Image via Flickr user m01229 of the city limits sign for Weed, California, in Siskiyou County.
Written by David Castellon
Just like the gold rush of the mid 1800s, thousands are looking to make it big in California’s new recreational cannabis industry.
But if you’re planning to start a new business growing, selling or manufacturing cannabis and related products with expectations of easy money, think again, warned Chip Allee, recent transplant from Colorado to Clovis.
“My feeling overall is it’s crabs in a barrel — over regulated, overtaxed, a very difficult industry to survive in Colorado and everywhere else,” he said, using the metaphor of live crabs trying to climb out of a barrel only to be dragged down by those at the bottom.
“It’s essentially crabs in a barrel because of the fear associated with cannabis and the greed associated either with government agencies or anybody providing services and the overregulation. It’s having a direct impact on feasible margins in the business, and it’s happening everywhere,” Allee said.
A complicated picture
Allee speaks from experience, as he’s the chief executive and financial officer for Ibannabi, Inc., which grows marijuana for recreational use in Aurora, Colo. That state, along with Washington, pioneered the legal sale and use of the drug with voter approval in November 2012.
Allee still runs the business, but the Fresno State graduate does so long distance from his home in Clovis, where he recently to moved for personal reasons.
Coincidentally, California voters in November 2016 passed Proposition 64, which legalized the sales and use of marijuana for recreational purposes, and in January 2018, the State Board of Equalization is scheduled to begin issuing licenses for recreational marijuana-related businesses.
But don’t expect smooth sailing for new cannabis businesses, Allee warned.
“We started close to three years ago, because it was not legal in Aurora until then,” but it has hardly been easy for him and other pot-related businesses in Colorado and other states, he said.
“You face the usual challenges of any startup business: Construction, planning, permitting, expenses, delays,” which often can culminate into big, underestimated problems, Allee said.
Hits from all sides
But other big problems the industry faces just about anywhere it has developed are overregulation and “larcenous” tax policies that often stems from cities, counties or states trying to wring out more money from pot-related businesses than from other businesses, he explained.
Despite the unfairness, “everybody agrees to [them], because they want to get some kind of compromise in place.”
In fact, in the same election that voters passed Prop. 64, voters in 37 California counties and cities approved ballot measures that created separate local taxes or fees on cannabis, the Los Angeles Times reports.
An article in the Emerald Report, an online website looking at Northern California’s cannabis industry, noted that by 2020 commercial pot sales across the state could total $6.5 billion — an amount nearly rivaling sales in the state’s wine industry — and the law includes a flat state tax of 15 percent.
Add to that any additional taxes and fees that could be further imposed by the state, cities and counties, along with regulations that impose other costs that could eat at industry profit margins.
Capital is key
In Colorado, the burdensome regulations didn’t come all at once but over time, so the more established cannabis businesses had the resources to endure the added costs, Allee said.
BOE officials are working out their regulations for licensing California’s recreational cannabis businesses, while many cities across the state still are deciding whether to allow such businesses — with the city of Woodlake among the latest — let alone set up regulations and taxes for them.
Still, from what he has seen occur in Colorado and other parts of the country where recreational marijuana is legal, Allee warned startups here that “You’re going to have to be very well funded to have any hope whatsoever to make it in the cannabis business.”
He added that if you plan to get into this new industry without being well financed or getting educated on the industry, “You’re probably going to lose.”
Despite the clear challenges, Allee is looking into the possibility of expanding his business — which sells pot under the “Blue Mountain” brand in Colorado — by starting a California division.
“We want to stick with what we know, which is cultivation and branding,” while staying out of the sale and manufacturing sides, the latter referring to processing oil, making edible cannabis products, etc.
It’s too early to tell where in the state the company might set up such an operation, but Allee said “We know where we’re not going to start, which is Fresno County, because the county is obstructive and hostile to cannabis.”
He noted that there are some Valley communities that seem receptive to cannabis businesses, the city of Coalinga among them.
Communities here in the Valley or elsewhere have golden opportunities to welcome the cannabis industry and become hubs for such businesses, generating tax revenues in the process, Allee said.
“You cannot continue to lose money out of some sort of dedication to the [anti-pot] movement. It all boils down to business,” he said, noting that the Valley is in a good position because it has lots of agricultural land for growers and lower land prices than in Southern California and coastal parts of the state.
“It’s going to be the friendly municipalities with lower costs,” that are going to draw these businesses and reap the financial benefits, Allee said. “We’re talking big money.”