Oakland's pot industrial park founders over its profit motive

Sacramento BeeDecember 27, 2010 

Former construction industry executive Jeff Wilcox has a $20 million bet riding on the future of marijuana commercialization in California.

That is what his AgraMed Inc. venture has invested in a warehouse near the Oakland waterfront and a bid to open a "business park for the cannabis industry." He hopes to lease the space to pot growers, bakeries, labs and processing facilities and to create hundreds of well-paying jobs.

But Wilcox is in limbo after Oakland officials last week suspended a plan to issue four licenses for factory-scale production of medical marijuana. Wilcox is only the most pronounced of numerous suitors for the coveted permits who suddenly have cause to worry.

Oakland City Council members approved the unprecedented plan to tax and license the industrialization of marijuana in July. At the time, Oakland was preening as the political epicenter for a California initiative seeking to legalize pot as a leisure activity and sanction a marijuana market extending far beyond medical use.

But Proposition 19, defeated by voters Nov. 2, drew the ire of U.S. Attorney General Eric Holder, who proclaimed the federal government wasn't going to tolerate retail pot sales in California.

Oakland's ambitious cultivation plan – designed to service the existing medical pot economy and potential recreational use – also drew the suspicion of federal agents, who contacted the city.

Now, the process is on hold amid fears of government raids and warnings that Oakland's bold pot plan may violate California laws mandating that medical marijuana businesses operate as nonprofits.

In a Dec. 6 letter to Jean Quan, Oakland's incoming mayor, Alameda County District Attorney Nancy O'Malley, warned that the city ordinance offered no "legal or equitable defense" against criminal prosecution of pot factories opening in town.

City Attorney John Russo said he was contacted in October and again in November by U.S. Justice Department officials "expressing concern" over the city's plans.

Oakland hoped to cash in on a 5 percent local tax on proceeds from the future pot factories that voters approved in November – and a 10 percent tax on recreational sales if California voters passed Proposition 19.

But with the initiative failing, District Attorney O'Malley warned, it was "an open question" if city officials "who aid and abet or conspire to violate state or federal laws" could themselves be held criminally accountable.

So last Tuesday, the Oakland City Council voted to rework its marijuana cultivation ordinance and hold off on granting any licenses. Officials say they still hope to sanction large-scale production by amending the ordinance to conform with California's medical pot laws. The council expects to consider a new draft ordinance Feb. 1.

"We're not giving up," proclaimed City Council member Rebecca Kaplan, who co-authored the ordinance. "We've always been a leader on this. This can be done well."

Oakland is the home of Oaksterdam University, the renowned marijuana trade school whose founder, Richard Lee, helped bankroll Proposition 19. Last year, the city became the first in America to impose taxes on marijuana dispensaries.

The ordinance, which authorized licensing of cultivation facilities of up to 100,000 square feet, was intended as more than just a tax-revenue score. Kaplan argued the ordinance positioned the city to mainstream and monitor all aspects of California's burgeoning medical pot trade.

"Currently, there is a lot of cultivation going on without a lot of regulation," she argued. "So having a way to have licensing and oversight of production seems like a reasonable thing."

City Attorney Russo backed Proposition 19 as a means to end "marijuana prohibition" and tax "the largest cash crop in the state." But after the initiative lost, he told City Council members the ordinance could violate existing California medical marijuana laws that prohibit pot-profiteering.

"Because Proposition 19 failed, you can't do things that you might have done," Russo said. "And that is certainly the case with for-profit licensing of the production of cannabis."

Though marijuana remains illegal under federal law, Attorney General Holder announced last year that the Justice Department would not target medical marijuana patients or providers in states where medicinal use is legal.

But with Proposition 19 on the ballot, Holder signaled that its passage could upset that fragile truce. He declared that any retail pot business would admit to a federal crime by the mere act of paying its taxes.

Most recently, Russo warned that the Oakland plan could provoke a backlash if U.S. authorities perceived the operation "as a cover for a for-profit industrial grow."

California law requires medical pot to be cultivated and dispensed in nonprofit, members-only patient collectives. Revenues generated by pot transactions are supposed to cover only the costs of producing and distributing the marijuana, which may include salaries of dispensary workers and growers.

The Oakland ordinance called on cultivators to operate "legally according to state law." But it was vague in spelling out the relationship between commercial growers and medical pot providers.

By contrast, voters in nearby Berkeley passed a cultivation ordinance – allowing six 30,000 square-foot facilities – that specified growers must be from licensed dispensaries or other medical providers.

Max Del Real, a cannabis industry lobbyist, said Oakland ran into trouble because its ordinance smacked of naked capitalism.

"Someone can come in and apply for a very large commercial growing permit with no connection to any dispensary in Oakland," Del Real said. "They went too fast on this, and now they're trying to reel it back in."

Wilcox is still working to make the idea a reality. An economic study he commissioned for AgraMed said his 170,000-square foot warehouse could generate $47 million to $71 million in annual medical cannabis sales and up to 400 jobs.

Wilcox hopes to get a return on his investment by leasing out the site to growers and medical pot outlets operating as nonprofits. He said tenants from pot bakers to growers would pay salaries averaging $73,000 a year, including $200,000 for top managers and $40,000 for entry-level workers.

"Oakland is not doing this to thumb its nose at the federal government," he argued. "They're doing it for economic stimulus."

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