California Pot: The Boom, The Bust, The Los Angeles

California legalized the sale of recreational marijuana on January 1st. Every news organization carried multiple stories regarding the event extolling the wonders of the newly legal industry and its substantial new tax revenues.

Press releases from every cannabis company doing or even dreaming of doing business in California flooded the newswire services. After all, the world’s 6th largest economy was the promised land. The next best thing to nationwide legalization.  Every company’s stock was going to be 2018’s bitcoin.

A different picture emerges when the hype dies down, and you look behind the curtain. California threw a party, and nobody came.

In search of crowds and a story, the media flocked to West Hollywood a small city of 36,000 people surrounded by Los Angeles and its 4 million residents. Los Angeles has no legally licensed marijuana dispensaries. West Hollywood has four medical marijuana dispensaries with temporary city permits authorizing the sale of adult use recreational cannabis.

The media found a line outside the MedMen shop with people waiting up to an hour to get inside. It was a lead news story on most broadcasts and publications.

 WeHo has restaurants with wait times of greater than one hour for Sunday brunch. Why did Angelinos just not care?

Medical marijuana has been legal in California for over 20 years. Everybody who wants to smoke marijuana has an annually renewable prescription to buy or grow pot. All it takes is a splinter and $50 for the 5-minute sob story session with the prescribing physician.

There is no shortage of pot. California has a massive, thriving black-market marijuana industry. Cannabis is the state’s number one cash crop with an estimated value exceeding $10 billion. California grows so much weed that most of it goes to supplying the black markets in other states.

Legalization does more to help the black market than it does to eliminate it. The state and local taxes making politicians drool increase the final sales price of recreational marijuana by as much as 45%. An eighth-ounce of high-grade bud that cost $40 before January 1st will now cost $60. Black marketers can raise their prices slightly while undercutting the legal market. Both an easier sell and more profit.

Fitch Ratings did a report on the California Cannabis Industry which is summed up by the following statement. “High taxes increase prices in legal markets, and have the effect of reinforcing price advantages to long-established black-market cannabis,” said Stephen Walsh. “Taken together, state and local taxation puts California on the high-end of the tax range for states that have legalized nonmedical cannabis.”

U.S Attorney General Jeff Sessions has just announced the reversal of an Obama era Department of Justice policy not to prosecute recreational marijuana legalization laws set by individual states. The decision of whether to respect state laws or enforce federal law is being left up to the U.S. Attorneys. California has four districts with separate U.S. Attorneys and could end up with four different enforcement policies.

Medical marijuana enjoys protection from the Rohrabacher-Blumenauer amendment. The Congressional amendment to the Department of Justice’s annual budget authorization says federal funds cannot be used to interfere with states “implementing their own state laws that authorize the use, distribution, possession or cultivation of medical marijuana.” This is not a law. It is a budget amendment that must be renewed annually or with every continuing spending resolution.

The decision to leave the level of enforcement to the discretion of the 46 U.S Attorneys, is surprising.  Attorney General Sessions is on the record as a staunch opponent of legalization. You would think he would be a proponent of a robust national enforcement policy rather than an incoherent and disjointed approach.

President Trump is on record as a supporter of states deciding on marijuana policy without federal interference. This brings up the possibility that Sessions' announcement is a trial balloon to see if polling results show stricter enforcement as helping Republicans chances in the mid-term elections. It is doubtful this is true because recent polls show that 67% of the country now supports legalization including a majority of Republicans. Give it a few days and the White House will make an announcement coming down on the side of the way the wind is blowing.

The uncertainty confuses the already messed up issue of recreational sales in Los Angeles. The city has no retail establishments that are legally licensed to sell recreational cannabis. Applicants need to be approved for a city license before they can apply to the Bureau of Cannabis Control for an A-license for adult-use commercial sales and an M-license for medical sales. The city did not start accepting applications until January 3rd. An additional bonus is that all licenses are temporary with state licenses expiring in 120-days.

Los Angeles not having its act together comes as no surprise. Medical marijuana was legal for 20 years before the city put semi-decent licensing and enforcement regulations in place. However, enforcement was weak with local experts estimating that the number of illegal pot shops equaled or exceeded the number of legal medical dispensaries.

The problem for medical marijuana dispensaries is that even those legally licensed to do business on December 31st were not legally permitted to do business on January 1st and could not apply before January 3rd. The city has stated that temporary licensing priority would go to existing medical establishments and the state has promised priority processing. Neither authority plans to enforce regulations against any of these businesses until they have a chance to complete the bureaucratic process.

However, while not legally licensed, all of these medical dispensaries lose any shelter from federal prosecution. The Rohrabacher-Blumenauer amendment requires businesses to comply with all local and state laws. None of them will meet this requirement until around the end of January.

The federal quagmire creates additional uncertainty. Most medical marijuana merchants intend to apply for A-licenses. Operating a recreational sales establishment combined with a medical establishment negates the Rohrabacher-Blumenauer protections. Proprietors need to make a choice between medical sales or combined sales and be ready to live with the consequences.

Many business owners lived under the national threat before the Rohrabacher-Blumenauer protections started in 2014 and will dare federal prosecutors to seat a jury in California that will convict them. The question is will the corporate officers and directors salivating over the imagined boom be willing to take the same risk?

Boom or bust will be a matter of perspective and risk assessment. Worse comes to worse Los Angeles residents can fall back on the old method of sourcing marijuana; find a skateboarder and ask them where to score an eighth.

 

 

 

 

 

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