.Santa Cruz County Prepares for Recreational Cannabis Market

[Editor’s note: This is part one of a three-part series on the changes coming to the cannabis market on Jan. 1. Part two runs in our December 20, 2017 issue.]

Tim Blake, founder of the Emerald Cup, was an 18-year-old Soquel High student when he started dealing bud, just as the industry began to bloom in California. During the last bloody years of the Vietnam War, large quantities of hash from Asia, and pot via Oaxaca and South America, started pouring into cities along the West Coast. By the mid-’70s it was an organized marketplace, he says, with 100,000-pound loads arriving 10 to 15 times a year on freighters from as far as Thailand.

Then the ’80s came, bringing with them Ronald Reagan, cheap cocaine, DEA crackdowns and high mandatory prison minimums for the possession and sale of a plant whose persecution began in the ’30s, and whose use can be traced back to the early hominids.

After a grand finale of 100,000-pound busts wiped out the once-abundant pot market, crack was brought in at $10/gram to cauterize the wound, and the $1-trillion War on Drugs was born. Blake spent a couple of years running loads of cannabis out of Arizona, before quitting that gauntlet in the mid-’80s and moving to Mendocino to live the lonely, isolated life of the first large-scale greenhouse growers in the so-called Emerald Triangle.

“During those dark days of CAMP [1983’s Campaign Against Marijuana Planting], when the cowboys started suiting and booting and jumping out of helicopters up north, a lot of people were raided, and the genetic stock was burned in piles by the DEA,” says Christopher Carr, host of KSCO’s The Cannabis Connection in a phone call last week. “But—this is crazy—the true Jedis took their seeds and put them in the Santa Cruz Mountains, and they were kept alive during that dark period. The building blocks of every cup winner anywhere internationally has some ties to a Santa Cruz farmer.”

In Sonoma last weekend, the Emerald Cup drew thousands—from octogenarians to aunts fighting cancer, to lawyers, doctors and investors, all wanting to learn more about the plant at the center of California’s imminent $8 billion industry. Blake, who began the Cup—which is now the world’s largest networking event in the industry—17 years ago as a small, underground gathering for organic, sun-grown cannabis, told producers and manufacturers that in the next five years, “some of you guys are going to be national brands like Nabisco.”

Santa Cruz is home to some of the best cannabis breeders in the world, and grows around 10 percent of the state’s supply. But it is also a historical ground zero for advocating medical patients’ rights to access the body’s natural healing system—the endocannabinoid system—with a plant. Two decades after the Compassionate Use Act (1996’s Prop. 215) laid down the first stepping stone in the road to legalization, the next generation’s Adult Use of Marijuana Act (AUMA, Prop. 64) extends access to all paying members of society. But for the first state to steward medical marijuana into the light, Jan. 1 is also the day it relinquishes its grasp on a hard-won legacy.

OPEN SEASON

Come 2018, California adults 21 and over can legally grow up to six plants per residence, and carry up to one ounce of cannabis flower or eight grams of concentrates. With the second highest density of dispensaries per capita in the state, Santa Cruz County has been working on regulations for cannabis retail since 2010, and for cannabis cultivation since 2013. The city of Santa Cruz is among a sparse handful of California cities—Berkeley, San Jose, San Diego, and Humboldt—ready to take the first swan dive into recreational sales on Jan. 1. The new recreational market is projected to generate about $1 billion annually in tax revenue, and balloon California’s existing $2.7 billion medical marijuana market to an estimated $6.5 billion by 2020. Just to put the size of this new market into perspective: Colorado’s legalized market breached $1 billion last year, which is about the size of the current medical marijuana market in L.A. County.

As of print time, the city’s three existing dispensaries—KindPeoples Collective, CannaCruz and WAMM (Wo/Men’s Alliance for Medical Marijuana)—say they should be licensed for recreational sales by Jan. 1, while a majority of the county’s 12 dispensaries that could be reached reported the same. Visits to KindPeoples and WAMM in recent weeks confirmed that they are indeed flying while the state builds the airplane.

TESTING GROUNDS

In the middle of an afternoon rain storm in mid-November, I drip dry in the entryway of KindPeoples Collective’s Dubois Street location. Though they are smiling, director Khalil Moutawakkil and public relations specialist Elise McDonough are also clearly still digesting the first, long-awaited 115-page tome of compliance regulations released by the state an hour before.

News to Moutawakkil is that dispensaries will have to choose between an “A” Licence, for adult use, or an “M” license, for medical use—or opt for both, which, after a temporary licensing schedule during the first few months of the year, will each cost $50,000 to $120,000.

“And that’s going to be really interesting, because right now, no one has had to make that decision,” says Moutawakkil. “It’s all just cannabis, which is greatly where I stand, and I wish they were all combined to just be that way, but it’s not what we have.”

Come 2018, the state’s Bureau of Medical Cannabis Regulation, established by the Medical Cannabis Safety and Regulation Act (MCSRA), requires that licensed businesses on every step of the ladder only work with other licensed businesses—from growers to manufacturers to dispensaries—and all transactions in between be done by a licensed distributor.

“Some of these local businesses that we’ve been working with for years, we might have to tell them, sorry, we can’t work with you because you don’t have your license, come back when you do,” says Moutawakkil, gesturing toward the brightly lit retail space’s colorful lineup of tinctures, topicals, vaporizer pens and oils (a leading product in today’s market, as it’s easier on the lungs and easier to titrate the dose), cold-water hash (made in-house, and one of KindPeoples’ specialties), jars of cannabis flowers, and edibles of all shapes, sizes and iterations.

Grant Palmer, who co-owns CannaCruz with his brother, Brad, echoes a similar sentiment in an email, saying, “The high cost of permits, licensing, and taxes is pushing producers to the black market. We may simply run out of product to sell due to lack of legal market options.”

It’s largely a misnomer that mom-and-pop cannabis manufacturers are rolling in dough, says McDonough, who served as the Edibles Editor at High Times magazine for 15 years and wrote The Official High Times Cannabis Cookbook. Those in the industry who can’t afford the fees of licensure and compliance may not have the means—or see a point—to come into the light of the legalized market.

“Santa Cruz has been quite progressive, but at the same time, for all of the hundreds of brands that we carry, they might be in for a rude awakening,” says Moutawakkil.

Indeed, try as it may, local government has only an approximate grasp on what cannabis attorney Ben Rice says has been the number one ag crop in the county for years. The county’s environmental impact report (EIR) estimates—though “estimates vary widely and the total may be higher”—the total value of cannabis production and manufacturing in the county to be $250 to $300 million annually. For comparison purposes, the county’s most valuable traditional crop, strawberries, was estimated at $219 million in 2015.

According to a staff report, Santa Cruz County could grow an estimated 13 percent, or 1,743,000 pounds, of California’s cannabis after legalization, based on its strong response to its cultivation registry. But the county has also seen attrition to neighboring counties, like Monterey, which offers more regulatory certainty, competitive tax rates and more manufacturing space—a telling shift for a county that, according to Rice, was notorious for sending growers to prison up until just a few years ago.

While California’s population consumes around 2.5 million pounds of cannabis a year, industry experts believe it produces five to eight times that amount—suggesting that the amount of locally grown herb that can be sold on the legal, regulated market could see a significant reduction, not an increase, from current levels.

But some manufacturers, like David Brissenden of Cosmo D’s Outrageous Edibles, have been preparing for the shift all along. After just one year in business, the former chef of 25 years has been producing around 1,000 units a week out of his shared commercial kitchen in Live Oak, and hopes to expand from 52 California stores to 100 in a few months.

“With the new distribution laws that are going to be in effect, I’m hoping to expand a lot faster,” says Brissenden, who sees the 15-30 percent distribution fees as a positive trade-off for the time he’s spent driving around the state himself.

For Moutawakkil, the new mandatory distributor, and bond required to hold it, is troublesome.

“This is exactly what happened in the wine industry; over time, year over year, they keep jacking up that bond until it becomes unobtainable for small businesses, and the larger alcohol distribution companies just keep buying up the smaller alcohol businesses,” he says. “So when you look at California, there’s a very small handful of distribution licenses because it’s some ridiculous amount of money.”

But even against this sea of unknowns, the pressing reality is that on Jan. 1 the race to keep up begins. Deep-blue paint is drying on the walls of KindPeoples’ new genetics room, which will house an extensive library of seeds and cannabis clones, and in a massive move to vertically integrate, two long-house-sized rooms in the back, recently acquired and empty but for ventilation pipes, will soon be filled with the city’s first dispensary-owned onsite cultivation. It will run on LED lights—a risk in terms of new technology, says Moutawakkil, but one that will slash energy consumption by half.

Microdose

Proportionally, KindPeoples already serves a higher number of women than the state’s market average, says Moutawakkil. It’s a demographic that’s been showing interest in edibles and vaporizer pens, as well as part of a growing number of people gravitating toward cannabis in place of antianxiety medication, says McDonough. But as stigma fades around cannabis after legalization, they’re also preparing for an all-new demographic that includes “parents, women, older people, and baby boomers who are returning to it after perhaps a long period of abstaining,” says McDonough. Which is why she’s working on a “Go Low and Slow with Cannabis Edibles” PSA, which educates new consumers about best practices around edibles, including keeping dosage low to begin with, waiting at least an hour for the effects, using a lock box to keep it away from children, and ideally, not mixing them with alcohol.

“While cannabis is relatively safe, when you concentrate it, and when you ingest it, it becomes about five times more powerful as it goes through your liver. And, in order for it to have that medicinal power, it has to be a powerful substance, and that it is,” says Moutawakkil.

To meet the needs of a green recreational market, especially with the edibles, McDonough emphasizes the importance of low-dose products that are easy for new users to enjoy.

For the recreational market, the new regulations require edibles to be sold in clearly marked 10mg doses in all-new childproof packages that total no more than 100mg—an overall limit that medical patients with high tolerances for THC balk at.

Sticker Shock

A state excise tax of 15 percent and a cultivation tax of $9.25 per ounce of dried flowers will be added to all cannabis sales, with local municipalities and counties setting their own tax rates. All dispensary sales are also subject to a cannabis business tax (CBT); which is 7 percent in the county, and 8 percent in the city—recently raised by one percent to fund youth programs.

Add the manufacturing, cultivation and sales taxes, plus distribution costs and price markups along the way to cover costs, and the customer gets dinged with at least a 50 percent price increase, says Moutawakkil.

Oregon, Washington and Colorado all lowered their initial tax rates after legalization to mitigate a price advantage on the black market.

Since its inception in late 2014, CBT has contributed more than $6.7 million into the county’s general fund, and $934,008 into the city’s.

“At this last [City] Council meeting, they discussed having different tax rates for medical and for adult use, and I think it would be a tremendous advantage for the city of Santa Cruz to set precedent and reduce the tax on medical, and attract medical patients into the city’s registry,” says Moutawakkil.

It’s something that the county has not discussed as an option, says District 1 County Supervisor John Leopold in an email.

Santa Cruz Mayor David Terrazas says that the Council values the medical marijuana organizations in the city, and that the tax rates will be revisited by city staff in the first quarter of 2018.

The city is allowing for two more dispensaries, with applications due on Thursday, Dec. 14.

“When Council took action in November we were concerned about the early medical marijuana leaders, like WAMM, being crowded out. So in the application process for the two new dispensaries, we made it a priority as a Council to consider applicants who were aligned and experienced with medical marijuana to protect this critical service moving forward,” says Terrazas.

On Nov. 7, a motion to lower the county’s CBT from 7 to 4 percent was denied in a split vote of 3-2. Leopold, who noted a leveling off in revenue over the last quarter, is in favor of lowering the tax.

“Here in Santa Cruz County, the cannabis retailers have generally been more accurate in predicting what would happen with sales, because they have a better handle on it than the county does,” says Leopold. “When the tax rate was originally set, the county administrative officer had told us that she expected that it would generate $900,000. The cannabis retailers told us that we would earn a lot more than that, given what they understood about sales, and sure enough, last year we took in $2.5 million. So when they came to us and said if you reduce the tax you would still be taking in a similar amount, or more, I thought that was reasonable information that we should listen to.”

District 2 County Supervisor Zach Friend, who voted against the reduction, says it’s a break that hasn’t been granted to any other industry in the county, and that the tax is what the voters overwhelmingly asked for. Friend adds that the state’s 15 percent excise tax is unreasonable, and the conversation should be at the state level instead.

“At the local level, we’re bearing all the responsibility—not just providing services, but any externalities that the industry creates,” he says. “Because, not everybody’s a good actor that comes into the industry—we’re talking massive grading of hillsides, diversions of streams, on the cultivation side, and as they have mentioned, they would like stronger enforcement against some of the bad actors that have come in.”

The county’s cultivation ordinance could be in place as soon as March, 2018, says Leopold.

Cost of Compliance

While most of the industry conversation around high taxes circles around black-market speculation and revenue loss, high price tags are already creating problems for the future of medical marijuana.

“[The taxes] are crippling to the compassion population, because there is no insurance support, there’s no formal authority that’s going to help them purchase this medicine,” says Carr, who ran KindPeoples’ compassion program, which offered free and discounted medicine to 75-100 medical patients, many of whom are living with terminal illnesses. But as of Dec. 1, Carr—an employee with KindPeoples since 2013, when it set up in a former Ducati repair shop in Live Oak—was laid off, and the compassion program suspended.

In an official emailed statement on Dec. 5, KindPeoples says, “New state regulations for manufacturing and licensing effective Jan. 1 prevents the KindPeoples Compassion Program from legally operating in its current form. We deeply regret these changes to such a core aspect of our organization. We are actively seeking a path to relaunch a new version of the program as we continue to understand how to be compliant with state regulations.”

But Carr sees this tightening of the belt as an indicator of a larger corporate momentum that leaves behind the portion of the population that needs cannabis the most.

“I think that compassion piece is just going away. It’s not a suspension I think it’s a termination,” says Carr. “We do have an underground, diehard community that is committed to people over profit, because that’s what we’ve always done. And then there’s these people that have no ties to the movement, no ties to the community, and no ties to the patient, and they’re just seeing profit. So it’s a very clear two directions,” says Carr, pointing out that Prop 64 was written and backed by billionaires like Sean Parker, the founder of Napster, who donated more than $8.8 million to the campaign. “And it could just be a sign of the times. It could just be that they’re following suit, where I was hoping that we could rise above. I was hoping Santa Cruz would rise above.”

While a clause in the state regs does allow for donations from distributors for compassion programs, McDonough, in a follow-up email, cited a limited supply of available licensed distributors, making it impossible to guarantee a distributor donation infrastructure.

CannaCruz also cited obstacles to its existing compassion program, saying, “With all the new regulations, taxes, and fees we will likely be operating at a loss in 2018, so it will be difficult. But we will have to find a way to continue to be there for our patients, as this is our core mission.”

Jason Sweatt, founder and director of SC Veterans Alliance, a dispensary that provides 100-200 veterans with free medicine at its monthly meetings, as it has since 2011, says that they will also be taking a loss.

“Not just giving away the medicine, but now we have to pay a tax on it,” says Sweatt, a U.S. veteran who found that cannabis helped his post-war issues in 2009, and now has Watsonville’s first licensed cultivation. “All of these new regs and not a mechanism for a compassion program—this has always been our top concern, that we won’t be able to continue our mission. Veterans are a big portion of the population that is underserved. But we will continue our mission.”

The shame of having no safety net for low-income patients, says WAMM director Valerie Corral, lies on the government. “In the laws, it hasn’t been written in to inspire people to do good. Tax breaks. Tax credits inspire people, help people do good, so that they can benefit and pass the savings onto others,” says Corral. “There’s nothing wrong with that. It should have been written into law.”

But MAUCRSA and AUMA were influenced by similar interests, says Corral.

People Over Profit

WAMM will continue, at least for the time being—though the only way to sustain, especially in the face of a potential influx of medical patients cut off from other compassion programs, and a waiting list for its own at-capacity compassion program, is to join the recreational market. They’ll be working with Strong Agronomy and Jade Farm to produce both indoor and outdoor medicine.

Corral, who coauthored Prop 215 and has run the collective for 25 years, thinks it’s profoundly important to push back against genetic modification—an element she says was intentionally ignored by MAUCRSA and AUMA. “It’s dangerous to give the freedom of access to plants away,” she says. Corral also thinks a coalition of small business people may be the best way to resist being swallowed up by the large corporations.

Carr’s Cannabis Connection radio show, originally funded in full by KindPeoples when it began in 2015, will continue, even as Carr’s been paying a large piece of the monthly costs out-of-pocket for the past couple of years. “It’s the voice for the greater community,” says Carr, and a beacon of light for those who want to “preserve the values of cannabis culture in the face of this tsunami of corporate greed, by connecting the dots between different tribes across the state.”

You could say that Corral saw it all coming for years. Settled into her warmly lit office at WAMM’s Westside headquarters, I ask her how long she thinks it will take before medical marijuana as we know it ceases to exist.

“I don’t think it’s far away, I think it’s four or five years,” she says, without skipping a beat. “Anything worth this much money is not going to be left in the hands of the people.”

Updated 12/14/17 12:43 p.m.: The City of Santa Cruz is among a sparse handful of California cities projected to be ready for recreational cannabis sales on Jan. 1, along with Berkeley, San Jose, San Diego, and Humboldt. The previous version of the story used the word counties, not cities, and the author regrets this error.

Updated 12/15/17 4:20 p.m. Medical Cannabis Safety and Regulation Act (MCSRA) was renamed Medicinal and Adult-Use Cannabis Reculation and Safety Act (MAUCRSA) between April and August 2017.