Features & Columns

Marijuana Goes Legit in California: Now What?

Prohibition is over for cannabis in California, and the estimates of money to be made in the legalized market are astronomical. So where do we go from here?
Californians woke up to a new world on Jan. 1, when suddenly anyone 21 and over could legally purchase marijuana. Photo by Justin Cannabis

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 came the '80s, bringing with them Ronald Reagan, cheap cocaine, DEA crackdowns and the war on drugs, creating high mandatory prison minimums for the possession and sale of a plant whose use can be traced back to the early hominids.

Blake spent a couple of years running loads of marijuana out of Arizona, before quitting that gauntlet in the mid-'80s and moving to Mendocino to live the 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 The Cannabis Connection, a Santa Cruz radio program on KSCO. "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 month, 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 suddenly legitimate $5 billion to $7 billion industry. After the passage of Proposition 64 in late 2016, and a yearlong rollout as the state fine-tuned its new Bureau of Cannabis Control (BCC), weed is now legal to buy for adults 21 and over.

Blake, whose Emerald Cup is now the world's largest networking event in the industry, told producers and manufacturers at December's event that in the next five years, "some of you guys are going to be national brands like Nabisco."

Ryan Brantley joined Caliva three months ago as the ollective's director of plant science after working at the Cal Poly Strawberry Center. Photo by Josh Koehn

Open Season
More than two decades after the Compassionate Use Act (Proposition 215) passed in 1996, the next generation's Adult Use of Marijuana Act (AUMA) extends access to all paying adults. But for the first state to steward medical marijuana into the light, Monday could also be seen as the day it relinquished its grasp on a hard-won legacy.

California adults 21 and over can now legally grow up to six plants per residence and carry up to one ounce of cannabis flower or eight grams of concentrates. San Jose is among a sparse handful of local jurisdictions—Berkeley, San Diego, Santa Cruz and Humboldt counties, among others—that took a swan dive into recreational sales in the new year. The recreational market is projected to generate about $1 billion annually in state tax revenue, according to the state Department of Finance. To put the size of the 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.

Seven collectives in San Jose have received licenses from the state's BCC, while the remaining nine were granted temporary "microbusiness" licenses to sell adult-use cannabis for 120 days.

Wendy Sollazzi, manager for the San Jose Police Department's division of cannabis regulation, says little will change from a local perspective because the city was ahead of the regulation curve starting with medicinal laws on the books.

"It was already being effectively regulated in our city," Sollazzi says. "We basically extended our medical program to our recreational program. By maintaining the sensitive-use areas, like our schools and day cares—we say 1,000 feet where the state says 600 feet—I think we may have a little bit more strict regulations."

SJPD also added a rule that requires electronic verification of state IDs for adults 21 years and older. "We anticipate it being a smooth transition," Sollazzi says.

If anything, local collectives may be the ones caught most off guard.

The Rush
On the eve of 2018, no one at Caliva collective in San Jose could say for certain what the new year will bring. But the 100,000 square-foot facility, named the best in the nation by Business Insider, is outfitted with a show floor that is part surf shop and Starbucks, as well as labs to "vertically integrate," or grow cannabis and extract oils on site. It's a model for what corporate cannabis looks like in the present and most likely will become for many dispensaries in the future.

Rubber-suited scientists bop around the building like a guilt-free scene from Breaking Bad, and Ryan Brantley, Caliva's director of plant science, can't help but smile ear to ear as he picks up a forearm-size baton of Granddaddy Purple bud.

"We chopped down as much product as we could," he says of the expected rush.

Two days later Rosie Rothrock, Caliva's director of marketing, notes in a text that the first day of fully legal bud in California was a bonanza. The collective had five times the traffic and revenue of a normal day of operations, she says, with 75 percent of people who walked through the doors counted as new customers.

"A lot of the stigma with the industry stems from a lack of trust, because there hasn't been a chance to build business credibility," Rothrock says.

This is true for even those in the industry. Rothrock and Erika Henika, the collective's general manager of retail, both had humorous stories of disinterested doctors "wearing sweatpants" while sitting in an office, going through the motions and handing out prescriptions to people who many times felt like they had to lie or exaggerate symptoms.

Commerce, however, remains a serious concern. The banking industry remains leery of a federal crackdown on collectives—marijuana, absurdly, remains a Schedule I drug, in the same class as heroin—and credit card companies often refuse to work with many collectives. Caliva, like many in the industry, only accepts cash for now, which might seem ripe for siphoning funds were it not for the 150 security cameras in place, which can be monitored at any moment of the day by SJPD.

"We're talking broom closets—everything," Rothrock says.

Cost of Compliance
While most of the industry conversation around high taxes circles around black-market speculation and revenue projections, higher price tags are already creating issues for the future of cannabis.

Doug Chloupek, the head of LUX cannabis dispensary in San Jose and the proprietor of Frosted Flowers, a top-shelf line of cannabis for connoisseurs, has been in the business for a decade and still remembers the early days, when his club was "almost exclusively boutique." But as customer appetites have increased, so has the scale of production.

"I think there has been a huge change in social acceptance and political acceptance of commercial cultivation," Chloupek says in an interview late last year.

As marijuana has gone mainstream, the number of state and local regulations has increased exponentially, which many cannabis club operators fear will lead to a return to underground operations.

In San Jose, for example, taxes include a $9.25 fee per ounce, a distribution fee to transport it to the lab, a testing fee, packaging fee, a transport fee for sending the bud to a retail center, and for every $100 of cannabis sold in San Jose there is a 10 percent marijuana business tax, not to mention a 15 percent state excise tax and 8.75 percent sales tax.

Caliva's vertically integrated model helps meet customer demand, but in anticipation of the New Year other collectives bought all of its wholesale product. Photo by Josh Koehn

"What a dispensary would try to sell for $100 ends up getting taxed $135.06 in the city of San Jose," Chloupek says. While the state has gone the way of legalization, rules are stricter in certain jurisdictions, setting off a race for bigger players to set up shop in sympathetic jurisdictions while some cities and counties resist progress.

"This industry migrates from city to city, depending on what the regulations are and the taxation, and it would be much better if cities would just realize there is a huge opportunity to assist with their deficits to create massive job opportunities, to create enormous wealth for these cities, to actually a help multibillion dollar industry to thrive and not choke them by over-taxation," Chloupek says.

Young Brains
Concern that a recreational cannabis market could increase its use among adolescents, whose brains are still growing, has led to extensive studies in legalized states—and numerous reports have found no correlation between legalization and increases in adolescent and teen use.

In September, the U.S. Substance Abuse Mental Health Services Administration released the results of its 2016 National Survey on Drug Use and Health. Not only were its findings consistent with previous ones, but they also reported declines in cannabis use by teens in most jurisdictions where adult use is legally regulated, including the District of Columbia, Oregon, Washington and Colorado—where it fell to its lowest level in nearly a decade.

Alcohol retailers may be wise to plan for revenue drops, as the "miscellaneous/fun" category of citizens' budgets will soon have a new competitor.

The beer markets in Colorado, Oregon and Washington "collectively underperformed" after recreational cannabis became legal, with sales trailing behind the rest of the country in 2014 and 2015. Research firm Cowen & Co. notes its inclusion of areas where craft beer had become popular. Other evidence has shown reduced alcohol consumption—across all types—in medical marijuana states between 2006 and 2015, compiled in a working paper on SSRN.

A 2015 study published by the Journal of Studies on Alcohol and Drugs found that density of medical marijuana dispensaries was not associated with an increase in violent or property crimes—which is good news for dispensary-rich areas like San Jose. In a report in the Journal of Economics, it was estimated: "An open dispensary provides over $30,000 per year in social benefit in terms of larcenies prevented."

Rules of the Road
Cannabis attorney Ben Rice says he tried the first cannabis-only DUI case in Santa Cruz County, which was dismissed, about 15 years ago—and he doesn't know of any subsequent cases that have gone to trial.

"When you try a DUI case and it's alcohol, they have all these things they can point at. And so they can prove to a jury everybody's [intoxicated] at .06, but certainly by .08 BAC [blood alcohol content]," says Rice. "You can't do that with cannabis, because we're all different, we have different tolerance, and because we use more or less—if we're medical patients we use a lot more."

Jeff Rosen, the district attorney for Santa Clara County, has consistently called for better marijuana testing mechanisms while admonishing Proposition 64 supporters to understand that "holding the steering wheel—not a joint or an edible," should be the priority.

While driving stoned is surely illegal, the science around cannabis and psychomotor performance continues to evolve. Studies show that THC-positive drivers possess virtually no increased risk compared with drug-free drivers after adjusting for age and gender. A paper by the National Highway Traffic Safety Administration—which conducted the largest case-control study on the subject of drug use and car-crash risk—concluded that acute cannabis intoxication is related to a 1.2 to 1.4 odds ratio for increased risk of crash, while the odds ratio is nearly four-fold for driving with legal amounts of alcohol in one's system.

Colorado's chief medical officer at the Department of Public Health reported in October a decrease, not an increase, in DUIs since legalization. And a 2017 study published in the Journal of the American Public Health Association found no increase in vehicle crash fatality rates in the first three years after recreational cannabis legalization in Washington and Colorado.

The new rules of the road remain untested less than a week into legalization, but time will tell if high times are here to stay.

Josh Koehn contributed to this story.