A Missouri-based cannabis company on Tuesday scored a major investor for a project to build a large grow operation in Grand Rapids: the state of Minnesota.
The Department of Iron Range Resources and Rehabilitation, a state agency charged with reinvesting taconite mining taxes into economic development in northeastern Minnesota, approved up to $20 million in low-interest and partly forgivable loans for HWY35, LLC, to build a $67.8 million marijuana growing and manufacturing plant inside a former wood products facility. The two-phase project promises up to 400 jobs, and the state could forgive up to $15 million of the loans if the company meets certain hiring goals.
The vote of the Iron Range Resources and Rehabilitation Board (IRRRB), made up of eight legislators, was 5-3. IRRR Commissioner Ida Rukavina has final approval once the board gives its recommendation. Among the no votes was a House member who said he suffered from marijuana addiction as a young man and a senator who questioned why government funds should be going to cannabis businesses, especially one with connections to another state.
IRRR is funded by mining industry taxes — about $25 million a year — and was created to diversify the economy by promoting economic development and job creation in 13,000 square miles of northeastern Minnesota. It provides loans and grants to a variety of public and private projects, including broadband development and manufacturing facilities.
HWY35 is led by Jack Mitchell, who is president of Besa Group and Mitchell Hospitality in Kansas City that grow, manufacture and sell cannabis in Missouri. Another principal in HWY35 is John Hyduke, the chair of a Minneapolis-based marketing company, Modern Climate. Mitchell and Hyduke are also the leaders — vice chair and chair, respectively — of a newly formed trade association called the Minnesota Marijuana Association, which has tapped former Mining Minnesota leader Frank Ongaro as its interim executive director. Other board members are with companies from Missouri, Nevada, Maryland, Colorado and Minnesota.
Portions of a shuttered plant in Grand Rapids that used to make oriented strand board would be turned into HWY35’s planned facility, according to the staff presentation to the IRRRB. In addition to the state loan, the project would be part of a tax increment financing district approved by the Grand Rapids City Council and would also be supported by private investment that would equip a growing and manufacturing facility to produce oils for edibles and other THC products.
The first phase would include a 30,000 square foot indoor growing operation — the maximum plant canopy allowed under House File 100 under a cannabis cultivator license. It would also have a manufacturing area. Phase 2 would include an additional 30,000 square feet of indoor growing canopy, something not yet allowed under state law but that could be granted if the new Office of Cannabis Management decides market demand requires it.
Mitchell told the IRRRB that his business model is to be one of the first growing operations up and running when the first retail licenses are awarded in early spring of 2025 (three tribal nations — Red Lake Nation, the Leech Lake Band of Ojibwe and the White Earth Nation — have begun retail sales on tribal reservations). Less than half of the 60 cultivation licenses granted in Missouri were able to produce cannabis in the first year, he said. That’s because it is complex and expensive.
“Our goal is to get into business quick,” Mitchell said, something that will be helped by using an existing building that is served by electrical power and sewage treatment.
“We could get up and operating before 90% of the market,” Mitchell said. “There were only two operators in Missouri for the first several months, and at the end of the first year there were only about 10. Consequently we had extremely high prices. We still have huge product shortages.”
As the business matures, supply will increase and prices will drop, he said, “so it’s very important for us to get in the market quickly.” Then, when the state determines it needs to increase supply, HWY35 will be in a position to add a second 30,000 square foot grow operation in the existing building.
Because of its status as an illegal drug at the federal level, financing new cannabis businesses is difficult. Most banks are reluctant to loan into the industry and many business-related expenses are not deductible on federal tax returns. That leaves private investors and, for small marijuana businesses, personal or family money.
Tuesday’s action includes public financing from two different IRRR-directed funds: the Douglas Johnson Economic Protection Trust Fund and the Minnesota Department of Employment and Economic Development 21st Century Fund.
Both are mighty compared to financing available to businesses in House File 100, which legalized marijuana for recreational purposes. The new law created a fund that begins with general tax dollars but will eventually be fed with money from the new cannabis tax. Called CanStartup, the fund can loan up to $150,000 for eligible businesses. The entire program was funded at $6 million over the first two years of legalization while other programs to help train people to enter cannabis businesses and to navigate the complexities of the industry received an additional $6 million.
The sponsors of HF100 also wanted the industry to be small and local. While some states require proof of residency to win licenses, the backers of the Minnesota law thought that by keeping the size of licensed businesses small — the cap of 30,000 square feet of plant canopy being an example — it would discourage large, out-of-state companies.
Picking winners or advancing public policy goals?
Leili Fatehi, a lawyer and consultant who led the campaign for legalization, said she has questions about the IRRRB recommendation to give so much money to one competitor, especially one with out-of-state roots.
“This is a lot of money and a lot of public dollars, especially when you consider that Minnesota caps the scale of licensed operators,” she said. Investing public dollars in a business whose plan for profitability depends in part on supply shortages and speculation that the Office of Cannabis Management would double the size of the growing operations is questionable, she said.
Fatehi agreed that there could be supply shortages when non-tribal retail stores open sometime around March of 2025. She sees a public benefit in trying to assure that supply, especially if a company like HWY35 helped other growers, including people of color, get into the business. That’s something Fatehi said Mitchell has been considering.
But absent some public policy goal such as that, “It is completely inappropriate for public dollars to be invested ahead of time with the intention of granting someone down the line additional market share. If these guys are speculating on the failures of Minnesota’s cannabis industry, that’s quite problematic for those of us who work with the local industry,” Fatehi said.
“If, however, they intend to bring supply to the market at the early end, I agree it is important to meet the market demand,” she said. And while she said there could be early supply shortages of cannabis flower, there will not be shortages of manufacturers and extraction.
Fatehi said she was also concerned that state money would go to a business that already has access to capital, as Mitchell has shown with his Missouri-based businesses and with his pledge to the IRRRB that he would raise nearly $46 million privately. She said it wasn’t inappropriate for Mitchell to ask for help from IRRR, “but we also need to be cautious that those public dollars aren’t being used to give folks that already have capital, especially out-of-state capital, from coming in and eliminating opportunity for Minnesota entrepreneurs and workers to get a foothold.”
‘If it doesn’t happen here…’
The $20 million in IRRR loans are relatively large for the agency. Sen. Justin Eichorn, a Republican from Grand Rapids, noted that in August the agency granted $2.5 million for a distribution facility planned by L&M Supply that will cost $55 million.
“Why didn’t we give them $5 million? They’re a well-known, respected entity that has been in our communities for generations,” Eichorn said. In 2021 the agency loaned Huber Engineered Woods $15 million for a $440 million wood products manufacturing plant in Cohasset that the company walked away from earlier this year.
Rukavina, the commissioner of the agency who is appointed by Gov. Tim Walz, said the project fits in with IRRR’s mission of diversifying the mining-dependent economy.
“Cannabis manufacturing and cultivation helps us achieve this goal,” she said. “The cannabis industry is resource based and centered on agriculture.” The up-to-400 jobs are projected by the company to range in pay from $40,000 a year to $160,000.
“While we know that not everyone will agree with this type of industry, it is now legal in the state of Minnesota,” Rukavina said. “If it doesn’t happen here it is going to happen somewhere else in our state.”
Rep. Ben Davis, R-Merryfield, said he opposed the loans because he opposed the legalization of marijuana last session. He told a personal story about being addicted to marijuana from age 17 to age 24 and was able to stop using it after getting help from the Christian-based Minnesota Adult and Teen Challenge. He later became a pastor.
“It destroys lives and families,” Davis said, though he said he wouldn’t criticize other board members who decided to vote yes.
“I’m absolutely for free-market capitalism but that does not mean I need to put my stamp of approval on taking $10 million of the people’s money, government money and basically subsidizing this industry,” Davis said.
Eichorn questioned the state’s involvement in one competitor in a new market. He solicited the opinion of residents of his district and said while some opposed on moral grounds, others said businesses shouldn’t get state help.
“I think you guys should be able to do this, anyone who wants to do this should have the equal opportunity to do this,” he said. And he offered help in other ways as long as it didn’t require state money. Davis, Eichorn and Sen. Robert Farnsworth, R-Hibbing, voted not to approve the loan.
But a majority of the board — including two Republicans and three DFLers — voted in support: Sen. Bobby Joe Champion, DFL-Minneapolis; Sen. Grant Hauschild, DFL-Hermantown; Rep. Spencer Igo, R-Wabana Township; Rep. Dave Lislegard, DFL-Aurora and Rep. Roger Skraba, R-Ely.
“It’s a good fit,” said Igo, noting the endorsement of Itasca County, the city of Grand Rapids, the economic development board and the local chamber of commerce.
“This is giving northern Minnesota a seat at the table of a new industry,” Igo said.
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