Territory status provides significant investment potential compared to stateside businesses
Sales of medical cannabis have begun in Puerto Rico, and businesses and investors may expect to receive the highest rate of return among all cannabis markets in the United States. In early January, nearly two years after outgoing Governor Alejandro Padilla legalized medical cannabis by executive order, 23 businesses have obtained licenses to grow, process, transport and sell medical cannabis and three dispensaries have opened for business in the cities of Barceloneta, San Juan and Toa Baja.
Licenses will be rewarded on a rolling basis until the commonwealth determines patient needs have been met. Reportedly, more than 250,000 patients will qualify for medical cannabis.
Since the program was initially enacted under Regulation 155 in 2015, it’s undergone considerable changes. Regulation 155 established a maximum of 1,500 plants for seed-to-sale; precluded people who were previously accused or convicted of a crime involving drugs from applying to be — or even working for — a licensee; mandated Puerto Rico residency for applicants; required applicants to post a surety bond; and subjected licensees to permanent, burdensome product-tracking requirements, among other regulations.
Last summer, Regulation 155 was repealed in favor of Regulation 8766, which, among other things, removed the cap on plant limits in favor of licensing based on square footage; eliminated prohibitions against applicants with drug convictions and allows their participation five years after having served a full sentence (and entirely removed bans against those merely accused of drug crimes); introduced the “primary resident” concept that requires residents to maintain a controlling stake, but allows foreign investors to participate; removed the surety bond requirement and instead required applicants to show the financial capacity for 12 months of continued operations; and required licensees to maintain a less onerous temporary tracking system.
Puerto Rico has adopted different aspects of licensing schemes that have worked in the states. Similar to New York and Pennsylvania, Puerto Rico’s medical products will not include flower and are limited to topicals, pills, transdermal patches, oils and oral drops. Like Nevada, Puerto Rico will offer reciprocity by honoring the home state medical cannabis identification cards of tourists.
Puerto Rico also requires strict laboratory testing and employs a variety of license types depending on canopy size.
Investment activity in Puerto Rico has been robust — and for good reason. Puerto Rico is a territory of the U.S., not a “state.” Thus, federal taxes do not apply to income received or generated by individuals and businesses operating there. Puerto Rican corporations are treated as “foreign corporations” for federal tax purposes. For medical cannabis businesses, this means that IRC Section 280E does not apply. In other words, while cannabis businesses in the states grapple with the inability to deduct ordinary business expenses, create separate companies for non-plant touching components of their businesses and pay nearly 70% in taxes, medical cannabis businesses in Puerto Rico businesses will pay zero federal taxes.
Sweeter still, in 2008 the government passed the Economic Incentives Act for the Development of Puerto Rico, a series of additional tax incentives designed to bolster profitability for Puerto Rican businesses. These incentives include significant credits on local hiring, research and development, manufacturing and recycling; favorable tax rates on industrial development income (4%) or on income for pioneer or novelty products manufactured in the commonwealth (0-1%); special deductions for acquisition and installation of machinery and equipment; cash incentives and/or refunds associated with job creation, retention and training; reimbursements associated with quality control and certification initiatives; additional incentives for projects of “strategic importance” to Puerto Rico (such as providing high quality jobs, technological know-how or new technology); and incentives to offset costs associated with solar energy.
Prominent brands operating in other states have been quick to cash in on these incentives. Both Colorado’s Julian Marley Juju Royal Brand and Ottawa’s CannaRoyalty Corp. entered into respective licensing deals with Natural Ventures PR, LLC, which operates a 100,000-square-foot cultivation facility and a 30,000-square-foot manufacturing facility in San Juan.
Accepting a government proposal, Natural Ventures further committed to hiring single mothers first, followed by military veterans, then the commonwealth’s general population. Reportedly, Natural Ventures’ deal with CannaRoyalty provides a 2.5% royalty on the company’s net profits and a 10% referral royalty on revenue generated by CannaRoyalty branded products over 10 years.
As licenses are awarded in Puerto Rico, the need for education and unity among participants is paramount. Francis Aparicio, co-founder of Regenerative Group, LLC and the youngest member of the Puerto Rico Cannabis Industry Association’s board of directors, seeks to unite licensees and ancillary businesses to launch a variety of educational platforms, simplify the licensing and reciprocity processes, loosen advertising and marketing restrictions, and lobby in Puerto Rico’s Congress and Senate. Also, San Juan’s popular smoke shop Monticello has been transformed by its owner, Gaby Pagan, into a cannabis information center. Provided with a “safe” and “judgment-free” space to learn, customers of all ages leave Monticello with an education on modern tools, resources, and compliant consumption methods. Ms. Pagan has also founded Growth Leaders, a service group with representation in San Juan, Los Angeles and Miami, whose mission is to connect Puerto Rican entrepreneurs with potential business partners and build a network of local creative talent.
With sales beginning barely six months since regulations were adopted, Puerto Rico’s medical cannabis program has been among the fastest to market and stands to provide medical cannabis businesses with the fastest path to profit.
Lauren Rudick represents investors and startup organizations in all aspects of business and intellectual property law, specializing in cannabis, media and technology. Her law firm, Hiller, PC (www.hillerpc.com), is a white-shoe boutique firm.