‘It’s been a rocky road’: Local cannabis industry struggles to take off

One year after recreational sales of cannabis began in Sonoma County, the prospect that marijuana’s legalization would fill tax coffers and tamp down the illegal drug market has not yet materialized.|

The massive buildings on Giffen Avenue in southwest Santa Rosa had been vacant for more than seven years, abandoned one by one and left to skateboarders and drifters who occupied the space where workers once made specialized coatings for spaceship windows and televisions.

Blighted no more, the industrial campus has been transformed into a guarded, indoor farm run by NorCal Cannabis with high-tech irrigation systems delivering cocktails of water and nutrients to marijuana plants in various stages of growth in 10 different rooms.

The company is just getting started. By the end of the year, it will have the capacity to produce 16,000 pounds of marijuana annually worth between $40 million and $50 million, said president Jigar Patel, 41, an Occidental resident and former winemaker. It also will open a processing hub, where it can trim, dry and package marijuana, and a manufacturing line, where it can turn marijuana into food, oils and other products. It plans to expand its retail presence, too, opening a Santa Rosa dispensary to complement its existing delivery service with 100 drivers serving San Francisco.

“For years, we have been waiting to do this,” Patel said of the opportunity to build a marijuana business in the open.

Patel’s trajectory from a West County winemaker, who also grew medical marijuana, to the head of a fledgling cannabis conglomerate is just one part of the story of cannabis legalization in Sonoma County, the gateway to Northern California’s renowned Emerald Triangle marijuana-growing region.

It also is a tale marred by controversy and a sluggish start to legalizing an entrenched and generations-old industry built on activism, black market cash and pioneering chutzpah.

Sonoma County leaders had hoped to bring existing marijuana growers out of the shadows and into a regulated program as a way to root out illegal activity and the violence that follows. But one year after recreational sales of cannabis began in California, the prospect that marijuana’s legalization would fill tax coffers and tamp down the illegal drug market has not yet materialized.

Just Tuesday, deputies responding to what seemed like a run-of-the-mill car crash found themselves investigating the aftermath of a shooting and searching for out-of-state men suspected of double-crossing a local black market pot dealer. At play was about 14 pounds of marijuana law enforcement officials said could be worth between $7,000 and $11,200 in Sonoma County and far more outside the state.

While many business leaders have praised Santa Rosa’s favorable tax rates and fair policies, Sonoma County’s rollout of its cannabis rules has been roundly criticized by pot companies and people worried about marijuana businesses opening nearby.

“It’s been a rocky road,” Sonoma County Supervisor Lynda Hopkins said. “Honestly, any time you do something for the first time you’re going to make mistakes, and we’ve certainly made plenty.”

Pot prices up, sales down

Dispensary customers have seen prices jump - as much as 40 percent in some jurisdictions - depending on local taxes. As a result, they are spending less.

Statewide, cannabis customers spent about $2.5 billion at dispensaries in 2018, far less than expected and about a half-billion fewer dollars than they spent in 2017, according to a January report from leading industry research firm BDS Analytics. To compare, people in Colorado spent $1.2 billion on cannabis last year although the state’s population is one-seventh that of California.

In its review of nationwide legal marijuana markets, the company’s researchers estimated California’s “expensive regulatory regime” has handicapped legal cannabis businesses. On average, marijuana costs 77 percent more at retailers than on the “robust illicit market,” the report said.

That will drive consolidation, which will ultimately decrease the price of legal pot, BDS head analyst Greg Shoenfeld said. And he expects spending will rise as the legal market continues to gain visibility over the familiar yet illicit places where people have acquired marijuana and its products. The key will be for the state to make it harder for the black market to thrive.

“The industry is very, very quickly maturing and with the types of revenue opportunities involved, big business is increasingly pouring into this industry,” Shoenfeld said. “The unfortunate byproduct is the people who have been fighting to decriminalize cannabis for 20 to 30 years, most of them are getting sidelined.”

At one point, about 80 percent of the flowers and other products sold at Mercy Wellness dispensary in Cotati were grown and produced in Sonoma County. Founder Brandon Levine said he’s watched as nearly all of his suppliers - many of them friends - have gone out of business or left the area.

Today, Levine said his dispensary buys from a distribution company as required by state law and it’s not always clear where the flowers come from. Other than that, it has only one local company’s products on the shelves, Santa Rosa-based CannaCraft.

“It’s been tough. You have to have a really good team and that’s what it really comes down to,” Levine said.

Still, his businesses stand to thrive. He’s expanding his dispensary to include an adjacent grow room that is visible, but not accessible, to customers. He also operates a packing company that specializes in preserving cannabis in nitrogen-filled cans. He’s starting a manufacturing outfit and plans to open two dispensaries and a cultivation facility in Santa Rosa.

Like Patel, Levine is among a small cohort of longtime Sonoma County cannabis entrepreneurs who are positioning their businesses to withstand new regulatory hurdles and capitalistic forces. Santa Rosa is headquarters for CannaCraft, a major marijuana manufacturing company with high-profile brands like AbsoluteXtracts and plans to expand to other states.

Levine said Sonoma County’s reputation for high-caliber goods is valuable and can help companies withstand market pressures from massive cultivation and manufacturing operations opening up on the Central Coast and in Southern California.

“People will still look for quality and craft cannabis, and Sonoma County is definitely the place for that,” Levine said.

Steep cost to go legal

The rollout of rules governing cultivation in unincorporated areas is widely viewed as as problematic as what existed before: a barely regulated system of medical marijuana cooperatives that sunsetted Jan. 9.

Most of the people who had been quietly growing cannabis in Sonoma County for years under the medical marijuana cooperative system have been pushed out of the legal market, unable or unwilling to pay the steep upfront costs for land acquisitions, upgrades, environmental studies and permit fees.

Alexa Wall, board director of the Sonoma County Growers Alliance, the industry’s main champion here, wrote a scathing open letter on Facebook about her frustration with what she viewed as the county’s obstructive policies, and she warned people against trying to open a marijuana business here.

“Sonoma County is NOT cannabis-business friendly and they will not support you,” she wrote in the Jan. 4 post.

Wall represents a dwindling membership for the alliance, which once estimated upward of 5,000 marijuana cultivators in Sonoma County. The advocacy group is now focused on helping businesses organize against what they view as NIMBY groups using the specter of black market crime and potentially misleading reports of environmental impacts against people trying to do the right thing.

Wall has seen firsthand what is working and what is not in the new regulatory landscape. She headquartered her delivery service Moon Flower Delivery in Novato and praised the city for what she called its fair policies.

She can’t say the same for Sonoma County. Wall said she has been waiting 16 months for the county to make progress on her company’s proposal for an outdoor and greenhouse farm, Luma California, on a 15-acre parcel in Penngrove, the former site of a care facility. The proposal has languished, she said, partly the result of a revolving door of county planners assigned to the project.

Wall said it seems unlikely there will be any meaningful amount of cannabis grown outside or in greenhouses in Sonoma County, a reality that only stands to benefit the black market.

“There is no success story in cannabis in Sonoma County at this time,” Wall said.

Tax collections fall short

State and local taxes tell a similar story of how the first year of legal cannabis in California has far underperformed.

Between Jan. 1 and Sept. 30 in 2018, California took in $84 million in taxes from cannabis businesses - a whopping $101 million short of what the state had predicted.

Combined with sales taxes, the state has generated roughly $228 million in cannabis-related tax revenue since it began collecting taxes, according to state figures.

Santa Rosa, too, has brought in far less tax revenue than projected two years ago when the City Council was firming up its rules for the new industry. All told, the city brought in nearly $468,000 in the last fiscal year, a far cry from early projections Santa Rosa would bring in $2.5 million in taxes annually from cannabis businesses.

Yet there’s evidence that amid this tumultuous shakeup of California’s cannabis industry - the most entrenched and experienced industry of any state that has legalized marijuana - that it will ultimately live up to those big-dollar promises.

In November the state Legislative Analyst’s Office reported cannabis tax revenue has grown at an average quarterly rate of 33 percent.

Santa Rosa’s quarterly tax revenues have tripled in just one year. Comparing revenue generated between July 1 and Sept. 30 in 2017 and the same period in 2018, the intake went from $84,700 to $254,000, according to city figures.

David Guhin, director of the city’s planning and economic development department, said he sees the city becoming a hub of cannabis manufacturing and distribution.

The city’s next revenue opportunity - and its biggest challenge - is taking shape this year with the approval of new dispensaries. The city’s stock of three longtime dispensaries is likely to skyrocket over the next year with nine stores already approved and a dozen more proposals under consideration.

Guhin said the state has not launched public education campaigns for cannabis use, particularly among people 25 and younger, and he said the city is interested in collaborating on a local public messaging program.

California’s top cannabis official, Lori Ajax, chief of the Bureau of Cannabis Control, said public awareness campaigns are a next step for the state and will tackle two main areas: urging businesses to legalize their operations and encouraging customers to buy pot from legal retailers.

Ajax described 2018 as “a wild ride” with uneven progress that in some ways should be expected in a state with such robust medical and illegal marijuana markets.

“This year will be a better measure on how we’re doing in diminishing the black market, because first you have to establish the legal market,” Ajax said.

Rural pot farms opposed

An outspoken number of Sonoma County residents are balking at the prospect of legal commercial cannabis farms interrupting life in their rural and agricultural communities. Reports of marijuana-related violence only underscore their concerns that even lawful operations could attract criminals or, at minimum, generate new problems like disruptive odors and increased traffic while putting additional pressure on stressed water resources.

Attorney Kevin Block is handling two cases involving groups of neighbors suing cannabis operators or entities applying to start a farm in Sonoma County, including a group of families who tried to sue a now-closed cannabis farm under the federal RICO Act, better known to fight organized crime such as the Mafia.

A federal magistrate judge dismissed their RICO claim but the farm had already shut down under pressure from county code enforcement, so their mission was successful.

Block said his clients may have chosen to live in agricultural areas with cattle farms and vineyards, but those sometimes loud and smelly operations are a far cry from a cannabis patch surrounded by fences, lights and guards.

“This stuff grows in the ground, but it’s not like grapes,” Block said. “It’s different and needs its own set of rules.”

Cannabis entrepreneurs putting down roots in agricultural and rural communities to build law-abiding operations are facing sometimes vitriolic opposition from their detractors. The dynamic has been exacerbated by Sonoma County’s decision to ban cultivation in rural residential areas where it’s been grown for years, often pushing operators into more traditional agricultural areas less accustomed to this edgy new crop.

These disputes have brought crowds of people wearing either red or green to symbolize whether they’re against cannabis or for it to the Sonoma County Board of Supervisors chambers during public discussions about local regulations for marijuana.

One of those voices is Laura Waldbaum, who for two decades has lived on St. Helena Road near the Sonoma-Napa county line. Waldbaum counts herself among those who voted to legalize cannabis in the November 2016 election. She’s had no problems with some of her neighbors who have long grown small amounts of marijuana without issue. But she’s been disturbed by recent crimes, including an August attempted murder involving a group of illegal marijuana growers far too close to her quiet rural enclave.

Her interest is primarily environmental.

Waldbaum said she’s watched as Mark West Creek’s flow and its fish stock have dwindled. Years ago, she could wade into the north fork of Mark West Creek and watch 2-foot steelhead trout swim around her feet.

“It was fascinating and brought a lot of joy to be able to see that,” Waldbaum recalled. “In the summertime we’d throw worms and crickets in the water and they’d swarm up to the surface like the water was boiling. In 10 years, that has changed dramatically.”

She’s worried about added pressures to her watershed, and her advocacy prompted a local supervisor for the National Marine Fisheries Service to send a letter to Sonoma County officials concerned about the county’s methods for evaluating cannabis cultivation in delicate watersheds, like Mark West and Green Valley creeks, which are highly impacted by groundwater pumping.

Hundreds of complaints

Sonoma County’s permitting department has responded to nearly 750 complaints about cannabis operations since Jan. 1, 2018. Code enforcement officers have dealt with most, leaving about 30 active cases under investigation, according to department director Tennis Wick.

Wick’s department has been handed the heavy task of permitting all but the smallest cannabis cultivation projects, and it has yet to approve a single outdoor farm. He expects each proposed farm will meet public opposition and legal delays as neighbors are increasingly turning to civil litigation as a means to air their concerns.

“The better-located, commercially competent applicants are going to make it,” Wick said. “But that number is going to be far smaller than we thought.”

Until marijuana is legalized nationally, Sonoma County Sheriff Mark Essick said it will continue to attract criminals seeking to make a profit “as long as people can buy marijuana in California and simply drive it hundreds of miles to the east and it magically increases in value three times.”

However, the sheriff said that he doesn’t expect lawful cannabis farms to attract a significant uptick in crime, just as local dispensaries have quietly been in business in the county for years. Farms cannot have any cash on site and must have a variety of security systems including guards, fencing and cameras.

Hopes that California might establish a public bank to serve the cannabis industry, still forced to deal mostly in cash because of the federal ban, were dashed last month when the state’s treasurer reported a task force had concluded that establishing a public bank for the cannabis sector was not yet feasible.

Essick said he personally reviewed the security plans for a proposed farm on Purvine Road by a landowner and his investment partners. The project has been under fire by a vocal group of neighbors who don’t want the proposed 1-acre marijuana farm to proceed out of concern for crime and impacts like traffic and water use.

“I have to tell you I was impressed,” Essick said. “The neighbors are frustrated and think they’re too close - and I get that. But overall, looking at his security plan and operations plan and his plan to use natural screening, that impressed me.”

Hopkins, whose west county supervisory district has been the center of cannabis culture in Sonoma County, said that the public debate needs to shift from its focus on where cannabis doesn’t belong to where it does. She said most of the proposed cannabis farms in her district have been uncontroversial, a signal that there’s hope Sonoma County may be able to capture some of the economic benefits of commercial marijuana cultivation.

“My vision, all along, has been a Sonoma County-branded artisan cannabis production and using it to support diversification of agriculture,” Hopkins said. “Farmers have long supported their income, quite frankly, with cannabis cultivation. If we can get people growing food and cultivating cannabis together, that’s a beautiful thing.”

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