Legal Cannabis Dispensaries Plan To Continue Operating Despite Federal Uncertainty

Just days after recreational use of cannabis became legal in California, U.S. Attorney General Jeff Sessions rescinded a memo written during the Obama administration that many viewed as instrumental in the booming legal cannabis industry.

The initial reaction was one of confusion, but some cannabis dispensaries said they are not concerned about the long-term implications even as some landlords weighed what it might mean for them.

“I’d be lying if I said it didn’t cause commotion,” MedMen Vice President of Corporate Communications Daniel Yi said. “There was a huge reverberation, for a lack of a better term, across the legal cannabis industry.”

Yi said the potential impact depended on a glass-half-full or half-empty point of view. Doing away with what was called the Cole memorandum created some uncertainty about the future of the industry, but it also galvanized many in Congress from both sides of the aisle who criticized Sessions’ move.

“Americans’ attitudes toward marijuana has evolved,” Yi said.  

While Sessions basically leaves it to the discretion of the 93 U.S. Attorneys to enforce the federal prohibition, Sessions did not say the Department of Justice would target state programs, Yi said.

MedMen’s investors expressed concern, and Yi said the company received a lot of calls from investors, but it has not changed the reality or investor appetite.

“Our investors are the types of investors who read between the lines and do their homework,” Yi said.

MedMen is still bullish about the industry and operations have not changed. Stores are still open and operating and business will continue as usual, he said.

While dispensaries may continue with business as usual, some property owners are still concerned.

San Diego-based Tabata Properties Managing Partner Steve Tabata said money has never been an issue with leasing to a dispensary owner. He has found dispensary owners offer up to twice the amount of the current market rate for a retail space.

For example, if he has an industrial or retail space in Southern California that goes for $2/SF, he will receive offers from dispensary owners for $5/SF in cash.

“But since marijuana operations are illegal on a federal level, I’m worried about banks and the insurance companies,” Tabata said.

He said insurance companies and banks that he has had relationships with for years will not touch dispensaries and will not offer his company any protection.

Though marijuana dispensaries are allowed in the state, Tabata worries that renting out land to dispensary owners could result in the federal government seizing his property.

"It's unlikely," he said. "It's a very slim chance. But why take the risk?"

Harborside Executive Director Steve DeAngelo said he viewed Sessions’ move as a political one and an attempt to slow down the flow of institutional-grade investment into legal cannabis. At the end of October, Constellation Brands invested $245M in Canadian dollars in Canopy Growth Corp., a leading medical marijuana provider in Canada. DeAngelo said this move was significant because the investment came from a publicly traded U.S. company.  

The Cole memorandum never actually stopped federal attorneys from prosecution, according to DeAngelo, whose company operates two cannabis dispensaries in Oakland and San Jose. The memo had given federal prosecutors the discretion to not take on legal cannabis businesses unless they violated specific guidelines.

Some federal prosecutors still felt marijuana was a threat to public safety and a few actively set out to close down medical cannabis, claiming they were run by criminals and profiteers, DeAngelo said. The first round of dispensaries, about 600, were closed after threats to seize the landlords' property. These properties were less than 1,000 feet from schools and did not necessarily follow the guidelines in place.

DeAngelo said then-U.S. Attorney Melinda Haag came after Harborside, claiming the business did not comply without indicating why. Even with the City of Oakland’s support, the battle went on for 3.5 years and cost Harborside $1M to $2M in legal fees. The Department of Justice then dismissed the case on prejudice.

Since that time, there has been a dramatic shift in both public opinion and that of federal prosecutors toward the benefits of legalization, he said.

“I think it is highly unlikely that U.S. Attorneys will decide that legal, licensed, tax-paying cannabis businesses are their highest enforcement priority,” DeAngelo said in a statement. “Legalization enhances public safety by disempowering criminal cartels, raising hundreds of millions of tax dollars and freeing police to focus on real crimes.”

DeAngelo said Sessions’ move will not stop his company’s plans and certainly has not stopped customers from walking through the door. Since legalization became effective Jan. 1, sales are up 50% or higher and customers are spending more per person.

Harborside plans to add more retail locations. The company will open up a shop in San Leandro during the first half of this year and has a pending application for a site in Hayward. DeAngelo also is looking at sites throughout Northern and Southern California. The two existing flagship shops in Oakland and San Jose are 10K SF. New flagships will range from 6K SF to 10K SF while satellite locations will take up about 2K to 4K SF.

“Cannabis is coming along just in time to save a little bit of retail, and that’s a pretty great thing,” he said.