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Illinois Wakes Up to Legalized Recreational Cannabis

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On May 31, 2019, the Illinois General Assembly passed House Bill 1438 to legalize the consumption and sale of adult-use cannabis in the state. On June 25, Illinois governor J.B. Pritzker signed the bill, approving marijuana use for all residents and visitors in Illinois over 21 years old. The law became effective on January 1.

The law allows residents to purchase 30 grams (around one ounce) of marijuana plant material at once. Residents can buy cannabis-infused edibles containing a maximum of 500 milligrams of THC at once. The law places a limit of five grams on the purchase of cannabis concentrates for Illinois residents. State law allows non-residents to purchase half of the amounts permitted for residents.

Illinois is the 11th US state to approve recreational marijuana. However, it’s the first state to legalize retail sales of recreational marijuana through the legislature and not through a ballot initiative. It’s also the second state to legalize the consumption of recreational cannabis through legislation.

Illinois is keen to open retail stores for recreational marijuana in 2020

According to Marijuana Business Daily, Illinois’s recreational marijuana market could reach $2.5 billion in annual revenue. Many of the existing medical marijuana dispensaries were licensed to sell recreational marijuana products as of January 1. On October 2, as reported by Patch, Illinois regulators announced plans to grant 75 “conditional adult use dispensing organization licenses.” Businesses could submit applications for these licenses from December 10, 2019, to January 2, 2020. The state also allowed organizations who were not operating medical marijuana dispensaries to submit applications. The Illinois Department of Financial and Professional Regulation plans to award these licenses by May 1, 2020.

According to Marijuana Business Daily, Illinois regulators plan to allot the first 75 retail licenses across 17 regions based on population distribution. The state will be allotting 47 (around 63%) of the new retail licenses in Chicago and surrounding suburbs in 2020. According to another Marijuana Business Daily report, Illinois will be granting licenses to 40 craft growers and 40 processors by July 1, 2020.

Besides the 75 new retail licenses, all existing 55 medical dispensaries will be required to secure two retail licenses each, one same-site and one second-site. In this manner, Illinois could allow a maximum of 185 adult-use cannabis dispensaries in 2020. But reaching this number is unlikely, considering that each municipality in the state has the power to ban retail recreational marijuana stores. Marijuana Business Daily highlights Naperville and Bolingbrook as two of the many Chicago suburbs banning recreational marijuana sales in 2020.

Adult-use cannabis market may face challenges arising from limited retail infrastructure

According to Marijuana Business Daily, Illinois could reach a maximum retail store density of 1.5 per 100,000 residents in 2020. However, retail penetration could be lower than 1 per 100,000 residents in 2020. In addition to the ban on recreational marijuana sales in many of Chicago’s suburbs, limited demand in the more rural and conservative areas outside Chicago may also impact the adult-use cannabis market.

The highest possible retail penetration in Illinois in 2020 pales significantly in comparison with the recreational marijuana retail penetration in many other states. Oregon, Colorado, Washington, and Nevada have 15.7, 10.0, 6.3, and 2.2 stores, respectively, for every 100,000 residents. California currently has 1.5 stores per 100,000 residents.

According to Marijuana Business Daily, Illinois could have a maximum of 500 retail recreational marijuana stores at any given time. This number translates to 3.9 stores per 100,000 residents for the total population of 13 million. Illinois will still trail behind Oregon, Colorado, and Washington, increasing the risk of black-market activities.

Marijuana Business Daily has also pointed out potential supply shortages of adult-use marijuana in Illinois. Growers have had only six months since June 2019 to ramp up production to match demand in the state. Furthermore, according to PharmaCann director of public and regulatory affairs Jeremy Unruh, there are 90,000 medical marijuana patients in Illinois. He also stated that the governor’s office expects 75,000 recreational marijuana users in the state, according to Marijuana Business Daily.

Marijuana Business Daily highlighted logistic challenges in rolling out recreational marijuana in Illinois. Unruh anticipates challenges with BioTrackTHC’s traceability system.

Green Thumb Industries focuses on the cannabis opportunity in Illinois

In its third-quarter earnings call, Green Thumb Industries (GTII) (GTBIF) discussed its plans to commence participation in Illinois’s recreational marijuana program on January 1, under the Rise retail brand. The company expects annual medical marijuana opportunities in the state to be worth $250 million–$300 million. The company also expects the adult-use marijuana market in Illinois to be worth $2.0 billion–$3.0 billion.

Green Thumb Industries anticipates some delay for supply to come online for the adult-use market. Meanwhile, the company will focus on the medical marijuana market. The company is also awaiting the voter referendum in Naperville scheduled for March 2020, which may reverse the recreational marijuana ban in the suburb.

Green Thumb Industries has been investing capital to significantly increase the production capacity for the adult-use markets in Illinois, Massachusetts, and Pennsylvania. The company is increasing its production capacity at its Rock Island and Oglesby facilities. It’s also working on increasing its retail footprint and improving its overall efficiency.

Cresco Labs has already established a significant presence in Illinois’s legal cannabis market

In its third-quarter earnings call, Cresco Labs (CRLBF) (CL) claimed to be the only multistate operator in Illinois with all cultivation and dispensary licenses approved for the adult-use cannabis market, at both the state and local levels. The company has also estimated annual sales of medical marijuana in the state to be $250 million. Cresco Labs, however, expects annual adult-use marijuana sales in Illinois to reach $2.0 billion–$4.0 billion. The company has considered the state’s 117 million tourists every year to be a major market opportunity. Around 58 million tourists visit Chicago annually.

On December 30, Cresco Labs announced plans to open five Sunnyside dispensaries in the Illinois suburbs of Lakeview, Elmwood Park, Champaign, Buffalo Grove, and Rockford.

Cresco Labs has three cultivation facilities in the state. In its third-quarter earnings call, the company said only one competitor has two cultivation licenses, while the others have only one. A cultivation license allows a company to grow marijuana on a maximum area of 210,000 square feet. Therefore, the company has 50% more cultivation capacity than a cannabis player with two retail licenses. In 200%, Cresco’s land-under-cultivation maximum is 200% higher than that of other cannabis companies in the state. Amid supply-side challenges, Cresco Labs’ higher cultivation capacity could be a major competitive advantage.

On September 27, 2019, Cresco labs entered into sale-leaseback transactions with Innovative Industrial Properties (IIPR) for its Joliet and Kankakee properties in Illinois. The company is using part of the $46.3 million deal consideration to expand its production capabilities in Illinois.

As reported by CNBC, Cresco Labs has been preparing to educate recreational marijuana users. The company has also developed cannabis-infused products for sale in the state, including vapes, edibles, concentrates, prerolled joints, and flowers.

Curaleaf has entered Illinois through the inorganic route

In July 2019, Curaleaf (CURA) (CURLF) announced its acquisition of Grassroots for $875 million. This transaction, when completed, will expand Curaleaf’s presence from 12 to 19 states, including Illinois. Curaleaf does not operate in Illinois. The company expects the transaction to close in early 2020.

How did the first day of recreational marijuana sales go?

According to ABC, entering sales data in the BioTrackTHC tracking system, especially for concentrates, caused some problems in Illinois on January 1. However, the issues were resolved in a couple of hours.

According to CNBC, Illinois will be taxing products based on their THC content. The state will impose a 10% excise tax on products with THC levels at or below 35%, a 20% tax on all cannabis-infused products, and a 25% tax for products with THC levels over 35%. The Illinois Department of Revenue (or IDOR) expects tax revenue and licensing fees of around $57 million in 2020. The agency expects tax revenue of $140.5 million in 2021 and $253.5 million in 2022, excluding application and licensing fees.

This year, IDOR expects excise and cultivation privilege revenue of $10 million–$58 million. The Department of Agriculture expects application and licensing fees of $12.7 million for cannabis growers. Meanwhile, the Department of Financial and Professional Regulation foresees application and licensing fees of $10.78 million for dispensaries.

CNBC reports Colorado-based consulting company Freedman & Koski expects much higher tax revenue for Illinois. The company forecasts Illinois’s annual tax revenue to be $440 million–$676 million. City representatives have estimated Chicago’s tax revenue will be around $3.5 million in 2020.

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