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Budding Business

Author: M.V. Wood
July, 2017 Issue

In the small town of Occidental, in western Sonoma County, the Summer of Love reigns eternal. Boomer hippies, some still sporting tie-dye, stroll down the street with their grandkids in tow. Neighbors chat and laugh in front of the general store. Quaint shops line the main drag, appropriately named Bohemian Highway. Every now and then, as you turn a corner, the scent of lavender wafts through the air, or the smell of marijuana floats out through an open window.

Sitting on the patio of a small Mexican restaurant, there’s a group of diners passionately debating broccoli. Folks in these parts take their farming seriously. Words like “permaculture” and “biointensive horticulture,” and “conservation hydrology” are as common here as the words “Round-Up” are in other parts of the country. This particular group has evidently just come to the restaurant from a plant sale at the Occidental Arts and Ecology Center, located just north of town. The OAEC is ground zero for the sustainability community and these diners seem amped up after their visit. The discussion switches from broccoli to the water requirements for vineyards and then to cannabis. It seems that at least one of the young men is a marijuana grower, and he happens to think most growers use too much water for their crops. After a lengthy discussion about pot, the conversation switches to dry-farmed tomatoes.

If you were to head just a little west of town, on Coleman Valley Road, you’d pass the site of the former Morningstar Commune. As part of the ’60s back-to-the-land movement, free spirits from San Francisco's Haight-Ashbury district wound up at Morningstar, and throughout rural Sonoma County, to grow food, live off the land and take part in communal living. In the process, they sowed the seeds of the peace and love philosophy that still permeates the farming community in these parts. They were also known to grow some pretty good weed.

Morningstar was eventually shut down by the county, and other communal living projects closed down as well. The back-to-the-earth hippies dispersed--as did their utopian philosophies, and their knowledge of pot cultivation. Today’s Northern California cannabis growers are perhaps the most direct ideological dissidents of these flower children.

The legalization of cannabis

For decades, they have been honing their craft. And for the past 20 years, ever since California became the first state to approve medical marijuana, the counter-cultural cannabis growers developed their own style of business and their own subculture: A little bit counter, a little bit mainstream, with a heavy dose of environmentalism. Of course, not all growers in the state were of the “peace and love” variety. Some were in the do-whatever-you-can-to-make-a-buck strain. So, when California legalized recreational marijuana in November, many local growers expressed relief that the entire industry would need to heed environmental protection policies. And, of course, there was a collective sigh of relief that decriminalization meant there was far less chance of law enforcement showing up at their door, taking them to jail, seizing their property, and placing their kids with Child Protective Services. But, legalization brought new problems as well. After all, the rules and customs of this community don’t quite jibe with the usual way of doing business in America.

Legalization of the cannabis market has opened up a huge business opportunity, which is predicted to generate $22 billion in U.S. sales by 2020, according to ArcView Market Research. Organizations, big and small, are clammering to get a piece of the pie. And one of the juiciest parts of the pie lies in Sonoma County. Just north of here, the Emerald Triangle, made up of Mendocino, Humboldt, and Trinity counties, produces some of the world’s best cannabis. Just south, along a major thoroughfare, lies the huge urban center of San Francisco, and to the east is Sacramento. Sonoma County, with its central location, established infrastructure and skilled workforce, is the natural nucleus for all this activity. The big players, with the big bucks, are already diving in. For example, the investment firm Privateer Holdings has chosen Santa Rosa as the headquarters for its expansion into the California cannabis market. Plans call for a medical cannabis processing, manufacturing and distribution center in the southwest area of town.

The fear is that the big money will squeeze out the local growers, and that the changes will reverberate through the larger, local economy.

“How do we harness this opportunity and promote business development while preserving the culture? That’s the million-dollar question,” says Tawnie Logan, director of the Sonoma County Growers Alliance.

“If we can figure out the answer to that question, we’ll be an anomaly. We’ll be more than a tourist attraction. We’ll be an example of a sustainable business model that is a destination for others to learn by. And If we don’t figure it out, then all we’re going to be is an industrial production zone.”

 

Rules and regulations

The right answer to the million-dollar question takes some time to hammer out. But there’s little time. When the Sonoma County marijuana tax was approved in March, it meant the new rules would go into effect January 1, 2018. That didn’t leave local government the luxury of time to massage out the details about permits and licensing and to offer a substantial transition period. As different rules and regulations are being implemented in all the different municipalities, many of the county’s 5,000 or so growers are finding themselves in the wrong zoning area, or in the wrong-sized facility, or at odds with other stipulations. For many of them, the cost of becoming compliant is prohibitive.

In addition, there are those local residents who would be happy to bid farewell to their neighborhood grower. After all, some residents feel threatened by the possibility of theft and other criminal activity at their neighbor’s property. Some simply don’t want to look out their window and see greenhouses dotting their view. Others don’t want to deal with the smell. They see centralized growing facilities and urban processing plants as neater and safer.

Growers argue that there are policies, which can be put in place to mitigate any potential problems. And by allowing established, local growers to stay in business, the entire local economy benefits. As with any industry, there are big pluses to supporting local businesses and keeping wealth more evenly distributed.

“For example, during the off-season, we have our money from harvest and we’re out there spending it,” Logan says. “We’re keeping the restaurants afloat during the winter.” Then, during tourist season, the entire community benefits from all the visitors flocking to the area. And part of the reason the area is so appealing is precisely because of all those great restaurants and cute shops that the growers helped keep alive.

“But when you’re dealing with big, outside business buying in, top management and investors are the ones who end up making the money, but they don’t live here, they don’t spend here,” Logan continues. “And sure, maybe they’ll hire local growers. But what will they pay, minimum wage? That won’t be enough to spend money at our neighbors’ businesses.

“I’m not saying anything new,” she adds. “A lot of people are on the same page with this. In fact, the Land Use Ordinance that was approved by the Planning Commission was a very good one that reflected hundreds of hours of research. But that was policy. And policy and politics are not the same thing. The local residents who don’t see beyond their own fears and prejudices had the loudest voices and highest turnout at board of supervisor meetings, and unfortunately, they won the supervisors over. Banning Agricultural and Residential districts and Rural Residential districts didn’t solve the problem, it perpetuated it by not allowing operators to participate in a regulated marketplace.”

One major problem is that rules and regulations are all over the place and extremely difficult to reign in, or even keep track of. State laws are in conflict with federal ones. Counties and the state are often working in different directions. Each municipality has a lot of leeway when it comes to commercial enterprise and zoning. And the laws of the last 20 years around medical marijuana are different than those for the new industry.

Yet, while the entire industry is in upheaval and change, some of the largest problems, such as the lack of banking, are still the same as ever.

 

Banking challenges

Since the industry is still illegal under federal law, banks, which are federally insured, cannot do business with growers without serious federal repercussions. This means that all transactions, including paychecks and paying taxes, are only done in cash. Another big problem with the federal legalities is that the cannabis industry can’t take off normal business deductions on their taxes. When all is said and done, cannabis products might very well end up being taxed by 70 percent or more. If it becomes that difficult to make a profit, some fear growers might choose to forgo licensure and just sell on the black market.

“There’s a lot going on right now, and a lot of people are feeling overwhelmed,” says Julie Mercer-Ingram, who heads the CannaLegal practice for Beck Law P.C. Mercer-Ingram says that getting favorable regulations in place for small growers is a battle, but there are more options and possible outcomes than many growers might realize. For example, county supervisors have been considering adding some inclusion zones that would allow growers to continue working even if they don’t fall into the usual zoning requirements. “The more the local growers get involved with the process, the better the chance that we can figure out positive solutions,” Mercer-Ingram adds.

“We are transitioning from the collective model that we’ve had for the past 14 years to the marketplace, and that brings a lot of changes.” It was a unique situation and the rules were pretty fuzzy. But now, with legalization, it’s “business as usual.” For instance, growers could often have gardens in residential neighborhoods before. Now, these gardens are commercial enterprises, which means commercial zoning rules apply. And typically, businesses aren’t allowed to operate in residential neighborhoods. “On the other hand,” Mercer-Ingram continues, “when properly done, greenhouses can have a low impact on neighborhood integrity and on the environment.” So, depending on how each community chooses to deal with zoning, residential greenhouses could be an option. Or, then again, they might not be. “Yeah...I know...it can get confusing,” Mercer-Ingram says in a friendly voice, with a slow sigh at the end. “We’re still in the process of pinning down specifics. Unfortunately, with all these changes, some growers will fall through the cracks.”

Ken Marinello, director of the medical marijuana delivery service Sebastopol Compassionate Care, agrees that it’s difficult to keep track of all the pending changes to the rules and regulations. “Everything is so convoluted right now, and there are a lot of hoops to jump through,” he says. “I have three attorneys working with me and it’s still difficult to stay informed and know what to do. “What it’s going to come down to—as to whether you can stay in business—is whether you have the money to be compliant.”

Marinello has an excellent reputation for not only the quality of his product but also for the individual attention he gives each customer. People describe him as “the nicest guy you could ever meet.” One man says, “He’s the definition of a sweetheart. He could be charging so much more, but he doesn’t because he’s doing this for all the right reasons.”

As for his rave reviews, Marinello gives an “awe shucks” kind of laugh. “I love farming and I love people, so it was a natural fit,” he explains. But he adds that in addition to his farming and people skills, there is one other area of expertise, that he picked up at his former job, which has helped him a great deal in this business: He knows a lot about procedure and compliance and he’s really good at paperwork. “I’ve always kept my papers in order, and that’s been a big help,” he says. “I’ve had the sheriff call before, and I show up with my paperwork, and I’ve always been compliant, and I’ve never had any problems.”

Before his career in cannabis, Marinello worked alongside food scientists, as the director of logistics and distribution for perishable and non-perishable foods going to Whole Foods, Trader Joe’s and Costco stores throughout the U.S., using radio frequency devices (RFDs) and barcoding. “I’m very aware of all FDA rules on distributing food, plants and raw material associated with food and plants. I plan on using RFD for seed to consumer,” he says. According to Marinello, the new regulations around cannabis are just like those around food manufacturing.

Now, instead of a cannabis farmer growing some plants and selling face-to-face to customers, the grower will send the crop to a licensed testing facility, then sell it to a distributer, which will then sell it to a retailer, which will finally sell it to the consumer. It’s taxed at each step. The FDA is fully involved. The items are branded. There’s a barcode on everything. The mold and antibiotic test results are printed right there. “It’s a very involved procedure,” he says.

Marinello points out that many people who are drawn to being cannabis growers aren’t the same sort of people who are good at filling out forms and following impersonal procedures. “For a lot of us growers, this is a labor of love,” he says. It’s difficult for many of them to see their work being homogenized and commoditized and losing that grower-to-consumer relationship. “I think we might be losing something very important, something very special, in the process.”

In the end though, experienced growers might have a bigger edge than they realize. “Everyone wants to get in on the gold rush right now,” Marinello says. But it’s more complicated than just throwing money out, opening up a facility and hiring a bunch of people. “Growing cannabis is farming at it’s very finest. And it’s hard, hard work. Not everyone is cut out for this.”

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