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San Diego Gears Up For Permitting Cannabis Supply Chain

A pile of dried cannabis buds is seen here, Aug. 31, 2017.
Andrew Bowen
A pile of dried cannabis buds is seen here, Aug. 31, 2017.
San Diego Gears Up For Permitting Cannabis Supply Chain
San Diego Gears Up For Permitting Cannabis Supply Chain GUEST: Andrew Bowen, metro reporter, KPBS News

Starting tomorrow San Diego will begin accepting applications for marijuana production facilities. Those are the supply chain businesses that grow, process and distribute cannabis before it is sold to the consumer. There are only so many permits available and Andrew explains competition for them is fierce.Reporter: Hello I'm Andrew. Marsha is the owner of a wholesale bakery in Miramar. It is in an industrial neighborhood but as soon as you walk in you are hit with the smell of delicious baked goods.Now we are in the production area and you can see these are cinnamon rolls.The bakery has 15 employees and it is about 10,000 square feet big enough to supply more than 50 hotels with a continental breakfast 7 days a week.This guy is making muffins.It is like a little gun that squirts a glob of Jell-O I guess.It is better.She gets her wish this bakery will soon be making more than just muffins, danishes and croissants. She wants to make cannabis edibles.Probably about 3 years ago we started receiving requests to produce different products for them that included cannabis ingredients.Now she says she gets these requests once a month. Her answer has always been no.My husband and I have worked for 35 years to build our business and we would be putting ourselves at risk if we did continue or agree to do that and we are going to do that.Last year California voters approved proposition 64 setting the stage for legal cannabis sales. In September the city Council voted to issue up to 40 permits for cultivating, processing, distributing and testing marijuana. She is applying for one of those.As a cannabis attorney I always want to see more license thing available. I think 40 is a good start.Kimberly Sims represents a number of businesses and says the application process for marijuana production facilities is going a lot more smoothly than in 2014. That is when San Diego started permitting medical marijuana dispensaries. She says people were literally camped outside the development services Department hoping to get their application in first.Had tents and snacks and it was tense, people had security guards and people were fighting standing in line. I'm glad that we have come up with a different approach.This time around the city is giving out appointments through a lottery and applicant to meet the minimum zoning requirements and have the permission of the property owner are guaranteed an appointment time on Thursday.I think it certainly is a more organized method and I think it creates more fairness in the process. It is more streamlined and it is much more fair.More fair but still plenty competitive. The land-use restrictions on these are tough. There is a huge amount of money to be made. She figures she can at least double or quadruple her revenues. Are you prepared to get out your tense?Absolutely. I have my lawn chair and my umbrella and blankets. My husband was going to trade places with me for a bathroom break. I was prepared to sit for a few days. In some ways I think the lottery system is a lot smoother and keeps it a lot calmer.Sales of recreational cannabis become illegal January 1. The permitting process for cannabis businesses in San Diego could take up to a year, sometimes longer. While pot shops may be open for business next year it could still take the months to find enough legally produce cannabis products to keep their shelves stocked.And you're welcome. Let me try to clear up my own confusion about this. If there was not a supply chain already in place, where were dispensaries getting their supply? Back there was a supply chain but it was unregulated. There are dozens of grow operations growing cannabis and passing it on to dispensaries directly. They might be passing it on two different processors who are creating their own infused beverages or creams and those are often made in people's homes or in basements. This tells the story of the haphazard process of legalization in California. The compassionate use act decriminalized the use of legal marijuana.Do each of these steps in the supply chain need a license?Yes. The state has separate licenses for all of those different types of uses. The state is behind on setting up the requirements for those licenses. Getting next month they are going to start taking applications for temporary licenses. The annual licenses will be the more permanent once and they will be a lot harder to get but it is unclear what those requirements will be. There is a lot of uncertainty right now.How much do the city permits cost?Including the state and local fees for the licenses plus attorney fees because you also need a land-use consultant and an attorney I spoke with says it could easily be $150,000 and that does not include the cost of waiting up to a year for approval and in business time is money.Just to put a fine point on that, you said the bakery owner you interviewed might be able to quadruple her sales with marijuana production, once she also have new expenses though beyond the licensing costs like security and legal expenses?Certainly there will definitely be higher security requirements for these kinds of businesses both at the state and local levels. You might also need more specialized legal representation like I mentioned and she is also going to be paying the gross receipt tax of 5% in San Diego which was approved by voters last year to help offset the cost of the legalization. She could definitely up her revenues but she will have a higher overhead cost as well.The people you spoke with says this lottery system is much better than the system before. It could still be very competitive. You spoke with someone who told you about the length one competitor went to to sabotage the rival.I spoke with Lisa low who oversees the permit process and she said she heard of a case where an applicant for a dispensary permit opened a childcare facility within 1000 feet of a rivals site just to knock them out of the running. She said it is fiercely competitive. The land-use restrictions are different for the supply chain businesses versus the dispensaries. Supply chain businesses can only be in industrial zones but they can be near each other. There is no 1000 foot separation. It is also a citywide cap of permits. There are some things about this supply chain business regulation that will be a little easier. In San Diego the permit is only call the marijuana production facility. If you get that permit for a bakery you could theoretically in the future also apply for a state license to cultivate on that site. You could be operating multiple supply-chain businesses under one single permit in San Diego.If the supply chain is not in place by early next year have you heard what the new cannabis retail businesses plan to do to stay in business?There is a chance they will be allowed to sell existing inventory they already possess with some disclaimer. There are a few places in California that have set up a fully functioning supply-chain in Desert Hot Springs is one of them. They will be making a lot of money with not having a lot of competition in the market and that could lead to an increase initially of cannabis which could have the undesired effect of allowing the illegal market to prosper initially. It will be a bumpy first few years getting into this fully regulated and taxed.Is it legal to transport let's say marijuana that has been produced in one area to San Diego?It is legal starting January 1 if it is transported by a licensed distributor. There is nothing to prevent marijuana from LA County or Riverside County from coming into San Diego. What is illegal under both state and federal law is transporting it across state lines. Every marijuana flower or product that is sold in California has to be produced in California.I have been speaking with Metro reporter Andrew Bowen. Thank you.

San Diego entrepreneurs on Thursday will begin submitting applications to open marijuana production facilities, as the city prepares for the legalization of recreational cannabis sales next year.

City Council members voted last month to permit up to 40 businesses to cultivate, process, distribute and test cannabis and cannabis products. Earlier this year, the council approved regulations for shops to sell recreational cannabis.

Marijuana production facilities must be located in industrial zones and cannot be within 1,000 feet of schools, daycare centers, parks or other so-called "sensitive uses." In addition to the city's conditional use permits, the businesses will eventually also need a license from the newly formed state Bureau of Cannabis Control.

San Diego has been through a similar process before — in April 2014 it began permitting medical marijuana dispensaries. Days before the city began accepting applications for those permits, people began camping outside the city's Development Services Department in an effort to get their applications in first.

RELATED: Marijuana Legalization Takes Root In San Diego Courts

Kimberly Simms, an attorney who represents several cannabis businesses, said the San Diego Police Department ordered the applicants in line to disperse — and that people later argued over the order in which they should get back in line.

"You could already seeing the arguing and fighting starting," she said. "I'm glad that we've come up with a different way."

This year, the city is assigning appointment times via a randomized lottery. Elyse Lowe, a deputy director in the Development Services Department, said that system should avoid some of the confusion and chaos seen in 2014.

"We want to ensure consistency throughout the applications, we don't want any applicants to get an unfair or perceived unfair advantage," she said. "The city's goal is absolutely the most fair and equitable process as possible."

Elyse Lowe, deputy director of San Diego's Development Services Department, shows KPBS reporter Andrew Bowen an application for a marijuana production facility, Nov. 6, 2017.
Kris Arciaga
Elyse Lowe, deputy director of San Diego's Development Services Department, shows KPBS reporter Andrew Bowen an application for a marijuana production facility, Nov. 6, 2017.

Proposition 64, approved by voters last year, immediately legalized adult possession and small-scale cultivation of cannabis for personal use. Beginning Jan. 1, licensed shops will be able to sell cannabis to people 21 and older who do not have a doctor's recommendation for the drug.

State law forbids those shops from getting their inventory from unlicensed suppliers — yet few cities and counties in California have set up local regulations for the cannabis supply chain. Simms said this could lead to supply constraints on the legal, regulated cannabis market.

"The dispensaries that already have their licenses are taking a tough look right now at who their suppliers are," she said.

Lowe acknowledged that San Diego's local cannabis supply chain would not be ready to supply licensed dispensaries with products next year. She said the city's conditional use permit application process takes three to six months — but Simms said she counsels her clients to expect to wait at least a year.

The process is often delayed by rival applicants who appeal the permit approvals of their competitors. Lowe described it as "fiercely competitive."

"I have even heard of an instance where someone went as far as to specifically open a childcare business near a competitor so that they could bump that person out of the market, and then they would be next in line," Lowe said. "It's a very, very interesting process because of how competitive it is. I've actually never seen anything like it."

San Diego Gears Up For Permitting Cannabis Supply Chain