Many Minnesota cities already sell alcohol. Should they sell cannabis?

Mike Larson has already seen how profitable marijuana can be for the city of St. Anthony.

Over 40 years of working in the alcohol industry, Larson said no product has been as much of a hit as THC beverages.

"The month typically described as dry January turned into high January," said Larson, who manages both locations of St. Anthony's city-run liquor store, St. Anthony Village Wine and Spirits. It's a sign, he believes, that the city should officially get into the weed business.

St. Anthony is one of dozens of cities across the state, from Osseo to St. Joseph to Grand Rapids, exploring the idea of operating their own cannabis dispensaries. Industry experts believe Minnesota is the first state to explicitly allow government-run marijuana shops, a tempting concept for cities wanting to bring in extra revenue to offset property taxes.

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Many Minnesota cities already sell booze, thanks to a Prohibition-era law allowing municipalities to control the sale of alcohol. Some have been more successful at that than others. For cities like St. Anthony, where the liquor operation consistently turns a profit, officials hope their retail skills will translate to selling pot.

But city leaders are quickly learning that cannabis is a completely different industry, with complicated regulations and shifting restrictions.

"I'm finding that it's just not as comparable as you might think," said Paul Kaspszak, executive director of the Minnesota Municipal Beverage Association.

And cities still have many unanswered questions amid the delay of the state's rollout of recreational marijuana. Many cities are partnering with investment firms and hiring consultants to help them navigate the weed industry. Others, like Wayzata, have crunched the numbers and decided the venture is too risky.

But in cities where officials see a real opportunity in cannabis, leaders are pushing ahead with urgency, hoping for the chance to be first to market.

"Lately I'm up to my earlobes in weed, learning all of this," Larson said. "Most of us just want to make sure we don't miss out on an opportunity."

Rigorous regulations

St. Anthony, which has sold alcohol since 1948, made nearly $500,000 in net profits in 2022, the last year data was available.

Not all cities see such gains. In 2022, municipal liquor stores across the state ranged from a loss of $180,000 in one city to a $1.1 million profit in another, according to a state report. Over the previous five years, net profits for stores overall fell nearly 6%.

Larson believes a "concierge-level of service" boosts his business, where profits go toward city services. Officials believe they can bring a similar quality to cannabis.

But there's a key difference between municipal liquor and cannabis: Cities that sell alcohol are allowed to limit the number of liquor licenses in their towns, which officials feel gives them a clear competitive edge.

Municipal cannabis rules require local governments to allow one retail license for every 12,500 residents. For some city leaders, that's created a level of uncertainty they aren't comfortable with, knowing they'll be rushing to open along with private retailers.

"Cities won't get that advantage," Wayzata Mayor Andrew Mullin said. "They're just allowed to get into the business like anybody else."

For several reasons, industry experts warn against drawing too many similarities between liquor and cannabis.

"Cannabis regulations are much more robust, from seed to sale, than the kind of regulations we see for liquor," said Leili Fatehi, with the cannabis consulting firm Blunt Strategies.

More states are legalizing marijuana, but most types of cannabis remain illegal under federal law. That makes it a serious challenge for dispensaries — cash-only businesses — to secure insurance and loans, as banks won't take on the liability. Dispensaries also get taxed at a much higher rate than liquor stores because the federal illegality makes them ineligible for business deductions.

Some officials question whether federal funding they receive could be jeopardized.

Fatehi said cities will deal with rigorous state requirements that are still being developed, including rules related to security, the tracking of sales and logging "just about anything that touches the plant."

"Municipalities should really think about what impact those uncertainties may have," Fatehi said. "And they may have an even larger obligation to be studying those things because they are public entities."

Some cities see green

Kaspszak, with the Municipal Beverage Association, said he's been coordinating with roughly 75 cities that are exploring the idea of opening dispensaries.

It's been a difficult process, made more challenging without other states to turn to for advice on municipal cannabis.

There was one example in tiny North Bonneville, Wash., which was widely reported as the first city to open a government-run dispensary about a decade ago. But the city sold the store by 2021.

Some Minnesota cities, like Osseo, don't operate a liquor store but see promise in the option to open a dispensary.

"We're looking at this as an opportunity to possibly generate revenue and take the tax burden off the residents," Osseo Mayor Duane Poppe said.

Osseo has been working with Red Pine Group, a firm going around the state making a pitch to cities. Red Pine — backed by the investment firm Koach Capital, which owns dispensaries across the country — is offering to fully fund and operate the dispensaries, while giving cities a 25% equity share.

Red Pine estimates that Osseo, a town of 2,600 residents, could make $500,000 in revenue a year through the deal, based on an estimate of 200 customers a day, each spending $120. The firm predicts that Blaine, a city of 73,000, could rake in as much as $1 million per year, if it served 400 customers a day.

For Red Pine, there's a clear benefit to such partnerships. The state is requiring businesses to apply for retail licenses through a lottery. But municipalities are allowed to obtain licenses without going through the lottery process.

Osseo, St. Joseph and other cities have been moving forward with Red Pine, and some have signed letters of intent. Zander Abrams, with Red Pine, has said he hopes to work with up to 20 municipalities.

Other cities, like St. Anthony and Grand Rapids, have been getting insight from Voyageur Cannabis Services, a consulting firm providing cities with market analyses and financial outlooks.

"I think dispensaries perform well if they are structured correctly," Patrick Hurley, with Voyageur, said. "It varies so much from city to city, with factors being location, pull from surrounding areas, traffic, local colleges, tourism and things like that."

For St. Anthony, with more than 9,000 residents, Voyageur has estimated $500,000 in startup costs, including leasing a building, over five years. City officials have discussed possibly using money available in the city's liquor fund.

The firm projects that the dispensary could make more than $600,000 in net income in its first year.

Kaspszak said he's waiting to see how state rules might affect cities' ventures or partnerships with investors, including whether licenses will be granted to cities without majority ownership in their businesses.

Officials wary of high risks

Some cities with profitable municipal liquor operations have decided to stay out of the cannabis business for now.

Officials in Edina said they are uninterested in weed because of regulatory complications and government-run dispensaries being "largely unexplored." City leaders also worry because they would be up against private businesses in the city as well.

In Columbia Heights, the city was moving ahead with plans for a dispensary, but due to redevelopment challenges and the time crunch, decided to defer plans until the state's recreational marijuana program is more developed, city spokesman Will Rottler said.

Wayzata hired a firm to study the feasibility of a dispensary. The study showed that with the startup and initial investment costs, a dispensary wouldn't start turning a real profit until the third or fourth year. It estimated more than 950 customers in store a month, and about the same getting weed delivered.

"When you look at the taxpayer money required to start up a business, then waiting three to five years, that's an unacceptable risk," Mullin, the mayor, said.

But other cities remain more hopeful. Leaders are rushing to be ready as soon as applications open, hoping for a shot at being the first to secure a customer base.

"Cities gain confidence knowing what other cities are doing," Kaspszak said. "When they see somebody moving forward on it, they'll decide maybe we can move ahead, too."

Kevin Allenspach contributed to this story for the Minnesota Star Tribune.