Spring is a time of renewal, growth and planting. While many gardeners focus on traditional crops, there is a growing community of cannabis enthusiasts who are also embracing the opportunity to cultivate their own cannabis plants.
Research from New Frontier Data reveals that approximately 3 million people worldwide grow their own cannabis at home, resulting in a staggering yield of approximately 11 million pounds of smokeable flower each year. This number is projected to reach 15 million pounds annually by 2030. Amidst all the excitement around planting and growing, it is essential not to overlook the indispensable foundation of all cannabis plants: the seeds.
The Power of Cannabis Seeds
Affordable and versatile, cannabis seeds provide growers with the ability to cultivate specific strains tailored to their health and wellness needs. These seeds are typically the size of a peppercorn, characterized by an ovular shape tapering to a pointed end. While seeds can vary in color and striation, they typically exhibit a brown hue. Unfertilized seeds, on the other hand, appear off-white and are considerably smaller in size.
Economic Impact
These tiny powerhouses enable growers to cultivate customized strains, while also contributing to the economic growth of the global seed market.
The global cannabis seeds industry was valued at $1.3 billion in 2021, according to Allied Market Research. Experts predict that this figure will surge to $6.5 billion by 2031. Notably, North America accounted for more than 80 percent of the global seed market in 2021.
Benefits for Home Growers
According to New Frontier Data, 70 percent of home growers purchase seeds and cultivate cannabis for the sheer enjoyment of the process while 52 percent find it to be a convenient option. In addition to these advantages, numerous research studies highlight the multiple health benefits of growing one’s own crops, including reduced stress levels, decreased anxiety and increased exposure to the outdoors. Some innovative chefs have even begun incorporating cannabis seeds into their culinary creations, further expanding the versatility and appeal of these seeds.
Seed Safety Considerations
Given that cannabis seeds form the foundation of the entire cannabis industry, it is crucial to understand the various options for obtaining them. One increasingly popular method is through online seed banks, such as Rocket Seeds. However, it is important for those new to purchasing seeds online to thoroughly research the legalities surrounding these transactions. Cannabis seeds are subject to legislation similar to other cannabis products such as flower, concentrates and edibles. The legality of purchasing seeds varies depending on the state in which one resides. It is vital to check local legislation before making any decisions. In states where adult use cannabis is legal, buyers only need to be 21 years or older to order seeds online. Conversely, in states where adult or medicinal use is not permitted, purchasing seeds online remains completely illegal.
Purchasing Seeds Online
Selecting a reputable online seed bank is critical. Ensure that the chosen seed bank has positive customer reviews, offers quality customer service and provides germination guarantees. Researching the available strains, payment options and shipping policies is also essential. It is advisable for beginners to start small by purchasing only a few seeds at a time. Prior to planting, conducting thorough research is necessary, as there are numerous variables to consider and a steep learning curve to navigate. Fortunately, abundant resources are available to assist in this journey. For example, we offer valuable advice on getting started. Additionally, individual seed manufacturers, as well as online resources and apps like Seedtracker, provide guidance and support.
Continued Growth
The U.S. legal cannabis market is projected to exceed $31.8 billion in annual sales by the end of 2023, according to leading cannabis research firm Brightfield Group. Furthermore, they anticipate that within five years, the market will surpass $50 billion in annual sales. Amidst this flourishing industry, it is important to recognize that seeds form the backbone of this expansive market.
As the cannabis industry continues to thrive and expand, it is crucial to acknowledge the fundamental role played by seeds. These tiny powerhouses enable growers to cultivate customized strains, while also contributing to the economic growth of the global seed market. By recognizing the benefits of growing one’s own cannabis and taking proper precautions when purchasing seeds, individuals can partake in this exciting and rapidly growing industry while savoring the rewards of their own harvests.
Ideal cannabis profits come from high demand/high selling prices and low production costs. The spread between those two, or margin, can determine the life or death of your business. We want to share this series of articles so that your next investment can be highly successful and high margin out-of-the-box.
Regardless of the grow method (soil, coco, rockwool, hydro or aero), every plant performs best in its own ideal environmental conditions. Experienced growers gained success through hard work, and just that, experience. Many have tried more advanced grow technologies, but shied away due to early trial failures or the complexity of maintaining chemistry across a grow facility. The wonderful thing now is that precision sensors and software controls eliminate the risk to robust healthy plants and harvest success. Growers are now able to both manage production while performing research in line with their operations.
We have learned a great deal working with our grow partners over the last 6 years. Every grow facility and location are different due to local weather, business environment and scale. This series of articles and guide, authored by our expert, Christopher Wrenn, will include recommendations of the most successful approaches we have seen here in North America and all over the world.
A 4-Layer fully aeroponic flower room using movable racking systems
Building top-quality cultivation facilities is no simple task. Cultivators are also looking for new help as they shift from older soil or media approaches to more efficient grow methods. One powerful method is aeroponics, which is very good at growing any type of plant in air in a sterile environment, with labor, nutrient and water savings.
Where possible, we will share key vendors that support healthy grow operations and (since it is World Series Time), customer examples that are knocking it out of the park. In today’s competitive business environment, it is critical to do what we can to increase profitability and survival in the face of steep headwinds. We want you to crush it and be “the last man standing.”
So, let’s get to it.
Climate: Environmental Control
We begin with a critical leg in your environment. The process of photosynthesis is more than just light, plant and moisture. We want to do more than just grow plants. We want to grow highly profitable plants. That means we have to accelerate photosynthesis so we are growing faster, bigger and more potent than our competitors.
The Vapor Pressure Deficit (VPD) is the amount of “drying power” available in the air surrounding your plants. This is a useful way to understand the amount of moisture your atmosphere can remove from your plants as they digest carbon dioxide and aspirate water and oxygen into the air around your plants. A higher vapor deficit is a good thing for growth; It is also a measurement of how much nutrient you can uptake into the plant roots and convert into size and potency in the canopy. We recommend that you have resources in your grow rooms to maintain your environment to within 5% of both your humidity and temperature targets for ideal results.
Onyx Agronomics is a Tier 3 indoor cultivator in the State of Washington. This is the canopy in one of their 8 flower rooms.
In our Top Quality Cultivation Facilitywhite paper, we review environmental settings for temperature and humidity for mother, clone/veg and flower rooms for day and night light cycles from early cuttings through to end of harvest flush. Day temperatures can be up to 20% higher than night temperatures for example.
Cooling
Managing temperature may seem straight-forward but the heat generated by LED lights, HPS lights or the sun will vary across rooms, time exposure and with the distance of the light source from the plants. Measurement sensors should be distributed across rooms to monitor and trigger temperature resources.
Humidification/Dehumidification
This is a topic that can be underappreciated by cultivators. It is important to slowly transition humidity as you move plants from cuttings to clones, to veg and to flower. Beginning in a very humid stage to motivate root start, humidity will be stepped down from an opening near 90% down to an arid 50% in your end of flush flower rooms. We detail the transitions in 5% increments in the white paper.
The 4-Layer aeroponic flower room with movable racking systems from the side with a tall human for scale. One can do a lot with 30′ ceilings.
Relative Humidity (RH) and the related VPD are the key metrics to accelerating growth throughout the stages. Not sizing dehumidifiers correctly is one of the most common mistakes our grow partners learn about as they move to full production. In the first phase of turning cuttings from healthy mothers into rooted clones, hitting your target VPD to motivate root growth is the number one success factor. This will require the addition of humidity into your clone room. It is also typical to require raise the humidity of your flower rooms when you transition clone/veg plants from the high humidity clone/veg room into an initially dry flower room, otherwise the plants may go into shock as a result of the dramatic change.
As flowering begins, if humidity remains high, and the VPD is below target, the plants will not be moving nutrients and transpiring moisture. We have seen lowering the humidity from 70% in a flower room down to 50%, results in a yield increase from 50 grams to 90 grams of dry trim bud per plant, so a smooth transition can both accelerate growth and have a big impact on your margins and profitability.
Plants in aeroponics can truly have explosive growth. This means that they will also transpire moisture at an accelerated rate. Fast automated growth in aeroponics means increased humidity output. Sizing these critical systems for humidification/dehumidification are a critical part of the design process.
Airflow
Fans combined with your cooling/heating/humidity/dehu systems need to mix the air in a room to break the boundary layer at the leaf surface for transpiration. As we covered, VPD is critical to growth success. A dry surface motivates the plants to transpire moisture. We recommend flow rates across the canopy in a 0.5-1.5 meter/second rate to align to your genetics and where you are in the flowering process.
A raw facility before it gets outfitted.
Airflow and flowering means rich beautiful aromas are generated. Every facility has to consider odor control. If you are in a populated area, you will have ordinances and neighbors to satisfy. The best way to do this is to minimize the amount of air that exits a facility. This is also the cheapest approach.
Sterile HEPA filters and scrubbing systems clean air of pathogens and odor but they also need to circulate and “condition” air to the correct temperature and humidity levels before it can be recirculated into a room. Oftentimes, this is a good place to also recapture humidity and reinject it into your pure water cleaning systems.
Key vendors to talk to about sizing air treatment systems are SURNA, Quest, Desert Aire and AGS. Each of these vendors have specialties and tend to be superior partners in different regions of the world. We would be happy to introduce you to excellent support resources for air management systems.
Flower continues to be the dominant product category in US cannabis sales. In this “Flower-Side Chats” series of articles Green interviews integrated cannabis companies and flower brands that are bringing unique business models to the industry. Particular attention is focused on how these businesses navigate a rapidly changing landscape of regulatory, supply chain and consumer demand.
Canndescent is a vertically integrated flower brand based out of Santa Barbara, CA with grow operations in Desert Hot Springs. Having opened the first municipally-permitted cultivation in California, Canndescent has pioneered luxury branding in the cannabis space with a focus on user friendliness. They were the first cultivator to market cannabis using effects like Calm, Cruise Create, Connect, and Charge rather than the strain name. Canndescent also recently launched a social equity brand, Justice Joints, with 100% of all profits going to cannabis-related expungement and re-entry programs.
We spoke with Adrian Sedlin, CEO and founder of Canndescent to learn more about his transition from tech to cannabis, how he thinks about product positioning and the company’s motivation for getting into Justice Joints. Adrian founded Canndescent in 2015 after being approached by his brother-in-law who ran a legacy cultivation operation. Prior to Canndescent, Adrian was an entrepreneur and worked in startup turnarounds.
Aaron Green: How did you get involved in the cannabis industry?
Adrian Sedlin: I started looking at the industry from a professional perspective in 2015, and once I came to understand how cannabis affects the endocannabinoid system, I became absolutely fascinated by the opportunity to build a world class cannabis company that prioritized consumers. Particularly, I became interested in the adult-use market because I see cannabis as an automobile compared to the horse and buggy of alcohol. Cannabis is a superior adult use solution from a health and society perspective, yet, the entire positioning of the industry at the time was sub-prime, non-aspirational and inaccessible. With Canndescent, the core idea was to counterprogram the existing paradigm and deliver cannabis in a way that was beautiful. To bring the power of the plant to more people, we had to reposition the category and simplify the shopping experience. Moreover, there were too many unsolved consumer problems. For example, in 2015 people said cannabis was a commodity but any stoner knows there are as many dimensions to consider as there are with wine. The opportunity to deliver consumer solutions in a nascent industry that desperately needed advocates while helping to improve the world was enough to get me out of retirement.
Green: Just curious, what was your background prior to cannabis?
Adrian Sedlin, CEO and founder of Canndescent
Sedlin: I’m a lifelong entrepreneur. I started my first company when I was still in college. After graduation, I ran that business for another four and a half years, sold it, and went back to business school and got my MBA. After Harvard, most of my career was spent in early-stage growth companies, turnarounds and pivots. When someone had $10 million invested in an enterprise or their company wasn’t growing at the rate they wanted, that’s when my phone would ring.
I was lucky enough to shepherd a number of companies to a successful exit several times. During my professional journey, I’d taken a year and a half off between 2004 and 2006, and then pre-cannabis in 2015 I had taken three years off and was getting a little itchy. I didn’t think I was permanently retired; I was just sort of waiting for the next thing to get excited about. And cannabis definitely was the first time I can say in my life that I finally understood what I was put on planet earth to do.
Green: I understand that Canndescent was the first municipally permitted cultivator to open in California?
Sedlin: Desert Hot Springs was the first city to legalize cultivation, and we were the first ones to operate in the city.
Green: How did that come about?
Sedlin: The city had conditional use permits, but a lot of people were trying to do ground up builds. We decided to do a retrofit of an existing facility. So, we were the first ones to get the regulatory permit and cultivate in a way that was truly compliant with MCRSRA which eventually became MAUCRSA.
It took lots of tolerance for ambiguity and incredible patience. There’s an off-putting expression that goes, “pioneers take the arrows.” Well, we took a lot of arrows along the way. A perfect example is within our first year of operation, the fire department sent us five cease-and-desist orders to turn off our CO2. Not because we were doing anything wrong, but because they changed their regulations and then they wanted us to immediately comply as opposed to giving us a transition period. You just got to learn to roll with it. I’d say anyone who got into the regulated cannabis market early – and there’s a bunch of us who are still standing – you just learn to roll with it, be patient and yet, apply boundless energy and passion to the process.
Green: Did you know you wanted to be in Desert Hot Springs? Or did it just turn out to be the permit that was the easiest to get?
Sedlin: That was a binary choice for us. The simple choice for Desert Hot Springs was that it was the only choice. We were doing a professional execution. We were taking investment dollars, and I couldn’t have any ambiguity of being in the gray market. This was before adult use legislation passed in California, so we were functioning under California’s Medical Cannabis Regulation and Safety Act (MCRSA). The only way to be compliant with MCRSA at the time and be a medical cannabis cultivator was to get city-based permission or county-based permission, and the first region to authorize that was Desert Hot Springs. From our team’s perspective, wanting to build a truly compliant company from day one, that was the only choice available.
Green: I understand your facilities are powered by solar?
Sedlin: We have several facilities. One of them is a greenhouse that has light supplementation. We have an indoor facility that is powered by solar. When we opened the facility, it didn’t have a solar project on it. After we opened it, about a year and a half later, we did this full solar retrofit. We found the solar panels offset 38% of our energy consumption.
Green: Your product marketing is effect-forward. How did you come to that positioning for the brand and for the products?
Sedlin: The idea is to simplify life for consumers and unburden them from having to understand the 6,000 different strain names that are out there which have no consistency from cultivator to cultivator. Before Apple popularized the graphical user interface for computers, the standing orthodoxy among engineers at the time was that everyone should have to learn how to code. Everyone who wanted to use a computer needed to go through the mind-numbing MS-DOS process. But computers didn’t scale that way. Apple’s genius is that it built technology to serve humans with a GUI and didn’t put humans in service of the technology. Similarly, you shouldn’t have to learn 6,000 strains, 100+ terpenes and 100+ cannabinoids to make your first purchase. Our goal has always been to put cannabis in service of consumers as opposed to having the consumer in service of cannabis.
To be clear, Apple doesn’t dumb things down. Apple makes things easier, so that more people adopt them, so those things can then get better. And, that’s really how we’ve always viewed it. At the end of the day, I’m not sure if a consumer needs to know that he or she loves AK-47 when one can understand loosely, “How do I want to feel? Am I trying to relax? What am I trying to achieve?” It’s about prioritizing the consumer over the engineer, or in this case the cultivator or breeder, who covets naming rights. We operate with a consumer-centric philosophy and our company is in service of the consumer.
Green: You have a social equity brand called Justice Joints. What was your motivation for that line?
Sedlin: We have the luxury and privilege of participating in a legal cannabis industry, but there are many people who were never afforded that choice and suffered a steep cost. With this in mind, we need to put our dollars and sweat into helping communities most impacted and marginalized by the war or drugs and doing our part to address some of the damage. Justice Joints (JJ), our brand where 100% of the profits go to cannabis-related social equity and expungement programs invites the cannabis community, dispensaries and consumers to vote with their dollars for a better world. “Here’s a vehicle where 100% of the profit goes to cannabis related social justice causes. Are you in? Or are you out?” It gives consumers a platform where they can participate in positive change with their dollars. It’s what the plant is about.
JJ was the right answer for Canndescent because we wanted to build a self-sustaining economic engine for social justice. We launch world class cannabis brands so building one for social justice was the right choice for us and provided a way for all 250 of our employees to give back and feel proud each and every day. Justice Joints isn’t a side project; it’s hardwired into the daily activities of Canndescent and will hopefully evolve into an industry-wide, give back platform.
Green: What’s one thing in the world that you want to change or inspires you the most?
Sedlin: The thing I’m most interested in professionally is popularizing the practice of gratitude into the broader business and social fabric. Canndescent is the first company that I know of to incorporate gratitude as a core value. We do so because we believe that happiness is a mindset and a choice, not an outcome. It’s not how many likes you get on your social media, or how much money you make. It’s how you frame your experience to yourself that makes you happy.
On any given day, there’s 100 things I can bitch about, but that just becomes poison ivy that itches and that would make me angry, frustrated and depleted. Living and acting in gratitude, we can move our minds to a peaceful and productive place where we have control and can be our best self for those around us. For example, I just lost my dad on Thursday but I’m focused on gratitude not sorrow. My dad was awesome, died peacefully at age 89, had a 60-year marriage, and loved and gave love. Naturally, there is sadness, but instead of sinking into that, I focus on the blessing of him and meditate on the good. Operating from a happy place, I’m freed up mentally to be there for my mom, sister, wife, children, employees and investors.
So that’s what I’m passionate about. It’s not so much something I want to learn about as much as it is something that I want to cultivate in the world. There would just be more happiness in the world if humanity exercised the muscle of perspective–gratitude. It’s the greatest time in human history to be alive. To listen to the world around us, it’s natural to forget that. But, I’ll take Covid-19 over the Black Plague and Spanish Influenza anyday. “Yes, shit happens, but are you a shit talker and complainer, or are you the type to say, let’s clean this up.” It’s a choice. Canndescent wants to project light and build a world of gratitude.
Green: That concludes the interview, thanks Adrian!
With data forecasting expert BDSA predicting that the global cannabis market will reach $56B by 2026, there is no time to waste. Whether it’s Oklahoma, New York or even Macedonia, the frenzy is on. Investment decisions are immediate, and you have to be correct out of the box. This is where an expert like Andrew Lange and his company, Ascendant Management, come in. Andrew has designed more than 1.5 million square feet of cannabis facilities and moved them into profitable production in North America and Europe. One of his active customers is Onyx Agronomics in Washington. Bailee Syrek is the director of operations at Onyx and this is the story of the key points in designing a precision cannabis facility with state-of-the-art efficiency.
Background
Andrew Lange, a navy veteran, runs a global cannabis consulting business based in Washington. With a “prove it to me” approach, he regularly tests the best new technologies in the facilities he designs. He integrates his knowledge of what works in practice into his subsequent facilities. One of his previous projects, Onyx Agronomics in Washington, started in 2014 and moved quickly into production in a retrofitted warehouse. Many of his best ideas started with Onyx, including some new innovations in the latest expansion there this month. Onyx is a tier 3 cannabis cultivator.
Bailee Syrek’s operation at Onyx currently produces 9,000 lbs. of dry trim bud per year in 8,000 square feet of canopy. She operates the state-of-the-art, clean room style, indoor grow facility around the clock, delivering 2.7 grams/watt from every square foot of canopy in her building. She runs a highly efficient facility.
Onyx has had an ongoing relationship with Ascendant Management and chose to leverage them again with their current expansion to increase their capacity further. Onyx uses a range of advanced technologies including aeroponic cultivation equipment and control software from AEssenseGrows to hit their metrics.
Precision, Quality & Consistency
“I look for ways that my clients can differentiate themselves,” says Lange. Maybe it’s his military background, but Andrew demands precision, quality and consistency in the operations he designs. “Cannabis is a just a plant really so we look for the highest performance grow methodology. I find that to be AEssenseGrows aeroponics,” says Lange. “The AEtrium Systems provides a good foundation to manipulate for grow recipes and business process. I add teamwork, communications, and operations procedures to that foundation.”
At Onyx, Bailee Syrek works closely with her channels. She invites her customers in regularly to review the Onyx cultivars and to cover their ideal requirements. These can range from bud size for their packaging to THC or terpene profiles (Yes, channels do want both higher and lower THC content for different consumers and price points). Based on that feedback, Bailee and Andrew work together to dial in the ideal grow recipe in the AEssenseGrows Guardian Grow Manager central control software. They push their target strains to optimize the results in the direction requested by their customers. For example, “How do you get the highest possible THC out of 9lb Hammer?” You’ll have to ask Andrew and Ascendant Management.
Driven by customer requests, Onyx is adding new strains to build on their innovative brand. Bailee expects to reach new levels of terpene bundles with Cheeseburger Jones, Koffee Breath, Shangri-La and OK Boomer. Utilizing Andrew’s expert knowledge, they can take typical sub-20% cannabinoid bundles and improve them using aeroponics and better controls, into standout aeroponic 30% packages.
The Onyx Vision
Andrew Lange, Ascendant Management
Bailee Syrek believes this is the most exciting time yet for Onyx. Delivering premium grade cannabis as a white label flower supplier for years, Onyx is a profitable and successful business. But even with doubling capacity every year, they are still having trouble keeping up with customer demand. Bailee wants to get to the point where she can always say yes and accept an order from their white label customers. With this objective, she again engaged Ascendant and Andrew to get beyond 15,000 lbs. of output in 2021 to make her customers happier. Beyond that basic expansion, she is also ambitious and is preparing plans for additional lines of revenue with their own proprietary flower, oil and derivative products.
“This expansion will be a new challenge,” says Syrek. “Flower production is in our wheelhouse. We have tighter operations, with the most consistent bud size, terpenes and test results in our state. These new products will require that same quality but now in new areas.”
Her Path to Leadership
Bailee started with Onyx in a compliance position that grew out of the constant demands for government licensing and reporting. In that compliance role, she had the opportunity to work a bit in every department, giving her a good understanding of all of the facility operations and workflows. All of that experience led her to eventually take over the operations leadership role. She instills care and effort to maintain the cleanest and most efficient operations possible. “With aeroponics, we don’t have to lug soil from room to room or in and out of the facility. This saves us a ton of work that we can redirect to plant health and maintenance,” says Syrek. “Medical precision and GMP quality is a given. Each room on average is 105 lights and one room manager and one cultivation technician take the room from clone/veg transfer to harvest as a two-person team.”
Bailee Syrek, director of operations at Onyx Agronomics
Bailee prides herself with results. “Medical grade precision is normal for us. We use medical grade SOPs for every aspect of our production.” Bailee has designed these guides into their control system that runs on the Guardian Grow Manager software. From sensor tracking, to performance graphs to time cards; everything is integrated in her performance monitoring.
A quality focus is very apparent in every Onyx flower room. Every watt of light energy is transferred to the pristinely manicured canopy. Naked stems feed nutrients up to the fat buds at the trained canopy surface. Fan leaves are removed and all possible energy turns into bud weight and potency. The room technician has a passion for plant health, table care and plant maintenance all the way through to the harvest bonanza.
What is the biggest challenge for Bailee as she drives the operation? Even at 105-110 grams per square foot per harvest, they are sold out. “Every customer wants to buy beyond our capacity. It is a good problem to have,” Bailee says. “Customers want our quality and love the consistency. This is the most exciting thing about our expansion. We will finally be able to make additional channels happy with high quality supply.”
This is where Andrew credits Onyx’s performance. “Most well running operations deliver 1.1-1.8 grams of dry trim bud per watt of electricity used in powering a grow room,” says Andrew. The Onyx grow formula results leave this in the dust. Running Fluence SPYDR 2i grow lights and the AEtrium System aeroponics, Onyx plants are delivering just shy of 4 lbs. per light with every harvest cycle. At 630 watts max output, that delivers ~2.7 grams/Watt, the most efficient operation he has seen. The Onyx process and execution works.
“Bailee is a great example as a professional. She builds a motivated team that executes better than her competition,” says Andrew.
At the same time, Onyx runs a highly space efficient nursery with just enough mother plants feeding energetic cuttings into the 4-layer stacked AEtrium-2.1 SmartFarms in their environmentally controlled clone room. They produce more than enough healthy clones to jump from veg to flower in the span of a week. Grow time, harvest turn time and no veg space, results in very efficient use of power in the complete operation.
Mirroring Onyx for Medical Grade Cannabis in Europe
Andrew Lange’s current passion is a green-field project in Portugal. Self-funded, Andrew says that this facility will be one of the first that is pure enough in operations to supply non-irradiated clean-room-level-quality cannabis beyond the precise standards required by European regulators. Current importers have not been able to clear the European standards for cleanliness without irradiating their buds. Other companies like Aurora have abandoned efforts to access the market due to the precision requirements. Typical methods used for fruit imports use gamma radiation to get bacterial counts down. This was tried with cannabis to sterilize buds, but the problem with cannabis is this degrades the quality of the flower.
Andrew’s Portugal facility will be using a sterile perimeter surrounding his grow space (mothers, clones/veg, flower rooms) and harvest and processing areas (dry, trim, packaging). Andrew creates a safe environment for healthy production. A steady harvest cleaning regimen is built into his operational designs from the beginning. All operators are trained in procedures to exclude pathogens and limit all possible transmission (airborne, physical/mechanical touching, or water carried). Every area is cleaned during and between harvests. Andrew is confident he will reach a consistent level of accuracy and purity beyond European requirements because it is routine in all of his designs.
Certified Efficiency is the Message
Good Manufacturing Practices (GMP) and Good Agricultural and Collection Practices (GACP) are required for certification and access to European markets. Andrew always builds tight operations, but in this case, his Portugal facility is designed with the fit and finish to be GMP and GACP compliant from day one with advanced air filtration and air management throughout.
Automated aeroponics is a foundation technology that Andrew recommends for his facility designs. The automatic data logging, report generation, cloud access and storage make this a foundational technology. Andrew does get some resistance from cultivators that are used to the classic soil media approaches but he explains that software configurable grow recipes, precision controls, zero soil/no pests and hyper-fast growth makes aeroponics the foundation of competitive advantage. Precisely controlled medical quality precision operations are built on top of this foundation.
The initial phase of the Portugal facility is 630 lights and this facility is Andrew’s latest personal investment. From secure perimeters to modular grow rooms and highly automated equipment, this location will be state-of-the-art in terms of grams/watt yields and renewable energy with an output of 6 metric tons per year. Solar powered electricity from a 4-megawatt farm will use Tesla megapacks for storage and be grid independent.
Technology & Innovation, Onyx & Ascendant
From his first experience with AEssenseGrows aeroponics, Andrew has been able to design complete grow recipes in the Guardian Grow Manager software with very tight precision on dosage. This makes it possible to create ideal recipes for each strain (nutrition, irrigation cycles, lighting and environmental management). This frees up the operations teams to focus on plant health and execution. The nutrients, pH, CO2, temperature and humidity, follow the Guardian directions that he sets.
Working with Bailee at Onyx, Andrew is now consulting on the post-harvesting side of operations (drying, trimming, extracts and packaging). In parallel with his efforts, Bailee is optimizing THC & terpene production on the cultivation side with UV lighting (considering far-right red frequency light recipe enhancements).
That is the Ascendant Management approach to innovation. Trial, test constantly, perfect ideas in practice. Optimize the results for consistent, high-quality results. Even while driving for the personal craft touch, use automation to increase efficiency of mundane, but important tasks. With these methods, Andrew believes that the Onyx labor cost is one third of typical soil media grow operations. Zero soil aeroponics offers many benefits. Bailee’s team is able to give each plant more attention and delivery better quality. Automation is a win-win for them.
Bailee finds that constant testing is useful for two things: one, great results, and two, surface the best talent with their hand’s-on approach.
Always Finish with People
Bailee says that her staff works incredibly hard. “We are a different grow, with better ergonomics on the job, aeroponics for precision and yields, and advanced technology at the leading edge in every part of our grow. No dirt up and down stairs. People are proud to work here. We are not your dad’s grow operation.”
“We promote from within. Everyone starts as a room tech and has the opportunity to move up. Teams are isolated by rooms so there is no contamination between rooms or humans. Put in the work, and you will get promoted with expansions, and grow with the company as we take a bigger share in the market.” Female employees make up almost half of the current staff, and Bailee encourages employees to refer their friends. “Good people invite good people,” she says.
Her training program introduces the technical aspects of their unique operation, the positive expectations and career path for every new employee. The social environment is friendly with good pay and regular raises. Each new employee fills a range of roles during their 1-month training circuit and are assigned to a cultivation space under a lead as an official cultivation tech at the end of 30 days. “One thing that we do more than at other grows is constant cleaning,” says Bailee. “This is an ever-present mantra for the staff.”
At Raw Garden, we have a ‘Farming First’ philosophy because we understand that the process of farming is the process of managing the plant’s life and the management of the land those plants grow on – this is when the plantgets its chance to thrive but requires that it is properly nurtured in order to provide resources such as high-quality terpenes and cannabinoids.
Our cannabis plants are sun-grown in Santa Barbara county soil just like other California crops. From the seed to the shelf, we are vertically integrated and maintain quality control at every step in the process. We grow our own seeds, farm and harvest our own plants, and process our own products while employing sustainable and regenerative farming practices – only organic and natural fertilizers, soil amendments and pest control methods are used on thefarm.
As farmers we have a responsibility to care for the land and the soil to ensure it is fertile and healthy well into the future. We take care of the soil and it takes care of our plants. The result is premium quality products that our customers love and trust. Our success and commitment to quality is proof that the economics of clean, sustainable operations are achievable. We’re farmers and scientists on a mission to make clean, high quality cannabis that is affordable and accessible.
A few of the sustainable agriculture practices we employ at Raw Garden include:
The Clean Green Certified logo
Clean Green Certification – Since our inception, we have been certified and licensed members of Clean Green, the #1 globally-recognized organic and sustainable cannabis certification program. The program was created in 2004 as a way to standardize legal cannabis products and the result was a program to help farms and brands obtain organic-like certification based on the USDA National Organic program. Clean Green-certified growers and processors regularly win awards for their high-quality products, including our award-winning extracts.
Water Conservation – Our farm team waters at the right time of day to reduce evaporative water loss; we also use drip irrigation and mulch to reduce water waste and runoff. Last year, we used about 8,000 gallons of water per acre on average, which is significantly less than standard outdoor grown crops.
Natural Fertilizer and Pest Control – We apply only organic fertilizers and foliar feeds and we spray only organic pathogen-free inoculants to keep our plants healthy and disease-free, which consistently results in high yields. To naturally deter pests, we recruit beneficial predatory insects like ladybugs and parasitic wasps, in addition to botanical oils and diatomaceous earth.
Precision Agriculture (PA) and Site-Specific Crop Management (SSCM) – We utilize technology to manage crops and increase farm efficiency, such as machine learning for fertilizer optimization and digital sensors in the field to monitor crops.
Author Khalid Al-Naser next at Raw Garden’s farm. Image by Brian Walker
Soil Health and Terroir – Like grapes for wine, cannabis plants grown in the soil have terroir that affects the flower’s qualities, characteristics, terpene profile, aroma and taste, based on temperature, climate, soil composition and topography, as well as other environmental influences. Micro-climates matter – the same strain of cannabis grown along the coast likely has a different taste and potency than one grown inland. We grow in Santa Barbara wine country for the combination of fertile soil, hot sun, and cool nights which yield an incredibly diverse, potent and flavorful crop of cannabis flowers. Between growing seasons, we employ regenerative agriculture by planting cover crops including oat, beans, peas and buckwheat to add nitrogen and organic matter naturally back in the soil. This method of cover crops also helps reduce pests and soil-borne diseases in preparation for the next growing season. We know that an ideal environment in combination with healthy soil and good land management results in healthier, more vigorous plants, which translates to higher-quality products.
As farmers, it is our responsibility to care of the land with good management decisions today so that we grow the best quality products while better preserving the land for the future. It takes careful planning, knowledge of the land, a commitment to sustainable practices and a desire to put farming first.
As cannabis legalization becomes more prolific across the United States, entrepreneurs are entering the cultivation business in droves. With so many new companies entering the market and growing cannabis, there are a lot of common errors made when getting started. Here are ten of the biggest mistakes you can make when building a cannabis grow facility:
Failure to consult with experts in the cannabis business – poor planning in floorplan and layout could create deficient workflow causing extra time and costing profits. Bad gardening procedures may result in crop failure and noncompliance could mean a loss of license. Way too often, people will draft a design and begin construction without taking the time to talk to an expert first. Some important questions to ask yourself and your consultant are: What materials should be used in the building of the grow? Is my bed-to-flower ratio correct? How long will it take before I can see my first harvest?
Contractor selection – DO NOT build your own facility; leave it to the experts. Sure, you have experience building things and you have a friend who has worked in construction. Do not make this mistake – Our experience can save you from the mistake’s others have made. To stay lucrative in this competitive industry and to maximize your products’ quality and yields, have the facility built right the first time. Paying an experienced, qualified cannabis professional to build you a facility will produce better yields and will save you time, stress and money in getting you from start of construction to your first crop.
Not maximizing your square footage potential – With today’s fast changing environment, multi-tiered stationary racks, rolling benches and archive style rolling racks help maximize square footage. Without the proper garden layout, you will find yourself pounds short of your potential each harvest.
Inadequate power – Not planning or finding out if there is sufficient power available at the site for your current and future needs. This will stop you from building the overall square footage you want. When finding a building make sure you first know how much power you will need for the size grow you want. With proper engineering you will find out what load requirements will be so you can plan accordingly.
Material selection – The construction material that goes into a cultivation and extraction facility should consist of nonabsorbent anti-microbial finishes. The days of wood grow benches are long gone. Epoxy flooring, metal studs and other materials are mandatory for a quality-built, long-lasting facility.
Hand watering – Once your facility is up and running, many people feel they have spent enough money and they can save by hiring people to water by hand, rather than going with an automated system to handle the watering and nutrients. The problem with this is your employees are not on your plants timetable. What if an employee calls off and can’t come into water at the right time or they mix the wrong amount of nutrients from the formula you have selected? These are issues we see a lot. It is critical to perform precise, scheduled watering and nutrient delivery to increase your yields.
Failure to monitor and automate – Automating your grow is important for controlling the light and fertigation schedules as well as data collection and is crucial to maximizing yields. Being able to do this remotely gives you peace of mind in that you can monitor your grow room temperature and humidity at all times and be notified when something is not right.
Poor climate – This can cause stunted growth, smaller harvests and test failures. Our experience has taken us to facilities that have had mold and mildew issue due to poor climate. Proper air balancing, additional dehumidification along with a proper cleaning procedure can get a facility back in working order. Installing proper climate control systems could save millions of dollars.
Choosing the wrong site or building – Not knowing the history of the building you are choosing to rent or buy can create logistical and monetary nightmares. The wrong site can be a distribution and marketing disaster. In the wrong building, exponentially more money is spent to bring that building up to the standards needed for successful production and yields. For example, bringing in the ceiling and the cleaning of an existing facility can be a great expense. If you do not know what you are looking at when you purchase, you may be in for months of unaccounted expenses and inaccurate timelines. This can be detrimental for companies and individuals that are on restricted timelines and have to start producing successful and continuous yields from a space that has to be converted into a prime grow facility.
Failure to maintain your facility – A dirty site creates an invitation for pests, workplace injuries, unhealthy working environment and equipment failure. Keeping the facility and equipment properly maintained with routine service will ensure efficiency, longevity of equipment life span and reduce mold and bacteria risk. Clean facilities = clean plants and better flower.
While we’re pleased to report that 2020 is almost over, 2021 will be a mixed bag. New jurisdictions will open their doors to cannabis and consumption will continue to rise, but competition from new operators and illicit supplies will increase. As California’s cannabis industry matures and turns the page on a bizarre year, market uncertainty will linger as the pandemic drags on and overtaxation and regulation strangle profits. But let’s remember, cannabis has been cultivated for over 6,000 years and has withstood far worse—this market isn’t going anywhere and will continue to grow and become more impactful.
Access to Traditional Finance Services
The U.S. Senate will likely pass legislation providing cannabis businesses access to traditional banking and financing services. This will be a game changer for the industry. Valuations will go up. Increased liquidity will smooth transactions. Companies will look to affordable debt to expand their footprints and capacity to compete on a new scale. Full federal legalization could be a game changer if 280E tax restrictions are lifted and interstate and international cannabis trade open up, but the timing of this is hard to predict.
Continued Quarantine-Induced Consumption
Cannabis consumption will continue to increase as Californians seek to ease pandemic-related stress, temper quarantine conditions, and sample an eye-popping array of new products. Sophisticated consumers will be open to spending more on unique and niche products. But hemp-derived cannabinoids may present a new source of competition, especially if CBD remains unregulated. By the end of 2021, cannabis beverages will begin to compete with mainstream alcohol categories. Pharmaceuticals will increasingly take notice of this industry and the increasing share of consumers turning to plant-based remedies.
Ever More Cultivation Opportunities
In pursuit of revenue, agricultural counties will liberalize their policies on cannabis cultivation by permitting more acreage and streamlining permit processes. Neighborhood groups will push back, but policymaker concerns will be assuaged when they see cannabis farms operating innocuously (and sustainably) around the state. Advances in seed breeding, pest-and-disease control, outdoor growing techniques and odor abatement technology will help too.
New Retail
Cities and counties will revisit opening their borders to cannabis retail storefront and delivery as they attempt to fill budget gaps. Many cities will allow cannabis retail for the first time and/or expand the number of licenses available. These new dispensaries will provide a much-needed outlet for the influx of licensed flower and will continue to spur innovation and consumer education. But a “second wave” of retail speculators seems poised to let optimism override judgement, setting themselves up for failure or acquisition by incumbents.
Getting Social Equity Right
2021 will be a pivotal year for social equity, which will establish a foundation for a just cannabis economy. The industry will have to grapple with how to ensure that those most impacted by the criminalization of cannabis and most often excluded from traditional financing exposure are provided with equitable access to meaningful opportunities. As California’s regulated cannabis market grows, getting social equity right will be important if the industry is to firmly establish itself as an inclusive industry that addresses impacts on marginalized communities and responds to customer demands.
Formalizing Appellations
California’s new CalCannabis Appellations Program will provide cultivators and brands a way to credibly market the value of their unique growing regions and cultivation methods. These distinctions only apply to cannabis planted in the ground, excluding greenhouse and warehouse grows. The expectation is that high-end consumers, trained to recognize place-based designations and quality certifications in other products, will reward products that boast these designations. How many consumers will be willing to pay the premium and how long full implementation of the program will take, remains to be seen.
Prices May Begin to Drop
2020 was a great year for the few fully licensed cultivators in California permitted to sell to the regulated market. 2021 may be different. Numerous licensed cultivation projects will complete the permitting processes and come online next year. While growing demand may outpace supply at first, by Q3 supplies could swamp the market. Premium flower is perhaps an exception. Adding to the pricing pain, as always, is California’s illicit market, which will continue to undercut prices, as legal growers toil to comply with a labyrinth of state and local regulations. Nonetheless, cannabis will remain the most profitable crop on a per acre basis for some time.
Business Turmoil
The drop in prices coupled with continued high taxes and regulatory burdens will result in turnover of assets and businesses. Less efficient and inexperienced cultivators will struggle, many unable to ultimately withstand pricing pressure. Others will be hit by enforcement actions for failing to comply with California’s myriad regulations. Retailers, already burdened by punitive tax structures, real estate finance commitments and onerous local regulations, will need to be disciplined and have a clear strategy to address new competition.
Consolidation
Driven by business failures and renewed investor interest, California’s regulated cannabis industry may consolidate rapidly in the second half of 2021. Institutional finance will enter the space with a much more disciplined approach than prior capital sources. Traditional agricultural interests will invest in cannabis cultivation projects. Well-run retail chains will begin to outcompete, and then acquire, mom-and-pop competitors. Big brands will continue to expand their shelf space, relegating smaller competitors to niche and novelty status.
In short, the cannabis industry will continue to be highly dynamic, exciting, enticing and risky.
For years, tetrahydrocannabinol (THC) got all the attention. While THC certainly delivers its own benefits (such as relaxation and pain relief), there’s a whole host of other – and often overlooked – compounds found in cannabis with important benefits as well. THC is truly only the tip of the iceberg when it comes to cannabis’s potential.
As the cannabis industry evolves with changing consumer tastes and developing medical research, growers may employ techniques to boost cannabinoid and terpene profiles in their harvests – beyond merely focusing on THC. Advanced LEDs allow growers to elicit specific biological responses in cannabis crops, including increased concentrations of these naturally occurring chemical compounds.
The Foundation of Cannabis’s Effects Whether used medicinally or otherwise, cannabis has changed our society and many of our lives – and there’s a collection of naturally occurring chemical compounds, known as cannabinoids and terpenes, to thank.
The cannabinoids THC and CBD are the most common and well-researched, however they are accompanied by more than 200 additional compounds, including cannabinol (CBN), cannabigerol (CBG) and tetrahydrocannabivarin (THCV), among others.
The cannabis plant also contains terpenes. These structures are responsible for giving flowers (including cannabis), fruits and spices their distinctive flavors and aromas. Common terpenes include limonene, linalool, pinene and myrcene.
Both cannabinoids and terpenes are found in the cannabis plant’s glandular structures known as trichomes. Look closely, and you’ll notice trichomes coating the cannabis flowers and leaves, giving the plant an almost frosty appearance.
A macro view of the trichomes and pistils on the plant
Trichomes – which are found across several plant species – are a key aspect of a cannabis plant’s survival. The specific combination of metabolites produced by trichomes may attract certain pollinators and repel plant-eating animals. Moreover, trichomes (and specifically THC) may act as the plant’s form of sunscreen and shield the plant from harmful ultraviolet rays.
While they play an essential part in the cannabis plant’s lifecycle, trichomes are volatile and easily influenced by a range of environmental factors, including light, heat, physical agitation and time. Therefore, environment is a defining variable in the development of these important structures.
How LEDs Support Cannabinoid and Terpene Development in Crops Spectrally tunable LEDs give indoor cannabis growers unparalleled control over their crops. As research has expanded about plants’ responses to the light spectrum, growers have discovered they are able to elicit certain physiological responses in the plant. This phenomenon is called photomorphogenesis. At its root, photomorphogenesis is a survival tactic – it’s how the plant responds to miniscule changes in its environment to increase the chances of reaching full maturity and, eventually, reproducing. While cultivated cannabis plants won’t reproduce at an indoor setting, growers can still use the light spectrum to encourage strong root and stem development, hasten the flowering process and the development of bigger, brightly colored flowers.
It makes sense that using the proper light spectrums may also have an impact on the production of specific cannabinoids and terpenes – an important factor when responding to highly specific consumer needs and desires, both within medical and adult-use markets.
Here are a few more reasons why utilizing full-spectrum LEDs can lead to higher quality cannabis:
Lower Heat, but the Same Intensity. When compared to HPS, fluorescent and other conventional lighting technologies, LEDs have a much lower heat output, but provide the same level of intensity (and often improved uniformity). This represents an enormous advantage for cannabis cultivators, as the lights can be hung much closer to the plant canopy without burning trichomes than they would be able to with other lighting technologies.
UV Light. Cannabinoids and terpenes are part of the cannabis plant’s natural defense mechanism, so it makes sense that lightly stressing plants can boost cannabinoid and terpene numbers. Some studies illustrate an increase in UV-B and UV-A light can lead to richer cannabinoid and terpene profiles.1 It’s a fine line to walk, though – too much UV can result in burned plants, which leads to a noticeable drop in cannabinoids.
Full-Spectrum Capabilities. The cannabis plant evolved over millions of years under the steady and reliable light of the sun. Full-spectrum is the closest thing to natural sunlight that growers will be able to find for indoor growing – and they’ve been shown to perform better in terms of cannabinoid development. A 2018 study titled “The Effect of Light Spectrum on the Morphology and Cannabinoid Content for Cannabis Sativa L.,” explored how an optimized light spectrum resulted in increased expression of cannabinoids CBG and THCV.2
This is the most important tip for indoor growers: your plants’ environment is everything. It can make or break a successful harvest. That means cultivators are responsible for ensuring the plants are kept in ideal conditions. Lights are certainly important at an indoor facility, but there are several other factors to consider that can affect your lights’ performance and the potency of your final product. This includes your temperature regulation, humidity, the density of plants within the space, CO2 concentration and many other variables. For the best results, your lights should be fully aligned with other environmental controls in your space. Nothing sabotages a once-promising crop like recurrent issues in the indoor environment.
Indoor cultivation facilities often use high powered lights that can give off heat
Cannabinoids and terpenes take time to develop – so cultivators will want to avoid harvesting their plants too early. On the other hand, these compounds begin to degrade over time, so growers can’t wait too long either.
Cultivators seeking potent cannabinoid and terpene profiles must find a happy medium for the best results – and the best place to look is where cannabinoids and terpenes develop: the trichomes. With a microscope, cultivators can get up close and personal with these sparkly structures. Younger plants begin with clear trichomes, which eventually become opaque and change to amber. Once your plants show amber-hued trichomes, they’re ready for harvest.
The truth here is that there’s no perfect formula to elicit show-stopping cannabinoids and dizzying terpenes with every harvest. A lot of cannabis cultivation is based around trial-and-error, finding what works for your space, your business and your team. But understanding the basics around indoor environmental controls like lighting and temperature – and how they can affect the development of cannabinoids and terpenes – is an excellent place to start. Using high quality equipment, such as full-spectrum LED lighting can boost both cannabinoid and terpene production, resulting in richer, more potent and higher quality strains.
References:
Lyndon, John, Teramura, Alan H., Coffman, Benjamin C. “UV-B Radiation Effects on Photosynthesis, Growth and Cannabinoid Production of Two Cannabis Sativa Chemotypes.” August 1987. Photochemistry and photobiology. Web. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1751-1097.1987.tb04757.x?&sid=nlm%3Apubmed
Magagnini G., Grassi G., Kotiranta, S. “The Effect of Light Spectrum on the Morphology and Cannabinoid Content of Cannabis sativa L.” 2018. Medical Cannabis and Cannabinoids. Web: https://www.karger.com/Article/FullText/489030
This is not a discussion of climate change, it’s a discussion of the impact of weather on the agriculture industry. The question for the cannabis & hemp industry, and basically the entire specialty crop industry, is what will be the impact? According to the U.S. National Climate Assessment, “Climate disruptions to agriculture have been increasing and are projected to become more severe over this century.” I’m sure that’s not much of a shock to anyone who owns a farm, orchard or greenhouse.
Every national newspaper for the past two weeks has published at least one article a day about the flooding in the Midwest, while industry newsletters and blogs have contained more in-depth stories. The question is, what can agriculture professionals do to mitigate these problems?
Relying on state and national legislators, especially heading into a presidential election year is likely to be frustrating and unrewarding. Governments are excellent at reacting to disasters and not so good at preventing them. In short, if we depend on government to take the lead it’s going to be a long wait.Instead, many farmers are looking at the future costs of outdoor farming and concluding that it’s simply cheaper, more efficient and manageable to farm indoors.
Instead, many farmers are looking at the future costs of outdoor farming and concluding that it’s simply cheaper, more efficient and manageable to farm indoors. Gone are the days when people grew hemp and cannabis indoors in an effort to hide from the police. Pineapple Express was a funny movie but not realistic in today’s environment.
Today’s hemp and cannabis growers are every bit as tech savvy as any other consumer-oriented business and one could argue that given the age of their customers (Statista puts usage by 18-49-year-olds at 40%), distributors must be even more tech savvy to compete effectively. Some estimates put the current split of cultivation at about one-third indoors/two-thirds outdoors. To date, the indoor focus has been on efficiency, quality and basically waiting for regulators to allow shipping across state lines.
A major driver in the indoors/outdoors equation is that as the weather becomes more unfriendly and unpredictable, VC’s are factoring climate disruption into their financial projections. When corn prices drop because of export tariffs, politicians lift the ban on using Ethanol during the summer months. It’s going to be a while before we see vehicles running on a combination of gasoline and CBD.
Leaving aside the case that can be made for efficiency, quality control and tracking of crops, climate change alone is going to force many growers to reassess whether they want to move indoors. And, it’s certainly going to weigh heavily in the plans of growers who are about to launch a cannabis or hemp business. Recently, one investment banker put it to me this way: greenhouses are the ultimate hedge against the weather.
Editor’s Note: This is the second piece in a two-part series delving into tax issues. Part one discussed tax code 280E as it pertains to cannabis businesses. Part two will go into research and development credits, 199A and a discussion of risk as it relates to Qualified Opportunity Zones.
While 280E is the most influential code section for the cannabis industry, structuring never happens in a vacuum. There are many open questions that each business must answer for themselves without court adjudication. We believe that among the riskiest of questions is whether a cannabis business can claim research and development credits.
There is no clear legal authority that either allows these credits or disallows them but certainly utilizing such credits comes at great risk. At the beginning of this article we talked about Congress and the purpose of 280E. Congress’s intention was to make sure that only the minimum required tax deductions were available to Schedule 1 and 2 sellers. A cannabis business receiving a research and development credit would not be with the intension of Congress. While the credits would be computed based on COGS expenditures, at this time we do not believe that a cannabis business should take this credit. Disallowance of COGS would create a constitutional challenge which is why Congress allowed the COGS deduction. Disallowance of Research and Development Credits does not open up the same constitutional issue since the credit is not part of COGS although calculated based on COGS expenditures. 280E states very clearly that credits arising from other code sections are disallowed in the entirety.
More recently the Tax Cut and Jobs Act (TCJA) opened up new issues for cannabis companies that are still unfolding. Two of the most publicized are Qualified Opportunity Funds and Section 199A, the 20% deduction (Qualified Business Deduction).
The 199A deduction allows eligible pass-through entities to claim an additional deduction of 20% of the income (subject to certain limitations) at the individual level potentially lowering the tax rate from 37% to 29.6%. While the American Institute of Certified Public Accountants (AICPA) and others have asked the IRS to clarify if 280E would make a cannabis business ineligible, the final regulations on the subject did not address this issue. There are other significant limitations and hurdles in 199A regulations that any business would have to first pass to be considered for the rate deduction. If a cannabis business meets all other eligibility and limitation criteria, should the pass-through income to their investors be qualified income under 199A? The answer will depend on whether the courts will treat this “deduction” as falling under the general prohibition of 280E.
We believe that there is a reasonable chance that the courts will allow the 199A deduction for cannabis companies. That does not mean, however, that we advise cannabis companies to claim this on their pass-through returns as Qualified Business Income. Much like everything else, it depends on the particular business and the risk profile that management is willing to tolerate. This is one area of tax law that is sure to be challenged in court. The more risk-averse business should pass on claiming this deduction on their returns, but monitor development with an eye to amending at a later date if favorable precedent emerges. If the amounts are large enough, consideration should be given to applying for a Private Letter Ruling, but that also has its own tax risks.
Another new tax incentive that was in the TCJA was Section 1400Z or Qualified Opportunity Zones (QOZ). The incentive allows for the deferral of capital gains until December of 2026. The use of 1400Z also results in up to a 15% decrease in capital gains tax- and tax-free appreciation if all requirements are met. While the IRS has only released proposed regulations and we anticipate significant changes to them when they are released as final, there was nothing in the proposed regulations limiting cannabis businesses from using Qualified Opportunity Funds (QOF) in their structure. It is interesting to note that the TCJA and proposed regulations did list other types of businesses that could not make investments under 1400Z along with all its benefits. Liquor stores, golf courses and sun tan parlors were among those listed but cannabis growers and dispensaries were not.
As the industry continues to mature, new issues and precedents will require CPAs and attorneys to find new solutions to best serve the industry.Using Opportunity Zones to entice investors sounds like a great opportunity, but there are significant risks. The first risk is that the proposed regulations, while currently proposed, may not be final. There is always a chance that the IRS will take a different position when the final regulations are released and add cannabis to the type of businesses that do not qualify. Another risk, and one that was previously mentioned as part of 199A and other areas of structuring, is that the IRS and the courts can always disagree with the taxpayer’s position. This is a new area of tax law and will eventually be litigated. The loss of the Opportunity Zone benefits can significantly change the return to the investors and lead to other issues.
All of these issues come into play when structuring businesses in this industry. These issues must be evaluated as they pertain to the business needs. This can be very complex and requires a great deal of research for each business opportunity. We have found that professionals operating in this industry like to know about all of their options. The most important thing we can do for the industry is to continue to educate the professionals working in it.
Accountants should be available to assist their clients and their clients’ attorneys with structuring techniques aimed at asset protection and minimizing 280E disallowances. Accountants should also be ready to speak to the questions outlined above and be prepared to explain the risks associated with each choice. As the industry continues to mature, new issues and precedents will require CPAs and attorneys to find new solutions to best serve the industry.
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