s complicated” and it’s going to depend heavily on the type of business you intend to operate. Let’s start with the good news as we unfold this potential boon to marijuana investors and store operators. 

It was left out of the law in 2017

While traditional ‘sin’  businesses were left included in the list of banned practices inside of opportunity zones, the recent ecosystem of cannabis-based businesses was left out. Some camps argue that because marijuana is still federally illegal, banning the business in the federal tax code would be redundant. Other camps have argued that leaving out the fledgling marijuana business is not an accident. I leave the interpretation and enforcements back in the hand of individual states which are currently choosing their course across the country. Additionally, if the law intended to expressly prohibit these practices it would have been easy to include clear language in their prohibition along with the other “sin” businesses. Its absence, then we feel, puts the interpretation and execution on the part of the states along with their maps and other eligibility determinations the states created.

It fits with the goals of the Opportunity Zone scheme

It’s hard to deny that the economic development that has accompanied legalization for both recreational and medicinal has been impressive. Cities have seen otherwise defunct warehouses, factories, and industrial storage facilities gain new life in the wake of legalization. Cultivation facilities, infrastructure vendors, fertilizer and chemical businesses, and retail outlets have all sprouted up in places that cities and states have written off as low-economic zones. This organic economic activity marries very well with the state objectives of the Opportunity Zone programs. 

The business would still be heavily regulated and approved

Given the regulatory environment surrounding the cannabis industry, both the business licenses and the location would be apparent to the state. I think it would be hard to argue that if the business operated with the approval and regulatory oversight regime set up by the state that could somehow void it from participation in the OZ. Everything would be above board with the state 

The opportunity set is encouraging

Because the industry is becoming far more than just the dispensary, this industry is wrapping its tendrils into several infrastructure needs that are required to make the supply chain work. Many of these businesses operate outside the traditional retail environment that draws so much eyre from municipalities and federal agencies. While the cannabis storefronts are the most visible component of the ecosystem, the most critical is cultivation and storage. These businesses look more like traditional chemical and agricultural supply companies and indoor growth facilities. It’s these businesses that might be able to transcend the negative attention typically associated with marijuana and still be a high profit, high impact role in the industry. Seemingly combining the core infrastructure needs, and the potential tax advantages of an OZ, and avoiding the regulatory and political concerns. This has led investors to believe that supply chain and cultivation operations might be the “safer bet” in this space and that retail might be too similar in operations to liquor stores which are prohibited.

The Former Treasury Secretary said an unofficial “no”

Treasury Secretary Steven Mnuchin advised in May 2019 that funds that operate in a Qualified Opportunity Zone “should not be used to invest in cannabis” but followed up with no formal direction from the treasury. Similarly, we are left to interpret the opinions of the new Treasury Secretary Yellen who has yet to officially comment on this program. It is my opinion that with bigger “fish to fry” in the wake of the pandemic the treasury will not be looking for more ways to shut down business formation, much less in areas that require the economic development encouraged by the OZ scheme.  

Bottom line, we feel that if the regulatory environment is followed effectively, and that there are no policy changes from the IRS or Treasury that the development of cannabis businesses will thrive in this tax environment. But as always, investments that push through the crevices should only be approached by those with the risk appetite for both regulatory, legal, and market-based risks.

 

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