Inside California's scramble toward legal weed

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When Alex Zafrin and Rekka Nicholson decided to make marijuana-infused ice cream, they started off small. They bought a small, $30-something ice cream maker and began experimenting with processes and flavors at home. While they’d eventually make flavors like Coffee Pot, Vanilla Kush and Go Fudge Yourself, the learning curve was steep. They made their share of mistakes – including a peanut butter and crispy maple bacon flavor that contained chunks of chewy meat and turned out to be “really awful,” Zafrin says – but after just three months, they finally found a balance. They found a company that could supply the THC oil, and landed themselves in 100 medical dispensaries across the state.

When Proposition 64 passed last November – which legalized adult-use recreational marijuana in the state as of January 1st, 2018 – Zafrin and Nicholson felt a mix of emotions. Like many in the cannabis sphere, they welcomed regulation in order to ensure quality and establish a system of checks and balances, but were concerned about overreach.

“When government gets involved with an industry, there are challenges,” says Zafrin. “Especially with something like this they tend to over-govern…a little bit.”

In this instance, it seems his concern was founded. In the push to make standardized guidelines for marijuana products across the state, the Department of Public Health determined that perishable cannabis items – like ice cream, for example – would be illegal. Zafrin and Nicholson had built their business on a recipe that would be banned.

The Fully Baked team are not the only ones to feel like they got the rug pulled out from under them. Throngs of cultivators, manufacturers, dispensary-owners and others in the cannabis industry are bracing for impact of the new state regulations and want nothing more than to get compliant – a difficult feat as final regulations are yet to be completed. For more than 20 years, municipalities up and down the state have slowly adopted their own policies on medical marijuana, from simply banning dispensaries to embracing them to offering responsible operators limited protections from legal prosecution. However, this process of regulation has been slow and sporadic, with no sweeping changes made across the board.

That’s where the Bureau of Cannabis Control comes in. Previously known as the Bureau of Medical Cannabis Regulation, this state agency was tasked last year with developing separate regulations for both medical and recreational cannabis. After months of research and a draft release of medical guidelines, that effort was scrapped in June 2017 when the state passed Senate Bill 94, which merged the two cannabis industries into one regulatory framework. Under its new role, the state went to work building a dual-purpose set of regulations to govern all commercial cannabis practices in the 583 jurisdictions throughout the state.

But the state is now facing a rapidly ticking clock. In fact, the time crunch is so pressing that as of August, the Bureau of Cannabis Control invoked an “emergency rulemaking process” that allows them to forego public hearings in the interest of time. (These hearings will be held sometime next year, after the regulations take effect.) Then in September, bureau chief Lori Ajax announced they’d be launching a temporary licensing program to avoid any rollout delays in the New Year. Under this system, applicants will be able to submit some basic information in exchange for a cannabis license that will be good for four months, with options for extensions if the final regulations aren’t completed by that time.

Jan. 19, 2017, Lori Ajax, chief of California's Bureau of Medical Cannabis Regulation, poses in the bureau's office in Sacramento, Calif. Ajax, and her staff are crafting regulations and rules that will govern the state's emerging legal pot mark, from where and how plants can be grown to setting guidelines to track the buds from fields to storefront.

Overall, the year following the passage of Proposition 64 has become a bit messy, and there’s a lot at stake. Within its first year of having a legal marijuana industry, California is expected to make $684 million in excise taxes, according to the 2017 Budget Act revenue forecast. In the years that follow, that windfall is expected to expand exponentially, with predictions that the state will make more than $1 billion in taxes by fiscal year 2021.

“Cannabis is a big business but it also touches on a lot of aspects of our lives,” says Ariel Clark, an attorney with the Los Angeles-based cannabis specialty firm, Clark Neubert LLP. “The challenge is that we’ve had 20 years of a thriving cannabis industry – really a cottage industry – and we’re now in a process of regulating that industry. There are people across the state who depend on this economy to live their lives,” says Clark. “So this is a very, very, very, big deal.”

These new laws will dictate everything from cultivation practices to lab testing standards and packaging requirements, and had to be developed in coordination with nearly a dozen state agencies, including the Department of Public Health and the Department of Fish and Wildlife. The state’s new guidelines must balance competing public and industry interests (of a state of more than 39 million people), and reflect the numerous public hearings and thousands of comments received by the bureau, while ultimately cohesively regulating all jurisdictions within California. It’s a state largely divided along geographical lines, says Alex Traverso, chief of communications of the Bureau of Cannabis Control.

“When you go up to Eureka and then you go down to L.A. and San Diego, what people are concerned about are very different things,” he says.

For example those from the Emerald Triangle, the lush cultivation epicenter of Northern California, seems most preoccupied with growing requirements, says Traverso, while Los Angeles residents have voiced concern over dispensary regulations and allowable hours of operation. Residents across the state are concerned with the price tag of going legit. In addition to forking over licensing, permit and application fees at both a state and local level, restrictions on where weed businesses can operate has created a limited – and very expensive – pool of real estate. Not to mention the standard startup and construction costs of any new business.

“When you run these sorts of numbers you’re looking at not less than half a million to five-million-plus, for some of these projects,” said Clark, who’s also chair of the Los Angeles Cannabis Task Force.

Even for serial cannabis entrepreneur Todd Mitchell, who has multiple businesses including cultivation operations in Santa Barbara and Santa Cruz counties and delivery services in Goleta and Paso Robles – each of which has their own marijuana policy. Ordinances can change in a single city council meeting, and the process is costly; both in time and money. For one, the legal murkiness of the cannabis industry often necessitates the (very pricey) help of attorneys, and because local regulations have been in constant flux, it can be a huge financial risk to plant your flag in one location. *

For Mitchell, the fiscal burden is eased by one his partners, a successful real estate developer and entrepreneur who bankrolls much of the operation.

“Financially, it would be very, very difficult for me to have done this on my own,” said Mitchell.

Although state cannabis officials say they aim to keep taxes and fees manageable, as hefty requirements damper a market and discourage businesses from going legit, fear remains that big business will stomp out mom and pop shops. More than anything though, potential licensees are itching for some direction. Not just from the state, which is scrambling to release final regulations, but from their local jurisdictions.

In this June 27, 2017, photo, bundles of $20 bills are placed on a table as Jerred Kiloh, owner of the Higher Path medical marijuana dispensary, prepares a trip to Los Angeles City Hall to pay his monthly tax payment in cash in Los Angeles. For Kiloh, the cash is a daily hassle. It needs to be counted repeatedly to safeguard against loss. State and local taxes must be set aside and stored, sometimes for a month or more. When vendors show up, they get paid in cash, too.

Each applicant must secure a local license or show proof of local compliance before applying at the state level. (Once again, a difficult feat when many municipalities have yet to release their own regulations). Los Angeles for example – the largest market to legalize recreational cannabis – is still in the process of finalizing guidelines and assembling the infrastructure necessary to get the program up and running.

If the regulations do move forward as proposed, entrepreneurs in Los Angeles may have a hard time finding space to set up shop within the designated “green zone”. This issue is common to many densely-packed city centers in the state, as there’s a litany of restrictions on where cannabis businesses are allowed to operate. While California’s regulations require cannabis businesses operate at least 600 feet from schools, playgrounds, or other “sensitive use” locations, L.A. is poised to require this distance be even greater, at 800 feet.

“Location-finding is always going to be the biggest hurdle when it comes to getting licensing,” says Emily O’Brien, founder of Mondo Meds, a cannabis powder that dissolves into food and drinks.

O’Brien plans to apply for a license to manufacture Mondo for the adult-use market, and has been scouting L.A. County for locations to host her future operation. Many landlords are hesitant to rent to weed businesses altogether though, and if they do agree to it, they often hike up the rents. As a workaround, O’Brien is planning to team up with other small businesses to rent a larger space and share the brunt of the costs – somewhat like an incubator, she says.

Anakatrina Waltz, owner of Anakatrina’s Edibles, knows O’Brien’s struggle well. A self-described “tadpole” in the cannabis biz, Waltz doesn’t produce enough volume to cover the costs of having her own kitchen as her soy/gluten/dairy/sugar-free brownies are currently distributed at just five dispensaries, so she rents a cannabis-friendly, commercial space by the hour.

“I have to try and save as many pennies as possible and cut costs like that,” she says. “I’m sales, I’m the chef, I’m the CEO. It’s just me – every aspect of my business I do myself.”

A trained chef and horticulturalist who still holds down catering gigs in her free time, Waltz says it’s a tumultuous time in California. Dispensaries are hesitant to take on new vendors who may or may not be licensed under the city’s future regulations, making it difficult to grow her business, she says, and the industry’s current state of limbo has made planning ahead difficult.

“It’s extreme stress,” says attorney Heather Burke of Greenspoon Marder. “People are not calm. Everybody is worried about how they’re going to fit in.”

Burke, who is based in Northern California’s Nevada City, has represented people in the cannabis industry for the last seven years, first defending people in marijuana felony cases, and now as they gear up for full compliance. Some of California’s policies seem to favor larger farms and indoor cultivators over mom-and-pop operations, says Burke, a disparity due in part to small growers having less access to lobbyists and policymakers who influence regulations.

“[It’s] frustrating and scary for the small farmer right now,” she says.

This financial burden is only exacerbated by the fact that the price of marijuana in California is dropping because of an oversaturation of the market. California is flush with farmers – so many in fact that the California Cannabis Industry Association, a trade and lobbyist group based in Sacramento, has been encouraging industry newcomers to consider other aspects of production instead, such as opening a dispensary or testing laboratory.

Some Northern California farms are still sitting on cannabis yields from last fall, says Burke, and if they are unable to sell it soon, they’ll face crippling financial losses. If Colorado and Washington State are any indication of what’s to come, marijuana sale prices will only continue to dip, as both states have seen dramatic decreases in the price point on weed following legalization and regulation. In Washington, the average price per gram plummeted from more than $20 in 2014 to just $5.81 in 2017, according to data from Axios. In California, some experts say recreational weed prices could go up for consumers at the start of the new year, but are expected to then level out and drop.

Making the industry financially hostile to small farms would be bad for consumers as well, as weed is actually better grown in craft batches, says Burke. About 70 percent of Burke’s clients are cultivators, she says, located across the state with a concentration in the NorCal foothill counties and throughout the Sacramento basin. In order to compete with larger growers, these small farmers have had to become sophisticated business people, says Burke, through forming LLCs to protect personal assets, registering their intellectual property and working hard to try and shape laws in their favor.

As Waltz and the rest of the industry anxiously await the release of the final regulations, expected in November, the Bureau of Cannabis Control is embarking on a hiring frenzy that involves growing their ranks from approximately 25 people to 100 over the course of the next few months. The bulk of these hires will be in the bureau’s licensing department to prepare for the deluge of applications come January.

In the meantime, companies like Fully Baked Ice Cream are coming up with contingency plans. The LA-based ice cream company is in the process of developing edibles that require no refrigeration – and some that are healthy, gluten-free and dairy-free to boot – in case they’re not longer able to sell their flagship frozen product. The company also recently landed a distribution deal to sell their ice cream in locations that allow it – including Canada and Florida – and the rest of their soon-to-be released goods in Arizona.

This is just one hurdle of many though, says Zafrin, as entrepreneurs in the cannabis industry are well-versed in complications most business-owners would never dream of. When there’s a knock at his door, it could easily be the milk man or the DEA, he says. So when people ask if they should get involved in the marijuana industry, he has his response ready.

“I tell them all the same thing; don’t do it,” he says.

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Source: 420 Intel – United States

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