Growing pains

steve@sfbg.com

The medical marijuana movement was born and raised in the Bay Area, and now the city of Oakland is poised to take the next big step forward by being the first city to explicitly allow and permit several massive cannabis cultivation facilities on industrial land, making millions of dollars in taxes in the process.

It’s the latest move in a growing trend toward Bay Area cities figuring out how to regulate and tax a booming industry that could really explode if California voters approve Proposition 19 in November, which would legalize even recreational uses of marijuana and give local jurisdictions more authority to control it.

Pot growing has long been the murkiest realm within an increasingly legitimate and professional medical marijuana industry (see “Marijuana goes mainstream,” 1/27/10). While Oakland, Berkeley, and San Francisco all have well-defined and regulated systems governing the 30 licensed cannabis dispensaries in those three cities, most of their growers are underground operations with no official oversight.

Public officials on both sides of the bay — who almost universally voice their support for the medical marijuana industry — say there can be problems associated with unregulated grows. Jerry-rigged wiring can pose a fire danger, and valuable crops can be targeted by criminals. Growers can be raided by police even when they have valid paperwork. And cash-strapped city governments aren’t able to tax or regulate an industry that has kept on booming throughout the Great Recession.

“There is no system to regulate production,” Oakland City Council member Rebecca Kaplan, who has authored cultivation regulations, along with co-sponsor Council member Larry Reid. Although the city may lack resources to enforce new requirements on growers, Kaplan believes growers will sign up voluntarily: “Every time we’ve created a permitting system, people have sought to use it. They want to be above board.”

The measure would permit growing facilities of more than 100,000 square feet, charging them each a $5,000 permit fee and $211,000 “regulatory fee,” as well as a gross receipts tax to be determined. The Oakland City Council approved the measure July 20 after Kaplan agreed to have staff also create a permit system for smaller growers, with both regulatory systems slated to take effect Jan. 1, 2011.  Kaplan has also proposed a November ballot measure to increase the current gross receipts tax on cannabis-related businesses from 1.8 percent now to up to as high as 11.2 percent, which the council is set to consider July 22.

Kaplan’s cultivation proposal initially generated a backlash from some small growers and Harborside Health Center, Oakland’s largest dispensary, because of its focus on creating mega-facilities that could monopolize the market and hurt the small growers who have been at the heart of the medical marijuana movement.

“All we’re asking for is a level playing field and a fair opportunity to compete with these factories,” attorney James Anthony, who represents Harborside and its network of growers, told the Guardian. “As medical cannabis comes into the light, it’s still capitalism out here in the world.”

Oakland developer and business person Jeff Wilcox, who is new to the marijuana industry, has been aggressively pushing to create a massive cannabis growing and manufacturing facility on his 7.4-acre warehouse complex near the Oakland Coliseum, covering 172,000 square feet over four buildings.

On May 21, Wilcox and his company, AgraMed, released a report showing how the facility could produce about 21,100 pounds of high-grade marijuana per year, generating about $60 million in gross sales and more than $2 million a year in taxes for Oakland, assuming a 3 percent tax rate (or about $3.5 million if the rate is set at 5 percent). The report was based partly on information gathered from independent local growers.

“By closing the loop and regulating the entire industry, we can ensure the healthy production and use of cannabis, and ensure its legitimate standing in our society. We’re working with public health and public safety agencies to make sure we do this right,” Wilcox, who did not return Guardian calls for comment, said in his press release.

Anthony said he was wary of Oakland politicians handing so much market power to one person: “It’s not for the government to pick the winners and losers through a regulatory scheme.” But he does agree that growers are overdue for regulation. “It’s time for cultivation to come into the light.”

State law requires growers to be part of the collective that uses or distributes the product, and the facility proposed by Wilcox would contract with many collectives, a model that hasn’t been tested in the courts yet. In fact, Council member Nancy Nadel has expressed concern that what she called “a structurally flawed proposal” could be on shaky legal ground (City Attorney John Russo, who has endorsed Prop. 19, did not return our calls with questions about the Oakland measure’s legality. His office also has not issued an opinion because it conflicts with federal law).

“Though state law allows for the operation of medical marijuana cooperatives by primary caregivers and patients, it does not legitimize large-scale growing operations. Just in the past few months, the DEA has raided two medical cannabis testing labs in Colorado. We need to retain a level of good sense and discretion,” Nadel wrote in a July 13 memo to her council colleagues, urging them to hold off on approving the measure until after voters decide Prop. 19 in November.

Yet Kaplan told us that even though the council moved the legislation forward, staff would continue to work through its myriad regulatory details and no permits will be issued until January. She also agreed that “it’s really important for Prop. 19 to pass,” giving Oakland more explicit authority to regulate the industry.

Oaksterdam University founder Richard Lee, who bankrolled the campaign to place Prop. 19 on the ballot, supports Kaplan’s regulations (although he told us he would like to see a greater focus on small cultivators) and called regulation of growers “a historic next step” that further legitimizes the industry.

“I think this will help Prop. 19 pass and help Oakland be ready when it does,” Lee said, voicing support for Wilcox and other business people who seek to join this movement. “We need everyone we can get on our side.”

Most polls show that Californians are split fairly evenly on Prop. 19. Even so, several California cities are already making preparations to use the new taxation and regulation authority that the measure would bestow.

Lee said Sacramento, Oakland, Stockton, Long Beach, San Jose, and Berkeley all have been working on cannabis regulatory schemes for voters to approve. For example, on July 13, the Berkeley City Council placed a measure on the November ballot proposing a gross receipts tax of 2.5 percent on medical marijuana and a 10 percent tax on recreational pot, as well as a system for permitting up to 10 medical marijuana growing operations.

“State law is really a mess at the moment and there are a number of things happening now that violate state law,” Lee told us. “That’s why Prop. 19 is going to be a cleanup law to deal with a lot of the stuff that’s going on now.”

Kaplan, who has been working on her ordinance for almost a year and got help from students in UC Berkeley’s Goldman School of Public Policy, agreed that the current legal requirements for growing medical marijuana are unclear: “There isn’t a right way [to permit cultivation facilities] under state law. The law isn’t clear.”

Attorney David Owen, who has researched medical marijuana laws for the new SPARC dispensary in San Francisco and for local growers, echoed the point. “The short answer is that we know so little about the boundaries of state law.”

Prop. 215, the 1996 measure that legalized medical marijuana, was broadly written and then codified largely by Senate Bill 420, portions of which were later struck down by the courts. But enforcement of marijuana laws has primarily been done by the federal government, which backed off after President Barack Obama took office, leaving state and local officials to regulate a fast-growing industry using standards that the courts have yet to clarify.

“We don’t have appellate court decisions to interpret a lot of key terms in state law,” Owen said. “We don’t really know what state law says.”

For example, Owen said the widely used term “dispensary” doesn’t even appear in state law. Local jurisdictions often define how much pot a patient can grow. For example, Oakland allows groups of three patients to grow up to 72 plants in 96 square feet. But most of those standards haven’t been held up by the courts. And even though state law says growers must be part of the same collective as their patients, Owen said, “In theory, you could have a collective with 37 million members.”

Although Owen said a large scale doesn’t necessarily make a marijuana operation illegal, he said permitting a 170,000 square foot facility is bound to draw attention from the feds: “I guarantee the DEA will be at their doorstep the day they open.”

Council member Nadel said Oakland could be liable then as well, noting that it would be permitting a facility that would meet about 60 percent of the entire Bay Area’s demand for 35,000 pounds of pot per year. “Thus, to prevent diversion to illegal markets and collective members outside of the cultivation collective (which would violate state law), the city must act responsibly and set a limit on the total size of cultivation allowed in Oakland. While the memo from the Council members discusses the alternative method [permitting a smaller capacity], it does not recognize the problems with projecting sales to dispensaries outside the Bay Area,” Nadel wrote.

Kaplan said the ordinance is a starting point that can be further refined by staff. But she emphasized the need to regulate the industry, warning of risks to Oakland residents. Her measure’s staff report attributes at least seven house fires, eight robberies, seven burglaries, and two homicides to unregulated growing operations in 2008 and 2009. Kaplan also said she worries about the possibility of “another Oakland Hills fire.”

Yet Kaplan, who is running for mayor, also told us the taxes are important in a city that was recently forced to fire 80 police officers. “Given Oakland’s budget crisis,” she said, “the revenue for the city is no small thing.”