How Do Non Profit Dispensaries Make Money

February 20, 2020; Phoenix New Times

A bizarre article in the Phoenix New Times details the toxic mutant forms that have developed in Arizona's nonprofit sector in the area of cannabis dispensaries.

In Arizona, marijuana is legal to use for medical purposes only. Recreational use is not legal yet. Proposition 203, or the Arizona Medical Marijuana Act, was narrowly approved in a vote in 2012 and allows people with "debilitating" pain and other serious issues to use it.

Indeed, the original intent of Arizona's proposition was to have the field managed by nonprofit organizations, presumably for the good of the public. In the definitions section of the proposition, this is specifically described as a "not-for-profit" entity that grows, prepares, and dispenses the product. In fact, the term "nonprofit medical marijuana dispensary" is mentioned more than one hundred times throughout the text.

There was a "greater good" spirit in this, as Andrew Myers, formerly with the Marijuana Policy Project, says. "We thought having the facilities be nonprofit was the best way to assure that the motivation was to provide high-quality medication to patients at the lowest possible price. We were not trying to create a situation where these licenses were very highly valuable assets to be traded."

But the best of intentions can go awry in implementation, especially when a market is expected to explode. As the dispensaries were launched, a limited number of certificates were made available by lottery. About 400 applications were received, from which only 92 applicants were chosen. But apparently not even the most basic of protections were put in place to prevent profiteering—some certificates bought for $5,000 were later resold for as much as $500,000.

Fast-forward to the present day, and the cannabis business in Arizona is booming, with all kinds of deal-making taking place, both above board and below. Cannabis is still just for medical purposes, but that may change later this year when a referendum to allow adult use of recreational marijuana goes before voters. One of the two competing referenda would limit business to current certificate holders only. The number of certificates out there has grown to only 130, and with the promise of a market that could expand exponentially, their value has skyrocketed into the millions of dollars.

To make matters worse, and as might have been predicted in this scrum, some of those remaining in this market have found a neat way to derive the greatest personal profit by subcontracting the management of the business to for-profit companies. These, in an ugly mutation of the nonprofit form that disallows private inurement, are often reportedly owned by a board member of the dispensary.

Under this structure, the board member is being paid by the nonprofit and, in a weird twist, if the board director chooses to, they can sell the management company to an interested buyer and step down from the nonprofit board to be replaced by the buyer. In a sense, they have sold the nonprofit board seat; transactions of $20 million or more have been reported.

John Labate, who quit his job selling advertising at PhoenixNew Times three years ago to become a pot industry consultant, said he once helped sell a management company with several attached assets for $18 million. Another time, he helped sell a management company without any assets at all—just control of the paper dispensary license—for $8.5 million, with a $300,000 bonus if Arizona enacted a recreational initiative within 22 months.

This would seem to be a case for the IRS but, remember, marijuana is still illegal at the federal level. To protect them, the proposition states that the dispensaries in Arizona only have to be registered as nonprofits with the state, not with the IRS. That, in turn, means they only have to file forms and reports with the state's Department of Health Services (DHS). By the terms of the original proposition, DHS is required to keep most of the information about the dispensaries secret and Arizona's own regulations pertaining to the situation are vague.

Other states that have legalized the sale of marijuana have gone the direction of opening it up to for-profit businesses. Arizona chose not to, and they wrote the law to make this about helping people in pain, not the money. But, as we have seen before in industries like charter schools, greedy people who see the chance to make a buck can always find a way around the spirit of the law. In this scene, the very concept of the nonprofit difference has been badly violated. It would be far better just to make them what they are—another extractive industry where speculators are trying to monopolize a growing market.—Rob Meiksins and Ruth McCambridge

About Rob Meiksins

Rob has served in the nonprofit sector for over 30 years in roles ranging from intern to program manager, executive director to board director, and consultant. Starting out in professional theatre in New York City, Rob moved to Milwaukee to work with Milwaukee Rep as the dramaturg. Later, he started to work more and more helping people and organizations in the nonprofit sector articulate, and then take the next step towards their vision. Currently he is working on a new effort to establish an intentional process for nonprofits to identify their capacity-building needs and then learn about and implement the tools that will help. Ideally this is a partnership between nonprofits, consultants, and the philanthropic community to strengthen the sector we all see as critical.

About Ruth McCambridge

Ruth is the founder and Editor Emerita of the Nonprofit Quarterly. Her background includes forty-five years of experience in nonprofits, primarily in organizations that mix grassroots community work with policy change. Beginning in the mid-1980s, Ruth spent a decade at the Boston Foundation, developing and implementing capacity building programs and advocating for grantmaking attention to constituent involvement.