Cannabis industry in limbo as California ends pot prohibition

A few days before California voters decided to legalize recreational marijuana, Jason got an upsetting email from his business partner: The new owner of their rented warehouse in San Rafael wanted to come by for a walkthrough in 48 hours.

For most businesses, that wouldn’t be a big deal. But it was a problem for Jason. Inside his warehouse were three fully equipped grow rooms, each housing 80 mature and flowering cannabis plants.

“I panicked and had a little freakout before realizing I had some time and had to get to work,” he said.

Discretion has been key for those involved in the underground marijuana industry. Jason had already suffered a home invasion robbery and agreed to be interviewed on condition only his first name be used, not only to stay out of trouble with his landlord, but also for fear his home will be burglarized again.

But after getting that email he had to act fast. Eight people got to work packing up equipment, while Jason spent four hours on the phone to score the hard-to-find boxes large enough to hold his plants without damaging them.

He and his crew worked for 30 hours with only a couple breaks until one of the biggest rental trucks available was loaded up with all the super-stinky plants, ready for transport. Jason drove an empty truck as a decoy.

Some of the inventory went to friends, but most ended up at Jason’s house. The warehouse owner came around the next afternoon and saw nothing.

“That night I was able to laugh a little here and there, eat a burger here and there, and finally fall asleep,” Jason said as he scooped up a dab of Face Off OG wax and prepared to smoke it from his electric nail, set to its usual 605 degrees.

The next day, before Jason could bring the plants back, the landlord of his West Oakland house sent a text to say he was on the way to check the smoke detectors. After quickly claiming to have food poisoning to delay the visit, Jason had to move everything all over again.

Capers like this have long been a part of the unregulated world of medical cannabis. But with the passage of Proposition 64 on the November 8 ballot, and new statewide medical cannabis regulations about to be implemented, a whole new set of challenges is coming. And those challenges will be particularly apparent in Oakland, hometown of Oaksterdam University and a city that will undoubtedly remain a center of the cannabis trade.

Prohibition against recreational use ended the day after the election in California, but residents can’t legally buy pot without a medical recommendation until 2018. Experts agree it’ll take a while to see the full impact of legalization, but it’s clear a major new industry will be born—and a big shakeup will hit everyone from secret growers like Jason to businesses already operating legitimately under state and local law.

Even if Proposition 64 didn’t pass, many of these changes were on their way for the medical industry.

California voters legalized medical cannabis in 1996, but there had never been a statewide regulatory system until the Medical Cannabis Regulation and Safety Act (MCRSA) became law in January. MCRSA is the joint effort of three pot-related laws requiring state agencies to issue licenses to medical cannabis businesses, enforce product testing requirements and track all plants grown by licensed cultivators.

The new system is supposed to be in place by the start of 2018. It will be a vast new bureaucracy of getting high.

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Cannabis and its industrial counterpart, hemp, were first used by humans at least 6,000 years before Cheech and Chong. Jazz musicians of the early 20^th Century smoked it, and recreational use soared with the counterculture of the 1960s and ‘70s.

Abuse of California’s medical cannabis system has been an open secret for a long time. The vague wording of the 1996 Compassionate Use Act, passed by voters as Proposition 215, allows doctors to recommend marijuana for nearly any claimed medical ailment. Only 84,000 medical cannabis cardholders have registered under California’s voluntary system. But since you don’t need to register to get access to the drug, there could be eight times as many people buying from dispensaries, according to data from the Marijuana Policy Project.

To get a recommendation, all you need to do is hop online, fill out a brief survey and pay a small fee with a credit card. You will get a temporary medical pass into pot dispensaries within minutes. The new medical law slightly tightens this loose process.

Proposition 64, the Adult Use of Marijuana Act (AUMA), made it legal under state law for anyone older than 21 to possess, ingest, cultivate, purchase and transport a limited amount of cannabis. It sets up a complicated system to regulate and tax the retail cannabis industry—divvying up the estimated $1 billion a year in state tax revenue between schools, law enforcement, regulatory agencies and substance abuse centers.

Despite being the first state to legalize medical cannabis, California has only now caught up to Washington, Colorado, Alaska, Oregon and the District of Columbia in terms of legalizing recreational use. Nevada, Maine and Massachusetts also passed similar initiatives in the recent election. Based on 2015 estimates from the US Census Bureau, just over a fifth of the U.S. population now lives where cannabis is legal for adult use under state law.

Since the early ‘70s, millions of people have been arrested and convicted for growing, selling and possessing cannabis. Many are denied access to services, jobs and opportunities due to their convictions. Unlike previous legalization proposals which didn’t win approval, Proposition 64 says people serving time for a pot-related offense which would no longer be considered a crime can petition to have their sentences revisited. People with prior convictions could have their records sealed.

“The war on marijuana has been a waste of billions of dollars and has destroyed millions of lives, and it’s time for us to put an end to it,” Oakland Councilmember-at-large Rebecca Kaplan said in support of a city resolution she sponsored endorsing Proposition 64 a week before the election.

Conversations with people in all areas of the industry echo this sentiment. As Kaplan said before her resolution was passed, it’s not like legalization is needed so people can get access to cannabis; there’s already plenty of access.

A 2009 estimate from California NORML said California’s cannabis market is already worth potentially $4.5 billion. Much of which goes untaxed and unreported.

California’s legislative analysis of Proposition 64 estimated the legal industry will bring the state $1 billion annually in taxes and fees. Amanda Reiman, the manager of marijuana law and policy at the Drug Policy Alliance, says she thinks this is a conservative estimate. “In all the other states we’ve seen them exceeding their revenue estimates, and we’ll probably see something similar in California,” Reiman said.

Early estimates of how much revenue would come into Colorado when it legalized cannabis for adult use in 2012, for example, were around $70 million a year. But in 2015, the first full calendar year that retail stores were licensed to sell to non-medical consumers, the state took in $113 million in taxes and fees.

Of course when an industry grows, so do jobs. A business analyst at thestreet.com estimated pot accounts for 60,000 to 100,000 jobs in California as of 2014. Depending on how many businesses get licenses to operate under the new laws, this number could increase substantially.

Taken together, regulations being adopted under the new medical law and Proposition 64 will bring a multibillion-dollar black market out of the shadows, creating two parallel mainstream industries: one for marijuana as medicine, and another, much bigger, for people who just like to get high.

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“This isn’t letting go the marijuana boogey monster, this is bringing regulation and controls to the table,” said Jeffrey Jones, the executive director of the Patient ID Center in downtown Oakland. Separated from Oaksterdam University by no more than a blue curtain and plastic yellow chain, the ID Center is a place where medical cannabis patients can go for information and support.

Jones has been in the industry since the mid-‘90s, when he founded a bike delivery service called the Oakland Cannabis Buyers Cooperative, which became the defendant in a landmark Supreme Court case in 2001.

The cooperative argued for a medical necessity exception to the Controlled Substances Act, which forbids the sale and use of marijuana for any reason. But the Court found there was no such exception and said it was up to Congress to change the law. To this day, cannabis sits on the federal government’s list of the most dangerous drugs of abuse with no medical value, next to cocaine, heroin, PCP and others.

Now, California state regulators get to spend the next 13 months establishing all the rules needed for a state-regulated system. It won’t be an easy task.

The medical cannabis law, which took effect in January, 2016, establishes the Bureau of Medical Cannabis Regulation to license distributors, testing laboratories, transporters and retailers.

The Department of Food and Agriculture will license growers. The Department of Public Health will oversee the production of edibles like pot-laced cookies and candies. The State Water Resources Control Board will watch over marijuana cultivation’s environmental effects on water quality. The Department of Fish and Wildlife will monitor general environmental effects and pesticide regulators will regulate the chemicals used in the fields.

The Proposition 64 system will be similar, in some respects. A new Bureau of Marijuana Control will be formed within the state Department of Consumer Affairs. That agency will do what the medical bureau does, but focusing on the recreational side.

“The regulatory environment in California will be like none other,” said Steve Owens, chief executive officer of Adherence Compliance, a Denver-based company that helps cannabis businesses comply with government regulations.

In Washington, for example, a state liquor and cannabis board controls all licensing. Owens, who already has clients in California, said he expects California’s more elaborate model will become a standard other states will adopt in the future.

Proposition 64 creates 19 different license types. It splits up cultivation licenses by indoor, outdoor and the scale of the operation, and designates licenses specifically for retail, transportation and testing. MCRSA, the medical law, does the same on the medical side with 18 license types.

While some are ready for change, this type of structure might be too much for others like Jason, who entered the unregulated industry for the freedom it allowed. As someone whose brain “turns on when the lights turn off,” Jason is no fan of the 9-to-5 routine.

He’s comfortable with his current model. He knows how to get things done, hires his friends and meets all his deadlines with no set schedule. To enter the regulated market, he’d have to adopt a level of compliance that would not fit the lifestyle he enjoys.

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But Jason’s days are numbered. Come 2018, the cannabis bureaus will begin issuing licenses, giving priority to those who have already been operating in good standing. Any state-licensed business will also need to obtain a license or permit at the local level.

This is where it gets hairy. Many cities, wary of an incoming tide of cannabis, have passed emergency ordinances banning or restricting commercial businesses until they’ve figured out how they want to regulate them.

In keeping with longtime efforts to mainstream the cannabis trade, Oakland is doing just the opposite.

Oakland’s municipal code originally allowed only eight dispensaries to get permits in the city. But a couple of weeks after the last 4/20—April 20, a cannabis holiday—the city council amended the code to allow eight new medical cannabis dispensaries permits each year. Other cannabis businesses were also invited to get established.

Measure V, passed by voters at the beginning of the decade, established a 5 percent tax on medical cannabis business’ gross income. This tax brought the city $13.4 million in revenue for the 5-year period from 2010 to 2015. In Denver, by contrast, combined special and base sales tax revenue for the two years 2014 and 2015, the first two years recreational cannabis was available for sale, totaled just over $30 million, according to data released by the city.

Oakland could get a very blessed bag of taxes by allowing new businesses to operate under the 10 percent tax on gross retail income, also set in Measure V (they thought ahead). This tax will apply to pot sold for recreational, rather than medical, uses.

But allowing more dispensaries wasn’t all the Council changed. Councilmembers also added the Equity Permit Program—a series of amendments sponsored by District 6 Councilmember Desley Brooks that have become a hindrance to the permitting process.

It’s no secret that cannabis prohibition has negatively affected the lives of African Americans and Hispanics more than whites, and lower income neighborhoods more than rich ones. The Oakland Police Department made slightly more than 4,000 cannabis-related arrests from 2006-2015, according to data released by the California Attorney General’s office. Of those, 89 percent were classified as black or Hispanic.

Brooks said she wants to give those disproportionately affected by prohibition equal opportunity to enter the new industry that’s fueled by the very thing they were punished for.

Under the equity program, half of all cannabis permits given out by the city must go to a business with a majority owner who meets a narrow set of criteria. To qualify, the applicant must be at least a two-year resident of one of six South Oakland police beats, or have been convicted of a cannabis offense in Oakland that led to incarceration in the past decade.

“We can lead the nation and have a city that looks like what it truly means to have equity,” Brooks said at the council’s November 14 meeting. At this meeting, the Council discussed expanding the equity programs criteria, based on suggestions from councilmembers and from the Oakland Cannabis Regulatory Commission (CRC), a group that advises the city council on marijuana matters.

After nearly two hours of public comment on the issue from 44 speakers, the council voted to get an equity analysis and new drafts of the code. These are set to be discussed in January.

People in the field say they support the goal of diversifying and remedying some of the damage done by prohibition. “I do think that Oakland would like to see a robust center for cannabis commerce and I’d like to see them do so,” said Reiman, who also serves on the CRC. She said there’s a need to have local rules in place before the state begins issuing licenses.

But critics of the equity program say it does not address the needs of those working in the unregulated market. Some industry players also have classic business concerns about unintended consequences of regulation and worry the Oakland rules as they stand could chase businesses out of town.

Oakland may not have found the ideal solution yet, but policymakers “could create a good equity program without hurting people in the industry,” said Andrew DeAngelo, co-founder of Harborside Health Center, one of the nation’s largest dispensaries.

Harborside’s Oakland location sits in the city’s green zone—land designated for light manufacturing and industrial use—and where pot facilities will be permitted to operate. With another site in San Jose, and a third coming to San Leandro in early 2017, Harborside is poised to enter the commercial market.

DeAngelo said Harborside employs more than 150 people and is ready for regulation. He said the coming changes “won’t change our business that much.” Harborside will continue to offer its many free health services like yoga, acupuncture and substance abuse counseling, but will take advantage of the new retail market and sell products to nonmedical cannabis users.

But not everyone is prepared to comply.

Until now, California’s underground cannabis market has involved mostly small-scale operations, people growing a few plants in their homes, or baking edibles and producing extracts in their kitchens.

This has happened despite the legal risk, and despite the need to sometimes use dangerous solvents, or occasionally dodge a landlord. Legalization may be an even bigger challenge for the underground players, according to Michael Allaire, founder of the West Coast Member Services collective, who offers consultation and business development coaching to small cannabis businesses in the Bay Area.

On October 20, Allaire urged members of Oakland’s cannabis advisory commission to recognize the value of home-based cultivators, and help the city council find ways to keep big business from taking over. He stressed the importance of state legislation, Assembly Bill 2516, which adds a “specialty cottage” license type to the medical cannabis law so small home-based growers can go legit.

He called for safeguards to help the small-timers get into the commercial industry without having to pay the same application and permit fees as a large-scale licensee. At the advisory commission meeting, he suggested deferring the first year permit fees, waiving or reducing the application fee and reducing the 5 percent cannabis business tax rate.

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The grow rooms in Jason’s warehouse were newly renovated and set him back $45,000—his profit from last year. Paying his people $20 an hour and tearing the rooms down burned away that investment. He’ll have to recover those losses before he can even think about going legit.

Having a place to operate is required to get a state license. This has been challenging enough for Jason and many in the underground industry, especially when even mentioning the word cannabis to a landlord instantly makes the rent go up.

And landlords aren’t the only people to hide from. Along with his plant-growing operation, Jason makes a product called BHO. Also known as dabs or wax, this cannabis extract is made by extracting THC and other active ingredients in marijuana plants using butane and then baking out most of the dangerous solvent.

He markets it as Inspired Extracts, sold at dispensaries around the Bay Area. But the underground nature of his work means he can’t openly promote the wax in Oakland because he’s concerned somebody might recognize him.

Bigger operations, like Harborside, appear ready to find a legitimate path to becoming a commercially-regulated business. But because many rules are yet to be written, Jason said he can’t predict his future in the industry as legalization takes shape.

And he’s not alone. No one’s future in the industry is truly guaranteed yet, and the whole country is now watching to see how California will take on the massive task of regulating the reefer.