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Marijuana Businesses Are Legal — But Darn Near Impossible To Open In San Diego

A staff member of Urbn Leaf adjusts a rack holding packages of marijuana, Jan...

Photo by Matthew Bowler

Above: A staff member of Urbn Leaf adjusts a rack holding packages of marijuana, Jan. 1, 2018.

Belinda Smith has had her share of challenges in life. Near the top of the list was a two-week trek to Everest Base Camp in 2002.

Trying to open a legal marijuana dispensary in San Diego, she said, is harder.

"This is probably one of the most arduous processes I've ever done in my business or personal life," Smith said in an interview at the Sorrento Valley site where she hopes to soon open her business.

The building, a former branch of the San Diego County Credit Union, is due for some major renovations. Smith plans to remove some of the soffits that make the ceiling hang lower and set up a new partition to separate the waiting area from the retail space. But that work has to remain on hold until she has permits from the city.

Four years after the City Council passed regulations for medical marijuana shops, San Diego now has 13 stores licensed by the state to sell both medical and adult use cannabis — more than most other cities in California.

Yet experts largely agree San Diego's licensed stores are a fraction of what the market demands. Sacramento, a city with about a third of San Diego's population, has about twice as many licensed cannabis retailers. San Diego's citywide cap of 36 stores is unlikely to ever be reached under the current rules.

Smith's dispensary permit application, which is back by the cannabis business accelerator Outco in unincorporated El Cajon, has been in the works since late 2016. Since then, she has been through several meetings with the city's Development Services Department, as well as multiple public hearings — all while paying more than double the market rent on her building.

"The city is very thorough when it comes to vetting all of these cannabis businesses, and they should be," she said. "We want to comply with all of their rules and restrictions because we want to be fully in compliance and legal."

Kris Arciaga,

RELATED: San Diego Gears Up For Permitting Cannabis Supply Chain

Still, her project has come across several frustrating delays. The Torrey Pines Community Planning Group refused to grant her a hearing until she threatened to sue, she said. And last month she learned during a City Council meeting that an obscure clause in the Torrey Pines Community Plan would prohibit her from selling recreational cannabis. That's because the city considers recreational sales a "retail" use, while medical sales are deemed a "commercial" use. The community plan all but forbids retail uses in free-standing buildings, which her building is.

The distinction seems arbitrary in a time when the lines between medical and recreational cannabis are blurring, yet Smith has to comply with the rules on the books. She is getting around the restriction by separating a portion of the building so it can be subleased to another business.

The delay that left a particularly bad taste in Smith's mouth came not from city bureaucrats or anti-marijuana activists, but from another cannabis business.

City staff had declared her application exempt from the California Environmental Quality Act — a routine decision when a project involves no new construction — but someone had appealed that exemption. In a first for any cannabis business in San Diego, the City Council last September upheld the appeal.

The appeal was filed by Preston Eggleston, an employee of a nearby cannabis dispensary, Torrey Holistics.

Torrey Holistics did not respond to multiple requests for comment. Smith said she is certain the dispensary's owners are trying to slow her application down to keep competition out of the neighborhood.

RELATED: Tough Marijuana Rules In San Diego Fuel Boom In Delivery Services

The tactic of using environmental appeals to delay competitors was well documented in the earlier stages of San Diego's permitting of medical marijuana dispensaries. But those cases generally involved other applicants who had not yet received permits to open up their own shops. Torrey Holistics, in contrast, has been permitted since October 2015.

Paul Seaborn is a professor of business management at the University of Denver who studies the cannabis industry. He said such legal tactics exist in all fields of business — but that the stakes with marijuana are much higher.

"There's an opportunity to be a real first mover in terms of location or brand or volume," he said. "All these regulations that exist for very valid reasons provide more angles for these competitors to try to restrict competition."

Seaborn said the biggest thing at stake when any jurisdiction decides to legalize cannabis sales is the government's ability to undercut the black market because consumers are less likely to patronize legal stores when illegal operators offer more convenience or cheaper prices. And there's another concern an overly regulated market could present: price fixing.

Photo by Kris Arciaga

The front of Torrey Holistics, a cannabis store in Sorrento Valley, is seen here, Dec. 27, 2017.

It's hard to tell when cannabis regulations are so strict that they create the conditions for an oligopoly, or legal cartel. Yet Seaborn said there are a few telltale signs: if all the stores look the same and offer the same buying experience, for example, or if they all charge the same prices. And, he added, in a functioning, competitive market, some businesses should fail.

"If everyone is entering and no one is leaving the market, you know, a very stable set of competitors, that suggests some level of a maybe overly structured set up," he said.

RELATED: Marijuana Use Is A Likely Death Sentence For A Military Career, Even In California

Barring a costly citizens' initiative, San Diego's regulations on cannabis dispensaries can be changed only by the City Council. One potential path council members have considered is to allow cannabis delivery services that are not tied to any brick-and-mortar dispensary. Under the threat of greater competition, some of the city's permitted stores have resisted that notion.

Alex Kreit, a professor at Thomas Jefferson School of Law who chaired a city commission on medical marijuana regulations, said eventually the city will have to find some way to relax its rules.

"If you don't have enough businesses serving the market, you are not going to be able to stamp out the black market," he said. "That's one of the chief goals of legalization, and I think really you probably need more of these licensed businesses if you want to achieve that goal in a quick manner."

Kreit added that stores that engage in overly aggressive tactics to quash their competition run the risk of a consumer backlash.

"If I was a consumer … I don't know that I would want to give my business to somebody that is engaging in what I think is at best ethically questionable conduct," he said.

Photo by Matthew Bowler

Belinda Smith shows KPBS reporter Andrew Bowen the former credit union building where she hopes to open a marijuana dispensary, Jan. 8, 2018.

Smith, who hopes to get a final vote on her project's approval in March, said she just wants San Diegans to have more choices when it comes to buying cannabis.

"Competition is healthy, it's part of capitalism, it's how we work, it's how the consumer expects it to work," she said. "More competition is actually better for the whole industry. It will separate the good players from the bad players, and just, in general, allow the industry to be more acceptable and easier and as a result, safer."

Tight regulations on cannabis dispensaries in San Diego have made opening the businesses extremely difficult and expensive. Experts warn that could lead to unintended consequences.

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