After the raid: The financial fallout for Oaksterdam and Oakland’s pot business

Following the federal raid on Oaksterdam University last April, Dale Sky Jones found herself with an incredible task: rebuilding the school from the ground up. Not only had Richard Lee, Oaksterdam’s founder and director, just stepped down—assigning Jones to take over his role—but during the raid, federal agents had gutted the university entirely. As Jones took on the responsibility of providing for the students, staff and volunteers who had already signed on for the spring semester, the rest of Oakland’s burgeoning pot industry was left wondering what lay ahead for their businesses and whether they, too, were vulnerable to raids or legal action from the federal government.

Oaksterdam was once a 30,000 square foot campus in the heart of downtown Oakland and the nation’s first trade school for those interested in entering the cannabis industry, with classes on the legalities and politics of medical marijuana, horticulture, and entrepreneurial “cannabusiness.” Since 2007, more than 15,000 students have graduated from Oaksterdam, which originally opened at 1600 Broadway.

During the raid, federal agents took everything but the office furniture, Jones said. Doors were broken, computers were snatched, and patient and staff records were removed from file cabinets. About 80 marijuana plants were cut down and removed from the school’s horticulture lab. “Every computer, every plant, the personal medicine in the desks of employees who were allowed to have medicine” were removed, Jones said. (Smoking wasn’t allowed within the school, but employees could store weed in their desks. “We’re probably one of the few working environments where people test positive for marijuana,” she said.) The government is only just now starting to return some of the school’s property—Jones recently received several computers, but the bulk of student and employee records remain confiscated.

So far, no legal charges have been filed against Oaksterdam or its operators, and the staff doesn’t know what kind of information federal agents were seeking. Representatives from the U.S. Attorneys Office and the Drug Enforcement Agency did not respond to interview requests for this article. But thanks to fears of legal action, enrollment dropped sharply immediately following the raid. Students were scared, and many, who had already paid tuition but hadn’t completed all of their courses before federal agents came knocking on Oaksterdam’s doors, thought that the school had closed.

Even some of the instructors thought the school might shut down. James Clark, an Oaksterdam instructor and attorney specializing in cannabis-related legal defense, wasn’t sure that Oaksterdam would be able to rebound from the raid. “Oaksterdam is kind of a regional name,” he said, referring to its reputation throughout the state. “I didn’t really think that was the end of Oaksterdam as an institution, but as far as the school went, I definitely thought that could be the end of the school.”

But in the end, no class went untaught. Jones, her staff and a team of volunteers showed up the day after the raid to teach, ironically enough, a legal raid preparation and training course. They brought in their own computers from home and relied on volunteers to keep the school afloat, because funds weren’t available to pay salaries. “We fulfilled the promise to teach every class, and we’re pretty damn proud of that,” Jones said.

Still, the school today is much smaller than it once was. All 108 employees lost their jobs following the raid; 15 employees have since been hired back. Oaksterdam’s teaching staff is all also making half of what they did before the raid. “My staffers are taking what they need and no more, and they’re all underpaid,” Jones said.

“I’m really proud of everyone who’s continued on despite that backlash, for everyone to persevere and keep going,” said Kali Grech, an instructor at Oaksterdam and a criminal defense lawyer specializing in medical marijuana defense at Pier 5 Law Offices in San Francisco. “But it’s like a ghost town now compared to what it was back then.”

Clark, who teaches classes about the rights of patients and dispensary owners and the legalities of searches and seizures, said enrollment in his classes tends to mirror federal marijuana guidelines. “When the Obama administration came out and made friendly pronouncements, interest skyrocketed,” he said, referring to Attorney General Eric Holder’s 2009 statement that the DEA would stop targeting raids against state-approved marijuana dispensaries. But when the Obama administration later made an about-face and dispensaries started getting raided across the country, attendance quickly diminished, he said.

Last November, the building that housed Oaksterdam on Broadway was sold to a buyer in Taiwan. The university relocated to a smaller site at 1734 Telegraph Avenue, across from the Fox Theater. At the university’s old location, class sizes could reach nearly 120 people. Although classes are still held with the same frequency, the university’s new location can only hold between 25 and 38 students per class, Jones said.

And not only have there been fewer students after the raid, but Oaksterdam’s new administration had to make good on tuition fees that had been pre-paid. “That in itself was a $50,000 hit to the school,” Jones said.

Oaksterdam’s raid and subsequent move also disrupted other businesses that had a relationship with the university. “For us, they’re home,” said Deidra Bagdasarian, chief baker at Bliss Edibles, who bakes and distributes cannabis-infused treats to dispensaries throughout San Francisco, Santa Clara, San Jose, Sonoma and Oakland. Bagdasarian has taught courses at Oaksterdam about edibles and cooking with cannabis since 2010, and sold her confections at Coffeeshop Blue Sky, the dispensary once connected to the school. “They were our foundation of our business when we first started,” Bagdasarian said. “This is a community I still believe in, something I hope will come back with the same powerful strength that it had before.”

In December, shortly after Jones and her staff left for their new location on Telegraph, the property’s new owner painted over the three-story mural on the façade of the university’s original campus. Measuring over 7,000 square feet, the mural showcased iconic Oakland landmarks, including the Fox Theater and the Port of Oakland. A marijuana leaf adorned the “O” in Oaksterdam.

“The first time we saw the mural painted over, that broke our hearts—that really punched us in the stomach, like wow, it doesn’t feel like Oaksterdam anymore,” Bagdasarian said. “Before, we would walk around Oakland, which was at least once a week to make deliveries, we would always see people from the school or students. That was the Oaksterdam culture. I feel that has really been gutted, that’s the worst part of it getting shut down, the effect on the culture that Richard Lee built.”

Still, Jones said, while classes are much smaller, after a slow summer Oaksterdam is now at maximum enrollment. In the past year, Oaksterdam has expanded its horticulture class offerings and has added courses on exploring different methods of ingestion, like salves and tinctures, which when applied topically, provide medical benefits like pain reduction without the effects of feeling stoned. Students enrolled in the spring semester can also learn about prepping for the upcoming outdoor growing season or receive advice on how “cannabusinesses” like dispensaries should file their taxes.

“I cannot emphasize to you enough that the survival of Oaksterdam was purely because of the dogged determination of the professors, volunteers and students that continued to show up and continued to say that education is not a crime and that Oaksterdam will not die,” Jones said.

Today, more than half of the school’s current enrollment is from out of state. There’s been a huge influx of students from Colorado, Washington, Connecticut and Massachusetts—all states that have recently passed new marijuana legislation—who want to learn how to grow and go into business, Jones said.

California law allows Oaksterdam’s staff and students to use real marijuana plants in class, but strictly for educational purposes. The university’s new space doesn’t include a horticulture lab, so teachers rely on student patients who cultivate their own pot supply and can bring in their own personal plants for classes week-to-week, depending on which stage in the growing cycle the class is learning about. “For the class on harvest, we have ready-to-pop, juicy, bud-laden cannabis in its prime, ready to go,” Jones said. “During week one, students play with seeds. Then they might practice cutting the mother plants and transplanting the baby clones.”

But students are still concerned about the federal government stepping in again, Jones said. “I think a lot of people were scared, and I don’t blame them,” she said. “I also feel a sense of righteousness that we’re trying to change the law, while standing within all of our laws.”

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Before the raid, Oakland had a booming pot business, one that city leaders were actively encouraging to grow, and much of which centered around Oaksterdam’s downtown location.

In February 2004, the city granted four licenses to medical marijuana dispensaries, including one to Coffeeshop Blue Sky. Three years later, according to a City of Oakland report, these dispensaries were bringing in $17.9 million in total gross receipts for the city. By 2008, this revenue had climbed to $19.7 million.

Business continued to skyrocket.  Just a year later, between 2008 and 2009, sales between the four dispensaries increased by 40 percent. In 2009, this brought in $28 million in gross sales—the equivalent of selling roughly 6,000 pounds of medical cannabis, based on reported dispensary sales. According to a 2010 city council agenda report, in that year the entire Bay Area consumed about 35,000 pounds of medical marijuana, about 10 percent of the state’s medical marijuana use overall.

In 2009, nearly 80 percent of Oakland voters approved Measure F, which authorized the city to impose a 1.8 percent tax on all “cannabis business activity”—the first marijuana tax in the nation. At the time of election, the city estimated that Measure F would raise roughly $294,000 in additional tax revenue for the city in 2010.

The city’s dispensary ordinance was revised in 2011 to boost the number of licensed dispensaries from four to eight. In 2010, the city council also approved an ordinance to allow industrial-size grow operations within the city—a move that would have generated up to $2 million in additional revenue. Plans were suspended though in 2011 after former City Attorney John Russo received a letter from Melinda Haag, U.S. Attorney for the Northern District of California, with a stern warning urging the city to reconsider its pot farm plans, lest the federal government intervene.

That same year, Russo, his successor Barbara Parker, and Oaksterdam founder Richard Lee all supported Proposition 19—the Regulate, Control and Tax Cannabis Act—a failed ballot initiative that would have legalized recreational marijuana use throughout the state. Even though voters gave it the thumbs down, proponents argued that marijuana could be a valuable cash crop. In 2010, California’s 8.6 million-pound marijuana harvest was worth $14 billion, compared to the state’s wine grape crop, which only pulled in about $2 billion in revenue, according to state reports.

But selling something prohibited under federal law—even though medical marijuana is legal under state law—carries a legal risk. In 2011, U.S. Attorneys began sending warning letters to landlords who leased property to dispensaries, urging them to evict their tenants or face legal action. Lee briefly closed down Coffeeshop Blue Sky, then re-opened it inside Oaksterdam’s museum. Jones said that made Oaksterdam a target for a federal raid.

Jones said she had been trying to divorce Oaksterdam’s school and dispensary components as far back as the Proposition 19 campaign. The two entities were just not compatible, she felt. “The dispensary needs to stay quiet and unobtrusive and the school needs to stay loud and bring lots of media in,” she said.  Financial investments for the school were hard to come by as long as it was still tied to the dispensary, and Jones felt she was limited on who was willing to back her on educational projects as long as the dispensary was still directly affiliated with the school. “I love Richard, but at the end of the day, he was violating a federal law with a Schedule I drug, and that puts a lot of limits on a school,” she said.

Because the university is longer attached to the dispensary, now keeping Oaksterdam open as a university is “just a First Amendment fight,” Jones said.

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Despite the Oaksterdam raid, Oakland is still encouraging and regulating its pot businesses. “We have a very good working relationship with all of our dispensaries,” said Arturo Sanchez, Deputy City Administrator. “They provide quarterly reports, we annually renew them and we’ve had very few problems.”

Business owners in Oakland’s dispensary system are largely “good corporate citizens,” agrees David McPherson, the city’s tax and revenue administrator. “They want to be able to pay their fair share of taxes and they demonstrate a willingness to do that. They’re very professional, they want to get their income taxes down, they want medical benefits for employees.” And the more the city supports medical marijuana as a legitimate business, he said, the less demand there is for street-level drugs.

But running a dispensary is expensive. Because federal law doesn’t recognize medical marijuana as a legal business, and for tax purposes, won’t accept any business they consider “unlawful,” medical marijuana dispensaries cannot deduct typical corporate expenses, like rent, from their tax forms. “They’re at a higher risk,” McPherson said. “They have no deductions, they have to be concerned about being raided—all things the normal businesses don’t have to worry about.”

Of the four additional cannabis dispensary permits granted by the city last year, only one has opened so far—Blüm Oakland on 578 W. Grand. Blüm Oakland is the business name for the Oakland Community Collective (OCC), a dispensary operated by Salwa Ibrahim, Richard Lee’s former executive assistant, and Derek Peterson, a former partner with weGrow, the now-defunct Oakland-based hydroponic marijuana superstore known as the “Wal-Mart of weed.” Peterson co-owns OCC, and serves as its chief financial officer.

But the Oaksterdam raid—as well as the current legal proceedings against Harborside Health Center, an Oakland dispensary the federal government attempted to seize in 2011—have had a chilling effect on property owners in Oakland, Sanchez said, many of whom are leery of entering into lease agreements with dispensary owners for fear of federal rebuke. Local property owners are still concerned about federal interference and are hesitant when it comes to renting their properties to dispensaries, he said. “Everyone is being really careful and slow with how they will approach this issue,” he said. “Property owners are concerned even though we have a well-recognized and non-problematic process here in the city.”

Tidewater Patients Group—another dispensary that was granted a permit from the city last year—is continuing to look for property to house the operation, said Sanchez. Magnolia Wellness Inc. and Abatin Wellness, two other approved dispensaries, are currently in the middle of an approval process to get business up and running.

So far, Sanchez said, there haven’t been any issues with landlords ordering excessive rent hikes since last year’s raid. But the city closely monitors whether landlords are charging exorbitant rents for dispensary owners. If market rates are $1.25 a square foot and a property owner wants to charge $5 a square foot for example, that’s a tactic akin to profiteering, Sanchez said.

There are no plans to increase the number of dispensary permits throughout the city again in the future.

So far, the raid’s financial damage seems to have mostly affected Oaksterdam, and perhaps to have slowed the start-up of similar businesses: at the city level, pot remains a big business. The city’s business tax revenue since from marijuana dispensaries since Oaksterdam’s raid is still in the $1.4 million ballpark range, the same amount as before the raid, said McPherson. Sales tax revenue, roughly $300,0000, also hasn’t changed substantially in the past year, he said.

But one thing the city doesn’t know, he said, is where patients will go if the federal government keeps closing down dispensaries. “Will they go to other dispensaries in another city or go underground? These are variables we won’t know until that actually happens,” he said. “We’re the model city for this type of thing, not only in California, but throughout the state, the country and the world.”

For Oaksterdam, rebuilding the school from the ground up has been a year-long effort. Slowly but surely, the institution is on its way back, its supporters say. “I think it’s only going to get bigger and better and exceed what it was before the raid,” said Grech.

“We’re just on the cusp. We’re almost over the hump,” added Jones. “We still need a little bit of push.”

Coming up in this weekly series, we’ll learn more about the web of conflicting local, state, and federal legalities surrounding medical marijuana and Harborside Health Center’s current legal troubles with the federal government.