Takeaways From Legalization’s First Year - Voice of San Diego

Government UNVEILING THE UNSEEN

Takeaways From Legalization’s First Year

The marijuana industry exists at the crossroads of two competing values. On the one hand, consumers want access to an open and affordable marketplace. But bringing the industry out of the shadows and ensuring that it’s run by competent people requires a heavy degree of oversight and control.

San Diego’s first festival celebrating legalized recreational marijuana / Photo by Vito Di Stefano

Proposition 64 gave cities in California the ability to craft their own marijuana rules.

That option for cities to opt out of the system helped lift the measure to victory in 2016 — conservatives could get behind local control. But it also set up a new round of disputes at nearly every city and county government throughout California.

That’s why in 2018, the first year of legalization, the debates around marijuana so often felt stuck in the past.

Regulators in Sacramento spent a decent part of the year traveling and listening industry players and activists. They then offered tweaks to the statewide rules that govern the larger framework of what’s possible and not possible on the local level.

San Diego city officials, on the other hand, focused largely on the bureaucratic nitty-gritty of picking and choosing applicants, mostly for the manufacturing and cultivation sides of the supply chain.

The marijuana industry exists at the crossroads of two competing values. On the one hand, consumers want access to an open and affordable marketplace. But bringing the industry out of the shadows and ensuring that it’s run by competent people requires a heavy degree of oversight and control.

Finding the right balance is no easy task. Seemingly every industry player has a strong opinion about how the whole system should operate, and in 2018 I heard a lot of them.

One of the most common complaints was that the cost of getting into the industry and staying compliant is extremely difficult. Unable to raise the necessary capital, some of the industry’s pioneers have been feeling the squeeze. They operated for years in the dark, at great personal and financial risk, and now feel entitled to something in return.

Of course, that’s not how capitalism works. Whoever already has the money and is willing to put it down is going to dominate.

For instance, MedMen, a Los Angeles-based company, purchased the Kearny Mesa Apothekare dispensary in February. Seven months later, the company bought the medical-marijuana dispensary chain PharmaCann in a $682 million all-stock transaction — the largest marijuana transaction of its kind in the United States.

But some industry pioneers have chosen to remain in the underground market, which continues to thrive in part because the demand exceeds the supply of permits available in San Diego. That also helps explain why tax revenues have been lower than expected across the state.

Those pioneers are also troubled by what they see as the slow death of the medical side of the business over the recreational. The two are treated differently in California — subject to different taxes — and the cost and energy of complying with both systems is not always worth it. Medical marijuana products are becoming niche and less profitable, so some newly licensed dispensaries are choosing to trade exclusively in recreational products for mass consumers.

Not every pioneer has been left out in the cold, though. Will Senn, the founder of Urbn Leaf, is expanding. Earlier this month, his Bay Park dispensary merged with the Southwest Patient Group in San Ysidro, run by Alex Scherer, another OG.

But that’s a conversation for another day. In the meantime, let’s look back at some of the other big lessons from the year …

It’s Worth Knowing Who Really Owns What

Salam Razuki, a prominent San Diego property owner, accused a business partner this summer of trying to steal several marijuana facilities, including the Balboa Avenue Cooperative dispensary, from underneath him. The problem was that Razuki’s name appeared nowhere on the state licenses or the city permits.

In the course of the lawsuit, Razuki admitted that he’d kept his name off of regulatory documents because he was concerned his past ties to the underground marijuana industry would prevent him from becoming a part of San Diego’s legal marketplace.

Prop. 64 was supposed to clean up the marijuana industry by making its players known and accountable. As it turns out, though, ownership disputes are fairly common in the industry. For one reason or another, some investors will try to disguise their involvement and avoid revealing themselves to public officials, often through companies that lay claim to the land on which marijuana businesses sit.

This fall, state regulators tried to make this practice harder by broadening the definitions of marijuana business owners and financial interest-holders.

Several weeks later, federal prosecutors arrested Razuki and alleged that he’d plotted with two of his employees to kidnap and kill his business partner.

If You Can’t Fight ‘em, Join ‘em

Several cities dropped their opposition to marijuana and elected to write their own rules, so that the industry doesn’t write them instead.

That was the case in both Chula Vista and Imperial Beach, where the Association of Cannabis Professionals had threatened to orchestrate ballot measures that would have greenlit marijuana businesses there. Oceanside also took the plunge into marijuana regulations, but activists found the results underwhelming.

Vista took a different course. City officials wrote and offered a ballot measure to residents, but industry professionals didn’t like it. So voters found themselves choosing in November between two competing visions for a legal marijuana market.

Voters went with the industry’s plan, which allows for up to 11 medical marijuana retailers and imposes a 7 percent use tax on their gross receipts.

The Industry Could Be More Equitable

In an effort to alleviate the impacts of the war on drugs, California established a financial assistance program for minorities and other economically disadvantaged individuals who want to get into the industry as either business owners or employees. People who’d previously been arrested or convicted of a marijuana-related crime, or who reside in ZIP codes or census tracts with higher-than-average unemployment, crime or child death rates, would get priority status in the application process.

The program still requires buy-in from local jurisdictions and it’s possible that San Diego’s new City Council and progressive president may go down that path.

The program, however, is not without criticism, because applicants still require access to capital. If they don’t have it, then they need to go out and find investors willing to partner with them.

Delivery Is Here to Stay

Marijuana delivery services began 2018 in the throes of an existential crisis. The San Diego City Council had decided that only permitted marijuana dispensaries could make house calls, meaning hundreds of independent drivers were going to be faced with a stark choice: go work for a dispensary, stop delivering or take the business underground.

But by year’s end, the mood was beginning to improve. State regulators tweaked the rules so that anyone who was licensed to deliver, either through a dispensary or through a standalone place of their own, could make house calls in any municipality, regardless of whether local officials allow it.

In other words, California has effectively overturned bans on delivery, like the one that exists in unincorporated parts of San Diego County, beginning next year.

Sam Humeid, for instance, the president of the San Diego Cannabis Delivery Association, secured a delivery license in Hesperia, which is outside Victorville in San Bernardino County, and he now spends his days making deliveries around the Los Angeles area.

Closer to home, Torrey Holistics and others have made clear they intend to expand their operations into parts of North County that were once considered off limits.

The All-Cash Nature of the Business Is Still a Big Problem

Imagine if you weren’t allowed access to a bank. Instead, you’d have to carry your life savings around with you or find other places to store it. And the rest of the world knew you were a walking ATM.

That’s basically what the state of California is doing to marijuana businesses — putting employees, especially those out on deliveries, at risk of robbery.

A bill that would have created a state banking system died in the Assembly after Gov. Jerry Brown made clear it wasn’t a priority for him. Others have noted that the bill wouldn’t completely shielded banks or private insurers from federal intervention.

Gov.-elect Gavin Newsom has signaled to lawmakers and the public that he’s more interested in a state banking solution than Brown was.

Some Stigma Remains

Brown may have balked at the banking bill, but he did consent to several other marijuana reforms this year. For instance, AB 2020 paved the way for marijuana license-holders to hold events on sites owned by local jurisdictions, but only if those jurisdictions signed off.

Finding cities willing to host the next pot-palooza has been difficult. Most cities, even those that allow legal storefronts, would prefer their citizens sell and consume marijuana out of sight.

Joshua Caruso, a San Diego resident and president of the United Cannabis Guild, said his team has contacted more than 100 cities in California after to ask about getting permission to host marijuana farmers markets and other events. Only two were OK with it, but both are in Northern California.

“Almost all cities in California are banning cannabis events or just flat-out refusing to work with our state license and also refuse to discuss how to change this,” Caruso told me.

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