Grow, Gift, Repair

Management agreements getting updated?

As the state campaigns to rein in the expansion of large cannabis businesses, multi-state operator Tilt Holdings Inc. is significantly walking back its agreements with several local companies, new documents show.

The disclosure was detailed in meeting documents posted in advance of Thursday’s Cannabis Control Commission meeting. The documents said that Cambridge-based Tilt had dissolved its management contracts with smaller entity Elev8 Cannabis, which has three locations planned in Western Massachusetts, and would work to eliminate others.

Tilt has said it will scrub its management contracts with all four cannabis operators with whom it’s involved, and renegotiate traditional loan financing devoid of purchasing requirements and other fees.

Such contracts have been criticized by regulators for enabling operators to distribute product to and ultimately profit from more licenses than it outright owns, effectively skirting the state’s licensing limit. The Boston Business Journal and others have recently detailed how large marijuana operators are establishing an outsized presence in the state through management agreements.

Already the state has refined its definitions around what it means to control a license and hired an outside firm to help it audit these contracts. But Tilt’s decision sets a new precedent for how larger operators interact with local entrepreneurs.

According to investigation documents filed by the commission’s enforcement team, cannabis regulators first started looking at Tilt’s relationship with Elev8 when Elev8 applied for recreational dispensary licenses in Athol, Orange and Williamstown. The review revealed a number of contracts Elev8 had signed with Tilt, including agreements that Elev8 would purchase 70% of its product from Tilt. Elev8 would also pay Tilt a $3 fee for every item it sold, and offer Tilt the right of first refusal for future equity or capital requests.

Elev8’s revenue was also tied to the larger company, with Elev8 agreeing to prepay 70 percent of any excess cash flow to Tilt in repayment of its $1 million loan, which carried 8% interest. The loan was also secured against the license’s assets and real estate through a mortgage and security agreement.

The commission said the contracts effectively gave Tilt control over the license, with every component of Elev8’s business tied into Tilt.

“Prior to termination of the… agreements, Tilt exercised decision-making authority over management and operational decisions,” commission enforcement staff said in the memo to commissioners. “Tilt controlled at least 70% of the inventory Elev8 could offer and established a per-item revenue sharing arrangement. Tilt held a Right of First Refusal over any offering Elev8 sought for debt or equity financing. Elev8 could not freely choose to cancel or renegotiate these arrangements because Tilt’s provision of capital under the loan agreement was expressly contingent on Elev8’s agreement and adherence to the supply and right of first refusal agreement. Further default on the loan could impact Elev8’s real property which was subject to a mortgage and security agreement in connection with the Tilt loan.”