Illinois “craft grow” marijuana license winners have a year to raise millions, open for business

Illinois “craft grow” marijuana license winners have a year to raise millions, open for business

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His Chicago-based company, HT23 Growers, is one of 40 applicants that won “craft-grow” licenses that allow them to operate up to 14,000 square feet of cultivation space for marijuana. The road ahead is daunting. Over the next six to 12 months, they’ll have to raise money, locate property, build out facilities and start lining up retail customers.

Production is an overlooked part of the long-awaited expansion of the $1 billion Illinois weed industry. The nearly 200 new retail stores that are expected to open in the next year will need additional sources of marijuana, from smokable “flower” to gummies, which can’t be supplied by growers outside Illinois. Growers also are critical to the state’s promise that recreational cannabis will create wealth and jobs among residents of communities, such as the South and West sides of Chicago, that were hit hard by arrests and incarceration stemming from the war on drugs.

Don’t let the name “craft grow” fool you: They start out with 5,000 square feet of cultivation space and can increase to as much as 14,000 square feet, about the size of the first medical-marijuana farms set up in Illinois. With additional space for offices, storage and other uses, most craft growers will build 25,000-square-foot facilities, employing 20 to 40 people. The facilities likely will cost $5 million to $10 million, compared with retail shops that cost $750,000 to $1.5 million.

Still, the craft-grow operations will be a fraction of the size of the existing cultivation centers operated by the industry giants, the largest of which can be 10 times bigger. The state envisions craft growers will follow the path of craft brewers, starting small but building lucrative businesses by filling a niche. Experts estimate a craft-grow facility could do about $10 million a year in revenue initially and approach $40 million at full capacity after several years.

Ambrose Jackson, CEO of Helio Labs, says his team located a building in Broadview before it applied for a craft-grow license, putting up a $40,000 deposit. There’s also a $40,000 state licensing fee. To begin the permitting process, Helio needs architectural drawings that he figures will cost a few hundred thousand dollars.

“We’ve raised about a quarter-million dollars to get to this point, which is a piece of paper,” he says. “We’ve got to raise about $10 million.”

Applicants say they’ve been developing relationships with potential investors for more than a year, one benefit to the delays in issuing licenses.

“We haven’t made any commitments, but we’ve had conversations,” says HT23’s Walton, who grew up in the Roseland neighborhood. “I’m pretty confident we’ll identify the right investor.” 

He worries about how much equity he and his partners will have to give up. “The choice boils down to: Do you want to hold on to control of the business and not have the money to stand up the business or give up some equity to pursue your dreams? I don’t think we’ll have to give up majority ownership.”

Legislators who designed the law worried that social-equity applicants might lack the resources to meet their goals. Raising money for new businesses is hard enough, but weed entrepreneurs face unique hurdles. Because marijuana is illegal under federal law, banks and other traditional sources of capital aren’t available.  

Paul Magelli, president of the trade group Illinois Craft Cannabis Association, estimates “half of the license recipients are not in a financeable position today; half are in a reasonable position.”

A state fund created from licensing fees on incumbent marijuana sellers and producers aims to provide $34 million in low-interest loans to marijuana entrepreneurs. But it’s designed to serve 185 retailers, 40 craft growers and 32 manufacturers. The maximum available is $500,000. 

“It’s wholly insufficient and wholly immaterial,” Magelli says. “(The state) needs to do something more aggressive off their balance sheet. That amount of money will not move the needle.”

The state says it “will continue to search for ways to raise additional capital and increase capacity of the cannabis social equity loan fund over time.”

Existing cannabis companies also are a potential funding source, providing low-interest loans of $100,000 to social equity applicants as part of the state’s licensing program. 

Applicants will have to raise money quickly. State law gives them a year to get the facilities open.
It’s a relatively short timetable that’s complicated by tight supplies of specialized materials and labor needed to build cultivation centers that have unique demands for ventilation, lighting and security.

“People are going to find trades are busy, general contractors are busy and materials suppliers are swamped,” says Andy Poticha of Cannabis Facility Construction in Northbrook. “They still haven’t gotten over the COVID factor. HVAC is the toughest. Most HVAC companies do other things, such as schools and other buildings.”

He says some materials are 50 percent more expensive than a year ago and the overall cost to build a facility now tops $300 per square foot, up from $250 to $285.

Demand for already scarce expertise and materials will be stressed even more by the sheer volume of customers hitting the market all at once.

“Everyone in Illinois will be ordering at the same time,” says Michael Mayes, CEO of Chicago-based cannabis consulting firm Quantum 9.

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