Marijuana dispensary licenses to the highest bidder?
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Massachusetts cities and towns are exacting increasingly hefty payments from medical marijuana dispensaries in exchange for letters the companies need to win state licenses, a Globe review of recent compacts shows.
In Worcester, a dispensary promised to pay the city $450,000 over three years — and $200,000 a year after that — if officials gave their blessing to the business.
In Springfield, the city is negotiating a deal that would ultimately take 7 percent of a dispensary's revenue, plus a $50,000 annual donation to the Police Department — a pact that could amount to hundreds of thousands of dollars.
And in Salem, where the first dispensary opened a year ago, the medical marijuana shop contributed $82,856, a paltry amount compared with more recent deals.
"It's quite clear if you don't negotiate an agreement, you don't get a letter," said James E. Smith, a Boston attorney who represents a marijuana company that signed one of the larger agreements in March, with the City of Worcester.
This phenomenon, which some called pay-to-play, is not typically seen with marijuana licensing in other states, and will drive up the costs of doing business while siphoning money from the dispensaries that could be used to lower prices for needy patients, advocates said.
But local leaders contend the negotiations and lucrative contracts are needed to ensure their municipalities have the money to deal with unforeseen problems from dispensaries. They say the true costs for allowing these businesses, such as extra traffic and the need for additional police services, are still unknown.
Four years after voters approved marijuana for medical use, just six dispensaries have opened, while 174 other applications inch through the process. Advocates for medical marijuana say protracted negotiations over escalating contract costs are a prime culprit for the delays.
The licensing process in Massachusetts requires a marijuana company to submit a letter from a municipality stating that residents do not oppose a dispensary in their midst.
The requirement was intended to give cities and towns a say in the process.
"I am not aware of another state that has such a hard line as Massachusetts" in requiring the community letter in the licensing process, said Adam Fine, a Boston attorney whose law firm, Vicente Sederberg, has helped marijuana companies across the country with licensing issues.
In other states, Fine said, state regulators grant a license, and then municipal officials are able to address concerns about traffic and security through local zoning and permitting.
Michael Cutler, a Northampton lawyer who has represented patients and companies in marijuana-related cases, said payments to municipalities drive up the cost of treatment.
"Whose hide does this money come out of? The costs are passed on to the patients," he said.
Aside from marijuana dispensaries, casinos, and waste landfill businesses, host agreements are not typically used in Massachusetts, according to Geoffrey Beckwith, executive director of the Massachusetts Municipal Association.
"They are generally put in place for uncommon, regulated industries, not something like a pharmacy, but something that is more unusual than that, like medical marijuana, where it is a restricted substance," Beckwith said.
Several municipal leaders said the prices they set in their agreements were intended to cover extra police or other services needed at the dispensaries. But Fine and other attorneys said the ante has surpassed that benchmark.
"There has never been a police incident at one of these [six open dispensaries], and they carry less drugs than a CVS, but cities and towns say it will take extra police," Smith said.
The deal that Smith's client, Good Chemistry of Massachusetts, signed with Worcester calls for the company to pay the city an escalating percentage of revenue over three years, in addition to a $450,000 payment. Good Chemistry will also contribute $10,000 annually to public charities.
After the third year, and for every year its dispensary stays open, the company agreed to pay Worcester $200,000 annually, plus 2.5 percent of its total sales revenue. Good Chemistry also agreed to pay property taxes and promised never to apply for a reduction or elimination of taxes because of its not-for-profit status, which would otherwise have allowed it to claim an exemption.
Worcester's city manager, Edward M. Augustus Jr., said that he does not believe the city will need extra police or other services when the dispensary opens, and that he intends to use the money from Good Chemistry to sustain a financially struggling after-school and summer youth program.
He said Worcester settled on the amount it required from Good Chemistry after studying contracts other cities and towns signed with marijuana companies, and factoring in the intense competition for a coveted letter from Worcester. Nine companies vied for letters, and Augustus said the city will grant four, issuing similar financial conditions for each.
"The market will dictate at what point it is not financially viable for them to sign host agreements that are above a certain number," Augustus said. "It's up to the companies to say that's not sustainable."
Salem was the first city to sign an agreement, in April 2014, with Alternative Therapies Group. That company opened the state's first dispensary in June 2015. That agreement is modest by today's standard. It includes no six-figure payouts and simply calls for the city to receive 1.25 percent of the company's annual sales for the first two years, and 2 percent in subsequent years.
The city recently received its first payment, $82,856, which means Alternative Therapies had roughly $6.6 million in sales its first year, despite some supply problems.
Dominick Pangallo, chief of staff for Mayor Kimberley Driscoll, said Salem has experienced no increase in crime or traffic since Alternative Therapies opened.
But given the lucrative contracts other communities have brokered, Salem leaders are considering going back to the bargaining table with Alternative Therapies to get a better deal, Pangallo said.
"We do have a reopener in our agreement and are in the process of reviewing other agreements to see whether or not it would be something we'd want to exercise this coming year," he said.
Since Worcester signed its contract in March, the Town of Southborough has signed a sweeter deal that promises the town 3 percent of the dispensary's annual sales, capped at $500,000 a year, plus $50,000 in annual payments to the town for school substance abuse and mental health programs.
The City of Springfield may soon top that. Springfield leaders are considering a 10-year deal with a dispensary that starts at 3 percent of annual sales and steadily climbs to 7 percent by the ninth year, in addition to an annual $50,000 donation to the Police Department.