High expectations: Marijuana legalization draws get-rich-quick prospectors to California’s other green industry
Recreational cannabis promises state billions, but will wannabe entrepreneurs pop the bubble?
Downtown & Vine sits in the shadows of the Esquire IMAX Theatre on K Street—a nondescript, hole-in-the-wall restaurant and wine bar where, on a quiet Thursday in November, in a side room, nearly 40 people, mostly women, met up to discuss a unifying topic: marijuana.
For nearly two hours—as a one-man-band strummed music in the dining area in the next room—a three-woman panel discussed the health benefits of marijuana for veterans and the various organizations in place to help provide that medicine. The eclectic audience soaked up the information in between sips of wine and nibbles of assorted appetizers spread out on shiny platters.
Monthly meetings like this are the signature of Women Grow, a nationwide networking organization interested in “cultivating cannabis entrepreneurs,” according to its marketing material.
This is the new reality. In California, which became the seventh state to legalize recreational marijuana on November 8, cannabis promises a green rush for aspiring entrepreneurs and government financiers looking to fatten their budgets. But the state has gotten too high on get-rich-quick bubbles before.
As marijuana expands its legal reach and becomes more normalized, can it sustain all the salivating expectations regarding its economic prospects, or does everything that blooms eventually die?
The state will begin handing out licenses to sell recreational marijuana on January 1, 2018. Business Insider expects the industry to bring in $1.57 billion that year alone—and nearly $4 billion in 2020. That’s on top of an already healthy medicinal marijuana industry that earned nearly $3 billion last year and is expected to approach that number again this year.
A study last year from the University of the Pacific predicted the new marijuana industry could create $4.2 billion in annual output in the Sacramento area as well as $1.4 billion in labor income, figures that would represent almost 2 percent of the region’s gross economic output. UOP also estimated a huge local demand in excess of 41.6 million grams in 2018—90 percent of which the city could end up supplying.
Depending on how lenient or restrictive local regulations are, the UOP study believes cannabis cultivation in Sacramento could be comparable to the $600 million wine grape cultivation industry in the Sonoma Valley.
State coffers will benefit from Prop. 64’s passage as well. Sales of marijuana products will come with a 15 percent tax for purchasers, and cultivation carries its own set of taxes of $9.25 per ounce for flowers and $2.75 per ounce for leaves.
The nonpartisan Legislative Analyst’s Office estimates the state could eventually net somewhere in the “range from the high hundreds of millions of dollars to over $1 billion annually” from the taxes. It’s also expected the state will save “tens of millions of dollars annually” due to declining marijuana-related arrests, incarceration and related police activity.
The UOP study estimates the marijuana industry would create “as many as 20,000” jobs in Sacramento, including 2,700 cannabis-related retail and distribution positions, comparable to employment numbers for automotive and accessory retailers in the area.
But getting into the business won’t be a cinch.
Prop. 64 states that potential retailers will require state licenses, and local governments can require licensing as well. The city of Sacramento has begun hammering out regulations for the local industry—covering everything from cash handling procedures, transportation, insurance, background checks and odor control to figuring out safe extraction methods for ever-popular cannabis oil. The city also has a provision that allows it to dispense local licenses before state ones are available in 2018.
It’s that exact quandary—state vs. city licensing—that Melissa Sanchez, founding attorney of the Harvest Law Group, a law firm that specializes in marijuana cultivation and production business practices, believes will be the primary issue to consider for potential investors and opportunists looking to get into the industry. “Most—I would say all—municipalities will require you to have some sort of local license to operate,” Sanchez said, echoing the developments already underway at City Hall.
The licenses for various forms of marijuana-related businesses will be costly.
In Colorado, applications to become a recreational marijuana business can cost up to $4,500. Operational licenses range from $3,750 to $14,000 and are renewed either annually or every other year for various fees. Washington’s licenses are much cheaper, with an application fee of $266 and an annual fee for issuance and renewal of $1,062.
In California, licensing is regulated by business size, so the costlier it is to run an operation, the pricier the licensing will be. In September, Gov. Jerry Brown approved a bill detailing specific types of cultivation facilities based on square footage, types of foliage, lighting and other variables, breaking down facilities into 11 different types, thus varying the licensing fees for each. In essence, these regulations allow smaller businesses to pay smaller licensing fees, giving an inroad for the mom-and-pop pot stores to come to fruition.
Marijuana businesses will also have to deal with the inability to bank in Federal Deposit Insurance Corp.-insured banks as marijuana is still illegal on the federal level, thus making banks serving marijuana businesses open to possible seizure under federal law.
“You’ll basically need to lie about what you do,” said Yoni Ofir, co-founder and creator of LEAF, an appliance that allows users to grow their own cannabis. “They can’t get bank accounts. They can’t get credit card processing. They can’t get the tax write-offs that you need to survive as a business.”
Sanchez agrees that banking could be an industrywide hurdle.
“Unfortunately, we have to deal in cash,” she said. “Unless you borrow from friends and family, there isn’t really a bank you can go to for a small-business loan to open up your cannabis business.”
“My advice to people that want to get into the cannabis industry is don’t,” Ofir said. “If you’re not an experienced businessperson you’re going to find it extremely difficult to succeed in this industry.”
Though he may just be coyly trying to fend off competition, Ofir’s advice is not without merit.
Licensing complications and warnings from industry vets won’t stop the funds from flowing. And plenty of the money made in the so-called green rush will actually be made by those who don’t rush to the green. One way around the banking hurdles, for instance, is to stray away from operating a so-called “touching the plant” business.
“We need bookkeepers. We need accountants. We need people to help with your human resources, with your marketing, with your design,” Sanchez said. “Anything that a small business would need, there’s all these new small businesses that will be emerging out of this gray market, out of the shadows, and will now take full advantage of all these opportunities that they will have, hopefully. They will need all of these types of services just like anybody else. Retirement planning. Financial planning. All of that kind of stuff that those businesses need, I think that’s a great opportunity to be a part of this.”
The best route for potential entrepreneurs may be to enter the weed business’ ancillary markets, in other words.
“I think if people are looking to financially benefit from any changes in the law, it would be on the ancillary side,” Sanchez said. “We already have plenty of people who grow, we have plenty of people who manufacture and have been doing it for a long time.”
Some people are already making money in the side market.
Robert Calkin, the self-proclaimed “cannabis warrior,” holds seminars throughout the state where he teaches would-be weed entrepreneurs the ins and outs of the business for $349 for their first session. He agrees that the ancillary jobs can be where more cautious entrepreneurs cash in.
“A lot of people come to that conclusion and say ’I don’t feel comfortable working directly with the weed,’” Calkin said. “’I’d rather just sell insurance. Or be an electrician and serve in that way.’”
Stockton native Jerry Zuniga founded Tactical Patients, a nonprofit organization that provides veterans with food, hygiene kits, free clothing and, of course, Prop. 215-friendly medicinal marijuana.
“It can be anything from flower to capsules, to creams, to liquid drops, to edibles to even shampoos and creams for your dog,” Zuniga said of the typical dosage he hands out to veterans each month. “Not every veteran that comes to the meetings chooses to participate in the Prop. 215 medical cannabis program, so not every veteran gets a medical cannabis bag from us. The medical cannabis is a bonus.”
As his organization expands, Zuniga and his partners have set up two 2,500-square-feet facilities in Nevada to grow and cultivate marijuana for veterans.
“We’re establishing a security team of just vets,” Zuniga said of the facilities. “It’s all nonlethal and it’s just like we do overseas. … We do that with simple escalation-of-force rules, simple phase lines, some lights and intercoms and even after all that if they continue to come we lock ourselves down and call the cops.”
So, in essence, Zuniga—a Marine Corps veteran himself—and weed have supplied 10 veterans with jobs so, as he put it a couple months ago, “they can get cash for the holidays.”
While Zuniga and others have their early success stories, people like Ofir foresee a saturation point that could lead California’s weed industry into a bust, similar to the dot-com and housing bubbles of the past.
“Everyone is looking at it, everyone is thinking this is an easy way to make money,” Ofir said. “What they’ll learn is, it’s a highly competitive market that is currently a limited sized market.”
And the newbies are the ones most likely the lose their shirts, he predicts.
“As a wholesaler you’re going to get stuck because there’s going to be so many people growing that the price for wholesale will go down,” Ofir added. “People are going to cut each other’s throats just to get into the dispensaries.”
That situation would benefit consumers as the supply outweighs the demand—yes, even for weed—resulting in cheaper prices for consumers./p>
Yet not everybody believes the weed business will be difficult to crack.
“I don’t think Prop. 64 will hold us or newcomers back, because the cannabis community is so strong,” said Noah “Mickey Tiltz” Perez, spokesman for Friendly Wellness Center, a mobile dispensary and delivery service in Sacramento. While he acknowledged the logistics of becoming a licensed retailer can be complicated, Perez believed that, “with the right lawyers and the right paperwork,” the process could be easy.
Instead, Perez thinks the most difficult part of a post-Prop. 64 California will be meeting the expectations of cannabis consumers with refined palates.
“The only hiccup for us was supply and demand for the connoisseurs, because they go crazy for the good stuff,” he said. “That good stuff goes quick.”
As the state continues on into the future of marijuana and its usage—both for medicinal and recreational purposes—there are plenty of people looking to embrace weed, and the money made from it, into the fabric of American culture, like beer ads during football or circles of co-workers sharing a cigarette break at work.
“I think Women Grow is a great example of an organization that attracts people of all different sorts of backgrounds,” said Sanchez, who serves as the chair of the Sacramento chapter of the organization. “We wind up with people that go one time and see how normal it is, and they’ll come back and bring their mom, or their grandma.”
But that won’t happen again. On January 5, the local chapter abruptly announced it was folding due to “unforeseen and unfortunate events” brought on by a restructuring of the national organization.
Consider it the first casualty of the green rush.