Valerie Corral dreams of opening a recreational cannabis dispensary to help offset the costs of her medicinal marijuana nonprofit, but high start-up costs have made her dream difficult to realize.
“It’s so damn expensive. It’s simply going to cost $200,000 more than we have,” says Corral. “It’s licensing and all the other costs, the permitting process … it’s a lot of money that we just don’t have.”
Corral has been in the medical cannabis industry since the early ’90s, providing free medical marijuana to low-income, chronically ill patients through her nonprofit Wo/Men’s Alliance for Medical Marijuana (WAMM). As the co-founder of the medical cannabis collective, Corral faced threats of incarceration and DEA raids, but it was legalization that ultimately shuttered WAMM’s doors.
California voters approved the legalization of recreational cannabis in 2016, and in 2018 adult-use cannabis regulations kicked in. These regulations required every licensed cannabis provider to pay cultivation taxes and a 15% excise tax, regardless of whether or not they were nonprofit organizations.
In 2019, Gov. Gavin Newsom signed into law Senate Bill 34, restoring the ability of legal cannabis suppliers to provide free cannabis to the neediest patients in California without paying taxes, and Corral was able to relaunch WAMM.
The transition into legalization has been hellish, Corral says. And even as she hopes to open her own dispensary, the financial and logistical challenges continue to mount.
It’s her intimate knowledge of these challenges that Corral draws from when she offers advice to the city of Santa Cruz as it develops a cannabis equity program. Designed to help minorities, women and people formerly incarcerated for the possession of cannabis enter into the competitive legal cannabis market, equity programs have been popping up in major California cities. But as with most initiatives in today’s legalized cannabis industry, the effectiveness of these well-intentioned programs is varied.
“One of the ways in which the equity programs haven’t delivered the promise is that many, many equity programs have kind of been diluted,” says Bryce Berryessa, who opened Santa Cruz County’s first dispensary and owns both the Treehouse and The Hook dispensaries. “These programs need to offer financial support, business management support, support with navigating the regulations, compliance and application processes to really have an impact.”
The Status of the Industry
In June of 2020, Watsonville’s City Council approved the implementation of an equity program to support small business owners in the cannabis industry. Approved applicants have the advantage of omitting certain fees, delaying a property acquisition for business operations and the benefit of not having to compete against regular applicants in the highly-competitive field.
In order to apply for the program, a person must meet three of nine requirements, including: having attended a Pajaro Valley Unified School District school for at least five years, having been negatively impacted in a disproportionate way by cannabis criminalization or being “economically disadvantaged.”
Felipe Hernandez, who sat on the Watsonville City Council from 2012 to 2020 and had a stint as the city’s mayor, says the inspiration behind Watsonville’s cannabis equity program was a similar program in Oakland that provides grants and no-interest loans to equity applicants; 240 equity applicants have been fully permitted there. The scale of that program is much larger than Watsonville’s, which currently has two participants, but the goal of the programs are the same.
“We wanted something that would address some of the social inequities that the war on drugs had,” says Hernandez. “In addition to some of the low-level crimes with marijuana offenses that we’ve had in our communities.”
It’s no secret that people of color have been historically prosecuted at much higher rates for cannabis possession. Compared to whites, people of Latinx descent were 35% more likely to be arrested for cannabis crimes, and Black people were two times more likely to be arrested for cannabis misdemeanors, according to data from the California Department of Justice from 2006 to 2015.
Even though Santa Cruz County has a reputation as cannabis-friendly, the city of Santa Cruz conducted a study that found arrest rates for cannabis-related offenses from 2000-2018 were considerably above the state average. Worse, those arrests primarily impacted low-income neighborhoods.
“We owe it to these communities to help them into an industry that is now dominated by white cannabis owners,” says Hernandez.
But Berryessa says that equity programs are not the wide-sweeping solution to the industry’s inequality issues that policymakers believe. Tax rates as high as 40%, regulations that differ from city to city, confusing application processes and expensive start-up costs create both logistical and financial challenges for those interested in entering the legal market, says Berryessa. And all of this inflates the price of legal cannabis.
For these reasons, in addition to the state’s relaxing of penalties against illegal operations in the name of racial justice, the illicit market brings in approximately $8 billion annually, twice the volume of legal sales according to Global Go Analytics.
So even after people jump through the legal hoops to get their business up and running, they are undercut by the booming black market—a financial blow that can be devastating to minority-owned businesses who don’t have deep pockets to reach into.
“People wanted to come over to the legal market, but what they found is that the costs were too high,” says Berryessa. “Due to all of the requirements to get compliant, many people just realized that they couldn’t do it, or that it wasn’t worth it, and stayed in the traditional [black] market. I think there’s going to be a lot of legal businesses that are going to go out of business in the next few months.”
Hernandez also hopes these types of programs will help curb the black market, but he knows that’s a bigger problem.
“With black markets, the solution is a combination of a carrot and stick type of thing, with the right combination of enforcement and incentives,” says Hernandez.
Rebecca Unitt, the Economic Development Manager in charge of creating the city of Santa Cruz’s equity program, says that ultimately the state plays a bigger part in reducing the illicit market.
“The state is really driving a lot of the cannabis regulations and the changes that impact locality,” says Unitt. “We have certain controls, but it’s legislation that sets up how the licensing works and how businesses can be structured.”
In The Works
Watsonville’s equity program currently sponsors two applicants out of the five that applied in the past year, but the city is working to expand its program by applying for more money from the state. This past year, Watsonville waived $55,000 in permit fees for those applicants, according to Suzi Merriam, the city’s Community Development Department director.
But that’s really all Watsonville can afford to do without additional funding, says Merriam. She hopes the program will receive $2 million from the state, after the city submitted an application for a cannabis equity grant on Dec. 20. That money will help equity program recipients pay for local and state permitting and licensing fees, and Merriam hopes to use it to help with rent startup costs as well.
Mentorship, training in business and exposure to business connections is what Hernandez hopes to see Watsonville use the new money for. Especially for people of color and people who have been formerly incarcerated, accessing venture capital is more difficult, he says.
Combined with the fact that no major banks will loan money to dispensaries while cannabis is federally illegal, starting a cannabis business requires access to people who have deep pockets: something minorities often don’t have the same access to as white entrepreneurs, says Hernandez.
“A lot of people know the cannabis growing aspect,” says Hernandez. “But some of the business acumen, some of the social contacts with investors, those things are less available to minorities.”
Right now, Santa Cruz’s equity program is just a framework, Unitt says, but it will also include similar business management training. The program’s main emphasis will be financial assistance and a process for expungement.
“Our consultants did a lot of stakeholder interviews and spoke with people in the industry to get a sense of the barriers for existing cannabis license holders as well who would qualify for this program,” says Unitt. “Which is how we landed on these elements to prioritize.”
The program will be flexible in nature, says Unitt, and will be easily adaptable as time goes on and according to industry needs and changes. Her team plans to present the model for the program to the Santa Cruz City Council in February, with the goal of accepting applications in March.
Even though Berryessa is skeptical of most equity programs’ ability to actually help people be successful long term in the legal industry, he says that if any city can do it, it will be Santa Cruz.
“My hope is, as the city develops this program, they create a program that’s going to provide more than just a permit, but provide resources that will allow them to be successful and not have to sell out just to continue to operate,” says Berryessa. “These are the people who helped build the industry, they created the products that made California cannabis famous. We all lose if those guys disappear.”