Acquiring an Arizona Medical
Marijuana Dispensary License Now May Be the Ticket to Obtaining an Adult-Use
Dispensary License in 2020
If adult-use legislation is passed, owners of licensed medical marijuana dispensaries will likely have an exclusive or preferential additional opportunity to own and operate an adult-use dispensary.
Recognizing the strong possibility that marijuana legalization will appear on Arizona’s 2020 general election ballot, many entrepreneurs are renewing their interest (and
investment dollars) in acquiring an Arizona medical marijuana dispensary
Although we cannot predict with any certainty the outcome of the ballot, if
adult-use legislation is passed, owners of licensed medical marijuana
dispensaries will likely have an exclusive or preferential additional
opportunity to own and operate an adult-use dispensary. This opportunity
suggests that substantial new revenues can be achieved by tapping into the
There are a number of avenues for obtaining a medical marijuana dispensary
license now, or for otherwise becoming an integral participant in a dispensary
business. This article summarizes various entry methodologies, with an emphasis
on June 2019 modifications to the Arizona Medical Marijuana Act, or AMMA (A.R.S.
§§ 36-2801 et seq.).
A. Become an Investor/Partner in an Affiliate.
By investing your own money, you may be able to join others as partners in the
dispensary business. While Arizona requires the dispensary licensee to be
operated as a non-profit, meaning that there are no profits to distribute to
partners, most dispensary licensees are managed by an LLC, which typically earns
substantial management fees paid by the dispensary. This managing entity may
provide an opportunity for investors to become partners (members/owners) in a
An investor should exercise considerable due diligence on a subject dispensary,
including its financials, operations, licensing status, and assets and
liabilities, and seek legal and tax counsel advice before investing. Federal and
state securities laws may require registration of the investment raise, and
Arizona may require the investor’s submission of fingerprints and an application
for a dispensary principal card to the Department of Health Services (DHS).
B. Become a Lender to the Dispensary or Other Marijuana Facility or Operation.
Making a loan to a dispensary can be an effective strategy. The borrowing
dispensary gains additional financial resources to buy or update equipment, make
tenant improvements, or hire additional employees, and the lender is typically
paid a commercial rate of return (often in excess of 20%) far above traditional
commercial loan transactions, given the potential for Federal or state criminal
law enforcement and property seizure.
Collateral for the loan is typically the dispensary’s personal or real property,
but not its medical marijuana in any form. Whether the borrower’s AMMA
dispensary license (and related approvals to operate [ATO] the dispensary,
kitchen and/or cultivation facility) can be collateralized for loan purposes has
not yet been litigated in Arizona, but the AMMA does prohibit the transfer of
dispensary licenses. (The creation of a security interest in a license for the
benefit of a lender is a form of interest transfer.)
Again, thorough due diligence should be undertaken before a loan is made.
C. Become a Landlord to the Dispensary.
Some dispensaries do not own, nor do their affiliates own, commercial real
estate to house their retail and cultivation activities. Entering into a
commercial real estate lease with a dispensary or its affiliated businesses can
pay above-market rentals and other concessions to the landlord. There are
commercial real estate brokers focused on serving the marijuana real estate
In Arizona, the AMMA and local zoning ordinances limit the size of dispensaries
to not more than 2,000 to 2,500 square feet. Monthly rents often exceed $10,000
to $20,000, plus real property and rent taxes and operating costs, with the
tenant also paying for its own improvements and building repairs and
The AMMA prohibits a dispensary from entering into unreasonable business
transactions whereby compensation is paid, a contract is consummated, or an
asset sold or purchased. Thus, while the AMMA permits a lease to be lucrative to
a landlord, its terms cannot unreasonably bind the dispensary.
Landlords have a statutory lien on the tenant’s personal property for unpaid
rents. Most municipalities and counties have enacted ordinances limiting the
location of marijuana business facilities to industrial and retail areas that
are separated from child care facilities, schools, religious buildings, and
D. “Purchase” an Operating Dispensary.
As mentioned above, a dispensary license cannot be transferred (sold), but the
management control of a licensed dispensary can be changed (transferred) on the
resignation of some or all of the dispensary’s board of directors and
appointment of a new board, coupled with a management change.
Here again, comprehensive due diligence is important to the transaction, and all
of the due diligence activities typically undertaken in the purchase of any
non-cannabis business should also occur on the change of management control of a
Purchase prices typically range from $15 million to $30 million for control of a
licensee and may reflect an expectation that Arizona voters will approve a
legalization measure in November 2020.
E. Apply for New Licenses Expected to Be Issued in Spring 2020.
Senate Bill 1494 (codified at A.R.S. § 36-2803.01) enacted in June 2019 requires
the issuance of new dispensary licenses in April 2020, with a preference for
rural geographic areas in Arizona. The AMMA as originally enacted in 2010
permitted the relocation of a dispensary after operating at a site for three
years; thus, to maximize revenues, many dispensaries that originally located in
rural Arizona have relocated to Maricopa County, which now has approximately 60%
of all dispensary licenses. With the recent passage of Senate Bill 1494, DHS is
now mandated to issue new licenses, if and when they become available, to rural
Every March or April, DHS determines whether the number of registered pharmacies
in Arizona has increased (on a ratio of 10 pharmacies to one dispensary license)
and whether any new licenses will be issued. Based upon projections made by DHS
six to eight new licenses may become available in 2020, with applications being
available in the summer and licenses awarded in October.
Senate Bill 1494 requires DHS to give preference to an applicant who intends to
locate a dispensary at the former (now vacated) rural location. If there are
multiple applications, the applicant’s location serving the most patients within
five miles will win, provided that the new location is at least 25 miles from
Also, the Department will give preference to an applicant intending to locate a
dispensary in a town, city or county that is at least 25 miles from its nearest
Third, if there are no applications for the first or second preferences, or
there are multiple applications for the second preference, the licenses will be
awarded by lottery. Applicants awarded a license of the first or second
preference must open within 18 months of approval. The relocation of licenses
awarded under the first and second preferences is limited.
Where are these new license opportunities (which may, in turn, give the licensee
immediate access to operating in the adult-use marijuana industry)?
There are no dispensaries in three Arizona counties:
72,000), Santa Cruz (46,000) and La Paz (21,000).
Two Arizona counties have only one dispensary each:
Graham (population 38,000)
and Greenlee (10,000).
There are no dispensaries in these Arizona cities and towns:
18,000), Douglas (17,000), Page (8,000), Holbrook (5,100) and
Two Arizona cities have only one dispensary each:
Yuma (population 95,000) and
Sierra Vista (44,000).
How should opportunists prepare to apply for new 2020 licenses? Prior to the DHS
announcement that licenses are available for application, potential investors or
lenders should consider the following steps for locating a site appropriate for
a medical marijuana dispensary in the rural areas:
Consider hiring a licensed real estate broker specializing in cannabis
properties. We can refer you to a few.
Conduct an analysis of commercial real estate locations in the above
underserved counties, towns and cities that (a) meet your site selection
criteria (traffic and population counts, lot and building sizes, parking
availability, surrounding uses, etc.) and (b) qualify under local zoning
ordinances for use as a medical marijuana dispensary. Also consider the
transportation patterns of nearby communities and whether prospective patients
and customers would likely travel to the dispensary location for their cannabis
Overlay the locations of the current dispensaries against the underserved
towns, cities and counties, and determine the distance between the prospective location(s) and its dispensary neighbors within 25 miles. Confirm that the
location is more than 25 miles away and that the location meets other zoning
Create a budget for the acquisition or lease of the location including,
without limitation, for tenant improvements buildout, fixturization, inventory
acquisition, staffing, etc. and for the license application process. Each
application you file with DHS must be accompanied by the application fee of
$5,000, of which $1,000 is refundable in the event a license is not awarded the
Consider your available funds: Do you have sufficient assets to embark on
this endeavor, or will you need investors? If you will need investors, consider
preparing a private offering memorandum for disclosure to potential investors.
We can assist you with this paperwork and consult with you on (a) the
applicability of the securities laws to your endeavor, (b) how you can comply
with those laws, and (c) how you can be personally protected from investor
disputes and claims.
Consider contacting the owner of a possible location even if the property is
not listed for sale or lease, but be prepared to make an offer to purchase or
lease. The offer should include a contingency that it will not become effective
unless and until the license is awarded for the location. Agree to pay a monthly
stipend to keep the location off the market and under an exclusive contract with
you until DHS announces license winners.
Form your applicant company and affiliates. Open a bank account. Execute
entity formation documents. Prepare your application packet including, without
limitation, various documents DHS will require (entity documents, background
check and fingerprints, site plans and specifications, policies and procedures,
evidence of zoning conformity, etc.). Obtain a federal taxpayer ID number. We
can assist you with all of this paperwork.
Contract with a medical director that becomes effective if you win a license.
Engage counsel and a CPA with cannabis business experience. Contingently appoint
the dispensary’s board of directors and officers. Identify employees needed to
run the business and vendors to assist you (cultivators, marketing agents,
Be prepared to submit applications for several locations to increase your
odds in the event of a lottery. We can suggest application strategies that
increase your chances of winning one or more of the sought-after licenses.
Contact Us. If you have questions concerning the developments described
above, please contact marijuana business attorney
Janet Jackim at (480) 425-2616
or by email.
More about Sacks Tierney's Marijuana Business practice.
 The author is a member of the Board of Directors
of the Arizona Cannabis Chamber of Commerce, which has proposed to the Arizona
legislature a referendum that would legalize marijuana for adult use (also
referred to as “recreational use”). This effort is in addition to a planned
initiative by the Arizona Dispensaries Association for the same purpose.