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Growing Pains Part 2: Back to the Underground

Instead of welcoming the cannabis industry into the light, Oakland's new rules are putting many out of business, while others are disappearing into the illicit market.

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The owner of the delivery business said it's a rational business decision that small- and medium-size cannabis industry participants have no choice but to make. They can't afford to go legal.

"There is no one in my position that could feasibly incubate someone," he said about Oakland's equity program. According to the property website Loopnet, it can cost about $12,000 a year to lease 1,000 square feet of industrial space in Oakland's green zone, but most industrial spaces are much larger, and it's hard to rent just one or two thousand square feet at a time.

"The only way you can play in this market is if you're a big company that can drop that kind of cash," he said. "For big companies, it's just an additional tax."



Chip Moore
, CEO of 4&20 Blackbirds, had big plans for legalization. He and his business partners were hoping to expand their weed delivery service into a brick-and-mortar center where consumers can learn about, buy, and use cannabis in a safe and friendly space. To do so, they needed a general dispensary permit, but Oakland's rules — which limit the issuance of new dispensary permits to only eight per year — have foiled this plan, for now.

Under Oakland's permitting scheme, four of the annual eight new dispensary permits are reserved for equity applicants. "We got dinged because I'm not an Oakland resident," said Moore, who lives in Berkeley.

His business partners didn't qualify either, so to bolster their chances and comply with city rules, 4&20 Blackbirds partnered with two equity program-eligible businesses and pledged to incubate them in their warehouse space for three years. Moore views the equity program as a major commitment of time and resources, in addition to real estate.

In the end, 4&20 Blackbirds lost out to other applicants — some from out of town — who signed up more equity partners, thereby earning more points in the city's scoring process. Moore, however, is skeptical of the claims made by other general dispensary applicants that they can genuinely incubate numerous small equity-eligible companies while running their own businesses.

"When they say they're doing six or eight equity companies, and they're supposed to provide business advice, to mentor them, I don't think so," he said.

"Every week, I hear about a company that is being bought out, or they're leaving Oakland, moving to Hayward, Richmond, Vallejo," he added. "We got an offer to move to Vallejo last week."

Although he's frustrated, Moore said he has no plans to leave Oakland. Part of what's keeping 4&20 Blackbirds in Oakland is their West Oakland warehouse, which they bought last year.

Amber Senter also hopes to keep her cannabis business in Oakland but said she is actively looking at what a move to Hayward or Berkeley could save her in terms of tax rates, real estate, and other costs. Senter runs Leisure Life, which manufactures pre-rolls and infused popcorn. Her company employs five people. Along with Nina Parks and Tsion Lencho, she's also a co-founder of Supernova Women, an organization that advocates for women of color in the cannabis industry.

Oakland's equity program, said Senter, was well intentioned but poorly designed and executed, and now it's killing small companies or driving them into the underground economy. "What kind of business can pay someone's rent for three years?" she said about the 1,000-square-foot-incubation requirement, adding that this is more space than most currently existing companies need for themselves. Senter's company, for example, operates out of a 600-square-foot space.

"It's set up so that to be in Oakland, you have to pay to play," she said. Senter estimated that in some parts of the green zone, real estate can cost as much as $36,000 per year for 1,000 square feet.

Other local costs include city-imposed security requirements that add thousands onto business expenses annually. New state-imposed cannabis testing requirements are also hitting small businesses hard, especially growers. Senter said that prior to legalization, testing would cost about $200 and only require a couple grams to complete. Now, testing services require multiple ounces of fresh flowers and can run as high as $1,000, and if flowers test dirty for pesticides, herbicides, or other impurities, an entire batch worth tens of thousands of dollars can be destroyed.

She also questions whether many of the equity businesses will actually survive their incubation period. To make it, many will need technical assistance and business counseling, but Senter said the city and bigger companies might not provide this as promised.

Last year, Supernova Women implored the city council not to enact the equity program as it's currently designed. The group said that rather than limiting the number of general permits available to run a cannabis business by pairing them one-to-one with equity permits, the city should adopt better measures to address the ongoing racial inequalities stemming from the drug war. Among their ideas were stronger local hiring requirements, fast-track approvals for equity businesses, and tax exemption for equity businesses.

"All our input was ignored," she said. "But I'm not surprised."

Senter now sees Oakland's legal industry as splitting into two streams. One carries the major companies that have obtained permits, often by pledging to incubate a large number of equity applicants. The other stream is the equity applicants, many of whom may not survive their first year or two of business.

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