Design for Compliance Part 1: Indoor Grow Facilities
What will compliance look like for indoor grow facilities with the legalization of cannabis in the U.S. markets? With full legalization in Canada, the winds of change are blowing down from the north pushing legalization closer and closer. What a federally legalized structure will look like remains to be seen. But we are confident in hypothesizing that U.S. legalization will require stringent compliance regulations at both the federal and state levels. I would like to talk about how compliance affects two areas - public safety and tax collection - in hopes of helping prepare growers and processors to navigate the current and future murky waters of compliance.
Much of what we do at Rogue Sky provides advice based on best practices learned from parallel industries. We have split the topic of compliance into two parts. The first part - the article you are reading currently - focuses on the what and why of planning and designing grow facilities. The second part focuses on how specific design elements work around compliance in relation to building construction, internal infrastructure and systems (e.g. power, water, HVAC).
Part 1A - Compliance: The history and future
The word compliance holds broad meaning as it relates to the legal cannabis market. Four specific forms are 1) building codes, 2) product and public safety, 3) tracking of product, and 4) taxation. Currently, legalized states are left to enforce all four of these primary forms of compliance. At the federal level, we can expect to see additional enforcement coming from the U.S. Food and Drug Administration (FDA) and the Alcohol and Tobacco Tax and Trade Bureau (TTB).
I am going to focus on two distinct categories: 1) Building Code Enforcement and 2) State/FDA compliance.
In regards to building code compliance, the new construction, modification or alteration of any new grow facility is reviewed and enforced by the city, county and/or state level agencies. The design or modification of any facility is reviewed by a dedicated group of ‘checkers’ that compare the design against International Building Code (IBC) and/or any local municipal codes. In most grow facilities, the IBC is relatively easy to comply with because we would treat the facility as any other agricultural production facility. However, the local municipal codes tend to layer on levels of complexity. This layered complexity can open the door to the creation of unsafe products. These local codes focus on a good neighbor policy that requires growers to install activated carbon scrubbers, expensive exhaust systems and other nuisance abatement technologies. Most growers that we work with want their rooms sealed and controlled. At Rogue Sky we are remaining hopeful that better communication of information and knowledge in the near future will help rewrite some of these codes in the interest of product safety. Even if cannabis becomes federally legal, enforcement of grow facility design will still remain the responsibilities of local governments. The best advice here is to do your homework and/or hire an architect and/or engineer familiar with grow facilities. They will be best equipped to research the applicable state and local codes and determine the best environment for you to set up shop. The knowledge and experience these professionals provide can make sure the location and code compliance in certain jurisdictions works with the needs of your facility before you sign any lease or purchase agreements. Not checking these things can add unneeded tens of thousands of dollars in cost to your project.
Currently, product safety and compliance is enforced at the state level through designated and certified testing laboratories. In a federally legal environment, we don’t see this immediately changing. However, there may be something more like a federal testing standard that will help to better regulate what the product is being tested for. More importantly is the anticipated enforcement from the FDA, which is in charge of public health safety through regulation of manufacturing, marketing and distribution. There are several parallel cornerstones already established under the FDA umbrella, such as tobacco testing and marketing, drug manufacturing and the like. Similar practices and standards will likely be incorporated into a dedicated regulatory umbrella for cannabis and hemp. At its core, the FDA is only an enforcement agency that has outlined steps for compliance. In most cases, any new or existing grower in a federally legal climate will self police under a program called Good Manufacturing Practices (GMP). (https://www.fda.gov/Food/GuidanceRegulation/CGMP/default.htm).
GMP is a suite of regulations that focus around standardization of quality control and documentation of product manufacturing, packaging and marketing. If you dig deeper into the FDA’s GMP documentation, it points to internationally recognized standardized processes developed by the International Standards Organization (ISO). You may have come across a manufacturer with ISO 9001 certification, meaning they meet the ISO organization standardized processes for product quality control and quality assurance. ISO certification is a whole discussion by itself and I will not cover it in detail here. The point is that the GMP and the ISO are massively enhanced standard operating procedures (SOP’s) and require facility monitoring and full documentation through all stages of production. The chain of custody from seed to sale has to be completely tracked, managed and documented in such a way that when the FDA does a facility inspection, you can confidently present them all information required to show that your product has been grown in a manner safe for public consumption.
While the FDA performing compliance checks is not currently an issue for new and existing growers, it is worth understanding these regulations and starting to work on implementing them on a continual basis so that you’re not left scrambling when the U.S. legalizes cannabis. GMP and ISO documentation management is a significant amount of work and it is possible that grow facilities or farms may require one or two dedicated individuals added to their staff just to maintain compliance at the federal level.
Part 1B - Future Proofing and Total Cost of Ownership:
At Rogue Sky, we find it incredibly exciting to watch every new state that legalizes and see the energy and profits so high. We have noticed that in all of the excitement, it is easy for a new business to lose focus on the long term goals. Long terms goals are most successfully reached when they are based on the development of a sustainable business model prioritizing smart investments today that will prepare the grow or extraction operation for the inevitable times of reduced profits that come with market saturation in the future. We can easily look at the Colorado, Washington and Oregon markets that made profits early on, but poor decisions based on high profits and the race to get in on the market are now causing businesses to fold at ever increasing rates. It is not our point to cast judgement on those that have closed their doors or struggle to remain open, but we advocate utilizing these situations as lessons for long term success in new and emerging markets.
For the facilities we design at Rogue Sky, they have to incorporate two key features or principles:
Design for future compliance reporting.
Design for lowest (or lower) total cost of ownership.
We have seen in newly legalized state markets the price per pound spiking based on demand and excitement. Then two years later, prices crash into a low margin environment burdened by flower overproduction. From what we’ve seen, the survivors of this pattern are those who had one or two of the following things:
Facility is bought and paid for during high margin/profit periods of the industry.
Vertical market integration (grows integrated with dispensaries, processing facilities).
The ability to continue to grow more cost effectively and at a decent margin as prices depress.
To improve cost effectiveness and margins in the midst of declining prices, there are many things a grow or extraction facility can start considering right now. How much do you anticipate to pay for electricity for an indoor grow? Is $7,000 or $17,000 a month reasonable to you? How reasonable will it be with a rapid drop in product sell prices? How much do energy costs impact your bottom line profit and/or break even point? It is commonly known that the most energy efficient way to grow is outdoors. But with a good engineering team on board, an indoor facility can be energy neutral or significantly more efficient than other “dirty” grow facilities. Informed and strategic investment today will save your business in the future.
Part 1C - New Normal = Clean Facilities:
The design of a smart, clean production facility is a lengthy topic that we will discuss in Part 2 of this topic and undoubtedly future blog posts. The focus here is on creating a clean and safe product for public consumption. The days of dirty weed are increasingly behind us. Market regulation and demand for quality are pushing those who don’t meet the requirements out. It doesn’t take much foresight to know that under the watchful eye of the FDA, any flower or oil product that is destined for consumer consumption or medicinal use will require a whole new expectation of facility design and operation. When you go to the pharmacy to pick up a prescription written by your doctor, medicine all comes from highly regulated, ultra-clean and sanitized facilities. It should be expected that the FDA will hold grow facilities to a much higher standard than they are currently operating at. The question then is, are you prepared?
A few ISO standards are linked below that will likely hold relevance when the federal government legalizes cannabis. What we expect is that there will be a new standard around international adoption of cannabis growing and processing created out of ISO standards. The underpinnings are already underway through a group called Focus (https://www.focusstandards.org/iso-cannabis-standards/). Their minimum facility design standards can be summarized as follows:
Integrated Pest Management (IPM) programs shall be the core focus of any new or existing building design and layout with contamination controls to prevent ingress of pests or crop diseases. If pests do enter the facility, controls must be in place to capture and contain.
Facilities shall have a layered approach with the core built around the design of the HVAC system to capture airborne contaminants and provide positive building pressurization.
Active monitoring of all environmental parameters (temperature, humidity, airflow, water flow, fertilizer use, etc.) with active alarming and documentation.
Ability to regularly sanitize and sterilize facilities and processes and to provide active sanitation systems.
Part 1D - Economics of Scale and New Market Dynamics
Rogue Sky has had the privilege to witness the impacts of new states being legalized. The trend has been a rush into the marketplace followed by the rapid contraction of the industry, generally all within a 2-year cycle. It is rare to find another market where you can see an entire economic supply and demand cycle on a repetitive basis as new states come online. We are closely watching the market dynamic at play with legalization in Canada, but what’s more interesting is seeing the value of the export market in Canada, which could hold more value to their economy than their own domestic market. This may keep margins higher for longer than what we see at the state level in the U.S.
As we watch these new market dynamics cycle through, we can see that the growers who entered the market early paid off their facility with high margins and held a good brand are surviving the market contraction. Surviving doesn’t necessarily equate to living. This is where a few solid lessons implemented early on can pay dividends into a profitably performing facility down the road.
Invest in energy saving technologies right from the start. Make them a core part of your operation by reinvesting a certain percentage of your profits into ongoing energy efficiency improvements. In most cases, energy savings opportunities integrated at the time of construction can have a payback in less than 12 months between a combination of state-level financial incentives and a lifetime of continued lower operating costs.
Any facility larger than 10,000 square feet needs to consider providing bulk HVAC systems. This will be discussed with more depth in Part 2, but why install a bunch of light commercial 5-ton air conditioners when you can install a larger air cooled chiller that is more efficient and more industrial-grade for just a little bit more cost up front. Consolidation of equipment into larger centralized systems is more cost up front but also more operationally effective. We recognize initial cost is always important, but you won’t be saving anything when the product price crashes and your operational overhead is too high.
Part 1E - Establish Grow Goals
Successful businesses start with a good written plan clearly defining what is being sold and how. Early in our consulting process, we have deep discussions with clients to make sure we understand what their goals are and how they plan to get there. With that understanding, we can more effectively incorporate the ability for creative expansions into our designs for organizations with limited startup budgets. More recently, we’ve focused our conversations on what growers desire to produce their product for (i.e. $/pound) rather than on how much money they have to start with (i.e. long game versus short game). We are not experts in how to grow, but we are experts in the operation of facilities and regulation surrounding them. We also understand what it costs to both develop and operate facilities over the life of the grow or extraction process, which represents a significant cost (sometimes >70%) of the breakeven dollar point.
Certain questions need to be quantified and each holds value as to how we can develop the facility and most efficiently support operational costs. Certain things such as:
Who is your end client? Dispensary? Wholesale? Processor?
What is the intended use of your end product? Smokable bud, oil, edibles?
Do you intend to cure onsite, or perhaps consider fresh frozen?
Greenhouse with light dep, or indoor grow?
Soil or hydro?
Who is your electrical utility? Any energy incentives available to cannabis, agriculture or industrial facilities?
Local jurisdiction special building requirements? (see Part 1A about location)
Already establish a “needs” versus “wants” list?
Our goal is to enable you, as the grower, to be successful in your ventures both in your short and long term missions. We aim to help you find answers to these questions, equipping us to make the right design for your circumstances and goals. Creativity is key with facility design and in Part 2 we’ll breakdown each facility infrastructure, giving a sampling of specific compliance measures as we move forward into the complexities of federal legalization.