State of Change

California dispensary operators provide insight on the challenges, opportunities and adjustments they face as the state transitions into new regulations

The Green Cross has been serving patients in San Francisco and the greater Bay Area since 2004.

Longtime dispensary owners in California have already survived raids by the federal government, the unstable foundation of ever-changing regulations and the immense challenges of being pioneers in the medical cannabis movement.

Now, these risk-taking entrepreneurs will run the gauntlet again, as the world’s sixth-largest economy prepares to transition from a loosely regulated medical program to a highly regulated adult-use market. Even the highest-profile dispensary owners who are in good standing with their local jurisdiction find themselves scrambling to stay on top of the regulatory updates and how statewide rules will impact preexisting legislation.

“If the draft language remains unchanged, there will be many changes ahead for our business and industry,” says Kevin Reed, the founder and president of The Green Cross, a Bay Area dispensary that first opened in 2004.

But regardless of the impending challenge, many dispensary owners — and thousands of prospective applicants — are thrilled about the opportunity of opening their doors to the general public.

“We have been waiting a long, long time for this day,” says Aaron Justis, CEO of Buds & Roses, one of the currently permitted dispensaries in Los Angeles.

LA proposes new rules

The nation’s second-largest city aims to improve its cannabis regulations, but Measure M leaves

By Michael Heicklen

Medical marijuana regulations in Los Angeles have been a mess since 2007, when the city passed an interim control order (ICO) giving 135 preexisting dispensaries immunity from prosecution. After six years of confusion and in-fighting, Los Angeles voters passed Prop D in 2013, affirming that these 135 pre-ICOs have a monopoly. All other commercial collectives, co-ops and cultivators in Los Angeles were deemed criminal enterprises.

In March 2017, Los Angeles voters passed Measure M, giving the City Council the power to scrap the Prop D system and begin issuing actual permits. The difference between Prop D and Measure M is substantial.

The current law, Prop D, strictly provides immunity. Under this “guilty until proven innocent” structure, pre-ICO dispensary owners, employees and agents can be arrested for almost any suspicious activity. Arrestees must subsequently prove they are exempt from prosecution, which can be a long and expensive process.

Under Measure M, which is expected to start in September, operators with city permits will be considered “innocent until proven guilty,” giving police far less discretion over whom they can arrest. On June 8, the City Council released its proposed permit rules, which include the following processing priorities:

1 – Pre-ICO dispensaries will be licensed first.

2 – Non-retail cultivators in full compliance with city laws since Dec. 31, 2015 will be licensed second.

3 – New applicants, with no prior history in the cannabis business, will be licensed third and fourth.

To the City Council’s credit, the new rules are well-crafted and thoughtful. But there is one glaring exception: Priority 2 makes no sense.

Under Prop D, only pre-ICOs can grow cannabis and only at their single registered retail location. Most of these dispensaries only have 500 to 1,000 square feet of total floor space and serve hundreds, if not thousands, of patients, making cultivation at the storefront virtually impossible.

Despite being technically illegal, rogue operators have commonly grown in off-site industrial warehouses, then sold cannabis to pre-ICOs through middlemen. Some growers claim to be pre-ICO independent contractors, which still violates the on-site growing requirement. The city has always been aware of this paradox. Some wholesalers have been arrested or have had their marijuana seized; others have been allowed to operate with impunity. At best, enforcement has been totally random.

So is the City Council now offering Priority 2 licensing strictly to the pre-ICOs who have been growing on their own (which is almost none of them)? It could take years for Priority 3 and 4 applicants to get licensed. Meanwhile, where will the other Priority 1 dispensaries get cannabis? What if dispensaries continue to buy from unpermitted cultivators? Licensees who ignore the city’s new rules could face fines, an injunction, jail time or have their utilities shut off. Further, meeting the state’s seed-to-sale tracking requirement will be impossible to follow for retailers buying from the black market.

Or is the City Council clumsily trying to extend Priority 2 licensing to rogue growers by implying that any business that has held and complied with a city tax certificate since Dec. 31, 2015 will also get immunity for past cannabis crimes if approved for a license? (Shockingly, the city regularly issued these to criminal cultivators so it could share in their illicit income.) If so, the Priority 2 rule needs a complete overhaul. No applicants are going to admit to committing prior crimes for which they can still be arrested. Publicly conceding to illegal conduct, without receiving immunity if the application does not succeed, comes with a huge personal risk.

Unless this gets rectified, Los Angeles could end up with 135 licensed dispensaries that have nothing to sell. The public comment period runs until Aug. 8. If you want to chime in, contact the Los Angeles City Council’s office.

Michael Heicklen has been practicing law in Los Angeles since 1993. He focuses on family and business law for the cannabis community, is on the legal committee for NORML and is a member of FLCA and the National Cannabis Bar Association. In 1997, he was part of a legal team that overturned 200 years of forfeiture history at the U.S. Supreme Court. He can be reached at heicklenlaw@gmail.com.

Prepping for a Relaunch

Erich Pearson, the CEO of two dispensary chains in Northern California, knows that major changes are unavoidable, both from an operational standpoint and in terms of rules and regulations.

“Well, I think anybody with as large of an organization as we have has to adjust,” says Pearson, who runs SPARC in San Francisco and Peace in Medicine in Sonoma County. “We are going to see drastic changes in state law and drastic changes in local law.”

Pearson has already mapped out SPARC’s path into 2018, but rather than spending a lot of time and money up front, he’s taking a more political route to ensure the adoption of sensible regulations.

“If you lobby for changes and show them (lawmakers) why it makes sense, then yeah, they’ll change them,” he says, but points out that one of the complex elements of California’s undertaking is how local rules jive with statewide regulations.

Businesses must be licensed by both the state and their local jurisdiction — making some cities and counties far more friendly than others toward the cannabis industry.

Justis believes Los Angeles, which currently has some of the most impractical regulations in California, is not going to establish rules that are more burdensome than those enacted by the state.

“I think if there is a legal issue with how they license us, then they are going to correct it,” he says. “The city of L.A. wants the cannabis industry to succeed.”

Justis says he has to update his company’s standard operating procedures on inventory management before the end of the year and switch from using generic QuickBooks to industry-specific seed-to-sale software. That transition won’t be too cumbersome, he says, but adds that his workload will increase significantly if the final regulations do not allow medical and recreational sales to be co-located.

“Having it in a separate location would be a nightmare,” Justis says.

Meanwhile, Reed’s edibles line, IncrediMeds, faces a more drastic overhaul than his retail arm, The Green Cross. New requirements are expected to include potency limitations, packaging rules and some types of edibles being prohibited, unless the proposed regulations change before January 2018.

At the opposite end of the state, San Diego’s city-licensed dispensaries appear to be well-prepared for state regulations, due to already strict local regulations, says Cathy Bliss, the marketing director for Mankind Cooperative.

Bliss says the 18-month-old cooperative, one of 14 licensed dispensaries in the city, is already aligned with proposed state regulations. Bliss says Mankind Cooperative has plans to expand in the future, but prefers to take a wait-and-see approach on how the regulations unfold before addressing the company’s future.

The lounge-style interior of Buds & Roses in Los Angeles

Los Angeles

Justis is excited about the future, but he’s also aware that the recreational launch will lead to a lot more competition over the course of the next few years.

“Now that it’s regulated there is a bunch of big money coming to the city because there are no residency restrictions,” Justis says.

Some businesses may be grandfathered in, or have been operating long enough to develop a loyal following, but a sudden influx of capital and the fact that California is a relative newcomer to regulated cannabis, means everybody faces an uncertain outlook.

“It’s going to be tough,” Justis says.

Buds & Roses will be pursuing licenses for both retail and delivery. Justis says the possibility of offering delivery services is both important and bittersweet for his business. Los Angeles’ draft regulations prohibit the 27-time cup-winning grower from having a cultivation license if the company is licensed for distribution. While the restriction may limit the potential for his business, Justis says he would prefer to refine one aspect of the new industry before moving back into vertical integration.

“We would like to expand, but I have learned to focus,” Justis says. “I want to maximize on what I am able to do in Los Angeles and then expand throughout Southern California.”

CEO Erich Pearson says Peace in Medicine dispensaries will be rebranded under SPARC’s stylish template.

The Bay Area

SPARC is vertically integrated with two flagship storefronts in San Francisco, two sister dispensaries in Sonoma County and a one-acre grow operation, also in Sonoma County.

Due to the company’s growing roster of more than 32,000 registered members, Pearson feels his stores have become stifled by the limits placed on his cultivation canopy by Sonoma County.

“You’re only allowed to have one acre of canopy in Sonoma County and one acre is not enough for four dispensaries,” Pearson says.

Pearson’s work in San Francisco’s AIDS movement was partially inspired by his friend and industry peer Robert Jacob, the former owner of Peace in Medicine. Pearson helped Jacob improve the dispensary’s cultivation practices and, in turn, Jacob lent his expertise to help Pearson understand the intricacies of the dispensary model when he opened the first SPARC location in 2010. SPARC and Peace in Medicine merged earlier this year.

The stylish interior at Sparc in San Francisco.

Pearson plans to remodel and rebrand the Peace in Medicine storefronts to fit into the SPARC family of dispensaries, but local restrictions may, in many jurisdictions, hamper companies from expanding.

“The state regulations do not, cannot and will not supersede local regulations,” he says. “The state of California provides a lot of latitude for incorporated jurisdictions, counties and cities to control their land use and that’s in the California Constitution. The state is more liberal in quantities of licensed categories, but what we have in Sonoma County is more restrictive. So, we have to take the two puzzles and match them together.”

For Pearson, being in two counties adds another layer to the complexity. Business owners who plan to expand throughout California need to be versed in both macro and micro levels of regulations in order to remain compliant. Despite the added challenges, Pearson says his existing stores intend to service medical and recreational customers in 2018.

On the flip side, Reed isn’t prepared to announce long-term plans. Although he hopes to expand his IncrediMeds line to new markets throughout California over the next year or so, he feels there are too many unanswered questions to determine yet whether The Green Cross will pursue a recreational license.

“We are certainly open to it,” Reed says. “As of right now, it remains to be seen whether we will be able to operate in both a medical and adult-use environment.”

Two bills that would remove restrictions on stores serving both medical and recreational customers have already passed the Senate and Assembly in California. Reed expects Governor Jerry Brown to sign both.

Mankind Cooperative allows its customers to handle flower and edibles directly from the shelf.

 

Finishing 2017

Despite a wide variety of perspectives on the coming changes, optimism remains high among California’s cannabis entrepreneurs.

Justis says his team at Buds & Roses has been working harder than ever to convert to Los Angeles’ new standards before the deadline in order to be grandfathered into the new market.

“We’re less than a hundred days away from when this process is supposed to be happening in L.A.,” he says. “We are totally excited.”

Reed says he is currently building an industrial kitchen and manufacturing facility that is slated to open later this year, converting IncrediMeds from an in-house exclusive to a full-fledged third-party supplier. Bliss says Mankind Cooperative has expanded its hours and continues to grow its selection for patients.

And many cannabis businesses already operating in California have made it their mission to be not just positive role models within the industry, but also outstanding members of their communities.

To be a good neighbor, Mankind raises money for a variety of different charities, Bliss says.

“We want to show people that we meet and follow everything that San Diego has asked and that we are good and fit community neighbors,” she says.

“Community engagement and donations are of the utmost importance to The Green Cross,” Reed says. “We contribute regularly to neighborhood clean-ups, gardening project and beautification efforts. In addition, we believe strongly in supporting local LGBT organizations and politicians that support and advocate for medical cannabis patients. As a local stakeholder, it is vital for us to give back as much as possible and be an asset to the community at large.”

Despite a wide variety of perspectives on the coming changes, optimism remains high among California’s cannabis entrepreneurs.

Justis says his team at Buds & Roses has been working harder than ever to convert to Los Angeles’ new standards before the deadline in order to be grandfathered into the new market.

“We’re less than a hundred days away from when this process is supposed to be happening in L.A.,” he says. “We are totally excited.”

Reed says he is currently building an industrial kitchen and manufacturing facility that is slated to open later this year, converting IncrediMeds from an in-house exclusive to a full-fledged third-party supplier. Bliss says Mankind Cooperative has expanded its hours and continues to grow its selection for patients.

And many cannabis businesses already operating in California have made it their mission to be not just positive role models within the industry, but also outstanding members of their communities.

To be a good neighbor, Mankind raises money for a variety of different charities, Bliss says.

“We want to show people that we meet and follow everything that San Diego has asked and that we are good and fit community neighbors,” she says.

“Community engagement and donations are of the utmost importance to The Green Cross,” Reed says. “We contribute regularly to neighborhood clean-ups, gardening project and beautification efforts. In addition, we believe strongly in supporting local LGBT organizations and politicians that support and advocate for medical cannabis patients. As a local stakeholder, it is vital for us to give back as much as possible and be an asset to the community at large.”

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