California’s Cannabis Conundrum: Legalization Will Lead To Fewer Dispensaries, Not More

With legalization of recreational marijuana just around the corner in California, the state is about to embark on what could be a $5B industry and a boon for tax revenue. But state regulations have created high barriers to entry and many cities and counties have banned cannabis outright. 

Legalization in California will not translate to an immediate influx of cannabis dispensaries. In fact, many dispensaries now in business will no longer be able to continue operations past Jan. 1. States like Colorado created a more open market with fewer regulations when it legalized recreational marijuana in 2012, leading to an explosion of cannabis businesses. California requires dispensaries to be at least 600 feet from schools, to close at 10 p.m. and to have 24-hour surveillance, among other regulations. Jurisdictions also have the right to be more restrictive.  

“This is the reality of running a regulated new industry,” said Daniel Yi, director of communications at MedMen, a management services and investment manager for legal cannabis. “There are rules and fees to pay.”

Yi said there could be as many as 1,000 to 1,200 medical marijuana dispensaries now operating in Los Angeles, of which 80% to 90% will close down since they will not qualify for city licenses.

Dispensaries that have been Prop D compliant and are in good standing with the city will qualify for licenses. Prop D passed in 2013 and gave medical marijuana dispensaries legal immunity so long as they complied with various city ordinances. About 100 to 135 existing dispensaries are Prop D compliant, Yi said.

Many existing medical marijuana dispensaries and others working in the previous gray area of the law will shut down immediately across the state, especially if they are in cities that have banned cannabis sales. If they continue operations without local authorization, they could lose the opportunity to get a state license in the future, according to Silverman & Milligan associate attorney Kellsi Booth, who serves as corporate lawyer for cannabis grower Premium Produce and represents other cannabis companies. Medical marijuana operators functioning as collectives or nonprofits also will have to apply for a license since the current nonprofit status is not transferable.

The new regulations will cost hundreds of thousands of dollars — if not millions — to set up a new cannabis business followed by regulatory applications and finding the right real estate, MedMen’s Yi said. 

Local Regulations Will Dictate Expansion

Cannabis sales will rely heavily on locale, especially with state licenses issued based on local authorization. While some large cities across the state have allowed recreational sales, dozens of others have banned it or created strict regulations.

San Diego was among the first municipalities to give legal cannabis the thumbs-up, voting weeks after the passage of Prop 64 to allow recreational sales. A San Diego business received the city’s first state license in December. Another 10 dispensaries are expected to receive licenses as well. Los Angeles, Long Beach and Santa Ana also will allow recreational sales in Southern California.

Bay Area cities have followed suit. As of November, Oakland was reviewing 255 applications with the expectation of permitting a handful by Jan. 1. Others would receive temporary state licenses as long as they were in the right area, paid taxes and satisfied requirements for an equity program, which benefits low-income residents. San Francisco passed regulations in late November, including reducing the buffer to 600 feet from schools after months of discussions over whether to keep a 1,000-foot buffer. The city will allow existing medical dispensaries to sell recreational marijuana Jan. 5.

While a lot of jurisdictions voted favorably for Prop 64, city councils have enacted broad prohibitions on the industry, according to Booth.

“Politicians tend to be conservative and not necessarily representing constituent voices,” Booth said. “They are OK with people smoking cannabis, but may not want it in the community.”

Cities like Riverside, Fresno, Bakersfield, Pasadena and Anaheim in Southern California and Fremont, Pleasanton, San Mateo and Sunnyvale and most cities along the Peninsula in the Bay Area will ban legal marijuana in general. 

Expansion Still Possible

Real estate will be key for dispensaries able to expand, especially with a patchwork of local regulations. MedMen analyzes city regulations to figure out what buffers it needs to maintain around schools, where existing dispensaries are and where the customer base is located, according to Yi.

Using computer mapping software, the company figured out where the best locations are for its dispensaries and then turned to real estate brokers and professionals to find leases and available spaces, he said. Because of how Los Angeles’ city limits butt up against Beverly Hills, where cannabis is already banned, MedMen found a location as close to Beverly Hills as possible, without being in Beverly Hills. This will allow the company to still serve the customers in the area.

Yi said landlords have been generally receptive to the dispensaries in their buildings and the company did not have difficulties securing leases at its locations.

MedMen is among the companies that have been expanding. It raised $60M for its first pot fund within nine months during 2016, according to Yi. It also set up a fund to raise $250M to grow and sell pot in Los Angeles, Las Vegas and Manhattan during the summer. Yi said MedMen has been deploying the money as fast as it raises it.

It has deployed a little over $100M within the last two years to buy land in Nevada, including a piece of land outside of Reno for a high-tech greenhouse.

The company is actively acquiring retail space and also has locations in Santa Ana, West Hollywood and Venice. By the end of the year, it should have about seven locations. It expects to open two more during the first quarter.

Fighting Against ‘Reefer Madness’

Outside of gaining a permit and local authorization, one of the biggest battles for the industry will be fighting against the stereotypes that cannabis dispensaries are bad neighbors.

“The reefer madness stereotype is alive and well,” Booth said.

Cannabis has long been associated with gangs and violence and the industry is currently an all-cash business because of federal laws, Booth said.

While Oakland has been tied closely to cannabis culture, many businesses have not been happy with medicinal marijuana in the past. Following the opening of a large cannabis dispensary and school on Broadway in Oakland, retail neighbors started to complain about people loitering nearby, according to JLL Senior Vice President Christine Firstenberg.

“Retailers like being around retailers that … draw people into the shops,” Firstenberg said. “Cannabis retailers weren’t doing that.”

Medical marijuana dispensaries in many cities have been pushed to industrial areas instead of retail areas even though cannabis companies make a lot of money and can often afford to pay high retail rents, Firstenberg said.

Some building owners also may be apprehensive to allow cannabis operations into their buildings since it is still illegal on the federal level, and the government has the right to confiscate the building, according to Firstenberg.

But many dispensaries create visibly attractive shops and storefronts, Booth said. She said many of the dispensaries she represents give back to the local community through charitable organizations as well.

“The transition is going to be a rough one,” Booth said. “Once we get through it and people doing it right dispel a lot of the stereotypes, it can be a great thing.”

CORRECTION: DEC. 18, 9:08 P.M. PT: A previous version of this story did not identify attorney Kellsi Booth as a corporate lawyer for cannabis grower Premium Produce. The story has been updated.