Investors may see a cultivation license in California as a fast path to riches, but they need to avoid mistakes made in Washington and Colorado to capitalize on the opportunity
* The following article was originally published in the October issue of Marijuana Venture, available now.
With the legalization of recreational cannabis in California, cultivation on a grand scale is a forgone conclusion. As with other states that have made adult-use cannabis a regulated, taxed industry, growing and processing marijuana will easily become a multibillion-dollar industry.
However, if mistakes made in Washington and Colorado are repeated — and it’s likely they will be — investors looking at a cultivation license as a fast path to riches are in for a big surprise.
California by the numbers
Although California may be a bit smaller geographically than Texas, it dwarfs every other U.S. state by almost every other measure.
The state covers 160,000 square miles and it is 800 miles long from its northern border to the southern tip. It has the highest and lowest points in the Lower 48 (Mount Whitney and Death Valley, respectively). It has the largest population of any state at nearly 40 million.
California’s economy is the largest of any U.S. state with a gross domestic product of $2.5 trillion — the world’s sixth-largest standalone economy. It has three of the world’s five largest companies by market capitalization: Apple, Google and Facebook. (The other two, Microsoft and Amazon, are based in Washington, another blue state with legal marijuana!)
In short, just about everything in California is big, from its physical size, to its economy, to its geographical diversity.
California is best known for its beaches, Hollywood movies and tech companies. However, the Golden State is also an agricultural giant, producing a staggering $45 billion a year in fruits, vegetables, nuts and other crops to lead all other states by a wide margin.
It’s the nation’s No. 1 producer of many agricultural products, including celery, almonds, lettuce, tomatoes, carrots, grapes and peaches, among others. California’s Central Valley, which stretches 450 miles from Bakersfield to Redding, is the largest single patch of Class I soil in the world.
Soils are rated in terms of their agricultural limitations. Class I soils have the fewest limitations; Class VIII is considered not appropriate for agriculture.
According to the USDA’s Natural Resources Conservation Service, Class I soils are “suited to a wide range of plants and may be used safely for cultivated crops, pasture, range, woodland and wildlife. … They are deep, generally well drained and easily worked. They hold water well and are either fairly well supplied with plant nutrients or highly responsive to inputs or fertilizer. … They are productive and suited to intensive cropping.”
Based on sales figures in Washington and Colorado, simple math indicates that the legal, recreational marijuana market in California will rapidly reach between $5 billion and $7 billion per year.
Furthermore, with its enormous stretch of Class I soil and ideal climate for growing, California’s productivity per acre will likely be much greater than the other states with legal cannabis.
When Washington first legalized recreational marijuana, would-be growers scrambled to find suitable locations. Long-vacant warehouses and sub-par agricultural land got snapped up quickly, often at rates far above fair-market value.
Cannabis cultivators who had little experience in leases and commercial agriculture were often targeted by shady operators. Many made deals they soon regretted on properties no savvy farmer or orchardist would have given a second look. Compounding the problem, many businesses hired so-called “master growers” with little more experience than growing cannabis in a garage or basement to manage a sprawling commercial farm.
The results were often disastrous for investors and license-holders. But the good news is that the lessons learned in Washington and Colorado can easily be avoided with a little advice from real experts and some simple due diligence on the part of the investors.
The Right Hire
The owners of struggling cannabis farms often make the same mistakes.
They spend too much money on labor. They overestimate the wholesale value of cannabis when setting up their business plan. They believe quality alone will generate sales and demand for their products.
But the most common flaw usually involves hiring unqualified operators. The aforementioned “master grower” who learned cultivation techniques by reading High Times and other marijuana books is not going to know how to run a full-scale commercial farm.
Cannabis, with its cult-like following of backyard “experts,” is not difficult to grow — despite what the purveyors of “how-to” books would like you to believe. In fact, cannabis is an extremely hardy annual that can survive — and even thrive — in a wide variety of environments and the plants will grow a foot a week with good sun, soil and the occasional dose of fertilizer.
Successful businesses in Washington have shown that the correct person to run a commercial cannabis operation has managed a professional greenhouse, graduated from a university with a degree in plant sciences or has real-world experience in commercial agriculture. In the long run, success in the commercial cultivation of cannabis will boil down to efficiency, just like every other field of commercial agriculture.
Selecting a site
Without a doubt, selecting the right location for a new cannabis farm is going to have more impact on success or failure than any other single decision in the process. In drought-prone, federally-irrigated California, water may be the single-most important consideration of all.
While the Central Valley might seem like the ultimate location because of its superior soil and abundant sun, the issue of water/irrigation is a potential business killer.
“The smart money is in water,” says Hezekiah Allen, executive director of the California Growers Association (www.calgrowersassociation.org). “Current U.S. law does not allow for federal irrigation water use in the cultivation of cannabis, and almost all the irrigation in the Central Valley is part of a huge federal project.”
If the Central Valley is a problem, what about the Salinas Valley? According to Allen, the problems in the Salinas Valley could be just as acute because of rapidly disappearing ground water and severe restrictions on the use of well water.
The traditional center of illegal marijuana cultivation in California has been the area known as the Emerald Triangle.
In the past, it was a favored because of its rugged geography and low population density. Ironically, for a completely different set of reasons, it might still be the safest location for legal marijuana cultivation. If water ends up being the most important consideration for a good location, Northern California, including Humboldt, Mendocino and Trinity counties, could end up the clear winner.
Consider some of the average annual rainfall totals in different California cities:
Bakersfield, near the southern end of Central Valley, receives an average of six inches of rainfall per year. Further north, Fresno in the San Joaquin Valley, receives 13 inches.
Napa, located closer to the center of the state, receives 27 inches.
Meanwhile, in Northern California, Eureka in Humboldt County and Ukiah in Mendocino County both receive 40 inches of rain annually and Redding in Shasta County receives 35 inches.
Crescent City in Del Norte County, just south of California’s northern border, receives an incredible 71 inches of rainfall on average — more than double the rainfall of notoriously wet Seattle.
Put in simple terms, Northern California and the Emerald Triangle have good average rainfall totals that will support a thriving cannabis industry without the need for outside irrigation and with little worry of wells drying out.
Allen suggests that a smart cannabis farmer could easily set up a rain catchment system that takes advantage of the ample winter rains by storing it for use during dry summer months when rainfall is historically low.
It’s always advisable to hire a professional when making a real estate purchase. That rule applies to residential houses and recreational properties, but it’s especially important with commercial real estate. Many pioneering growers in Washington and Colorado, who had little experience in farming, made bad deals they came to regret. Working with an experienced real estate agent can save a lot of heartache.
Real estate broker Kyla Tripodi says the most common mistake among buyers is failing to research and fully understand Humboldt County’s ordinance before they invest.
“While we are on the forefront of cultivation in California, based both on reputation as well as being the first county in the state to pass an ordinance, the process is still complex,” says Tripodi, who owns The Land Man Office along with her father. “The permit application is lengthy and requires compliance with several different county, state and federal agencies. Additionally, there are ongoing maintenance requirements once a permit is issued, including inspections from various departments.”
Sandi DeLuca, a real estate agent with Coldwell Banker in Arcata, says, “The cannabis industry is well established (in Humboldt County), and with the passing of legalized marijuana, the Building and Planning Department has said that it wants to be seen as a friendly, pro-business area for the industry. Property owners are working with lawmakers, contractors, engineers, surveyors, consultants and California Fish and Game to get all their ducks in a row.”
When looking at a site in the Emerald Triangle, DeLuca, who represents buyers and sellers in Northern California, emphasizes the importance of working with someone who knows the “ins and outs” of both the industry and local regulations. She says she’s seen outsiders get bad advice that led to a poor purchase.
“I have seen and cleaned up a lot of deals done by a handshake in the hills — properties sold that had no water, no legal roads, improper transfers, liens, etc.,” she says. “I recently heard of a property owner who refused to return a deposit on a piece of land that an out-of-town buyer was hoping to purchase, even though the land was not even zoned for cannabis cultivation.”
When evaluating land in Northern California, DeLuca says the main things to look for depend on what the property will be used for.
“Zoning can affect not only current use, but also future use,” she says. “The commercial cannabis cultivation permits offered in Humboldt County had deadlines. Did the seller meet those? What was applied for? Water and its source are huge considerations.”
Roads, slope, easements and liens can also have big impacts on selecting the right location for a business, she says.
While the price of properties that meet the county’s cultivation ordinance have grown exponentially, Tripodi says there are still deals to be found.
“The county stopped taking permits at the end of 2016, which led to a limited supply of cultivation properties on the market while buyers from out of the area continued to flood in,” she says. “However, it appears that prices have peaked, and may come down. Some overpriced properties have not moved. When you consider everything the county has to offer, and the price in the rest of California for an acre of land, Humboldt County is still a relatively good deal.”