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Cannabis plants at ZenLeaf’s nursery in Oceanside. Photo by Samantha Nelson
Cannabis plants at ZenLeaf’s nursery in Oceanside. Photo by Samantha Nelson
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For Oceanside cannabis, slow and steady wins the race

EDITOR’S NOTE: This article is part of The Coast News’ three-week series on marijuana in North County. 

OCEANSIDE — While one of the first cities in the region to start regulating cannabis, the city of Oceanside has taken a somewhat slower and steadier approach to navigate through a relatively young, legal industry compared to other North County cities.

Oceanside began regulating cannabis in 2018, two years after Proposition 64 passed in the state. Nearly 57% of Oceanside voters were in favor of the law.

Unlike its neighbor cities of Vista and Encinitas, whose citizens had to vote on a measure that essentially forced those cities to start regulating cannabis, the Oceanside City Council approved an ordinance in April 2018 allowing the establishment and operation of several medical cannabis-related uses including manufacturing, distribution, testing, cultivation and nurseries.

Later in Sept. 2018, the council then allowed the city to issue only two licenses and conditional use permits for medical, non-storefront cannabis delivery businesses.

In the first two years, Oceanside received dozens of applications for licenses, which are issued based on which type of use a cannabis business would operate. Currently, there are five licenses for distribution, four licenses for manufacturing, 12 for cultivation and nurseries, and only one non-storefront, retail license.

According to Associate Planner Stefanie Cervantes, who runs the city’s cannabis program, another facility that applied for a non-storefront retail license but was waitlisted may be the next to receive a retail license as long as its financials and budget structure are up to date.

MedLeaf Delivery currently holds the only non-storefront cannabis retail license in the city. The application process was based on a point and merit system, something that co-owner and General Manager Karen Hannawi liked about the process.

Medleaf Delivery has seen a significant boost in sales and deliveries since the city allowed adult-use, recreational cannabis sales in the city. Photo by Samantha Nelson
Medleaf Delivery has seen a significant boost in sales and deliveries since the city allowed adult-use, recreational cannabis sales in the city. Photo by Samantha Nelson

After acquiring a license, a business must then move on to gain its conditional use permit (CUP). Cannabis businesses in Oceanside must obtain both a license and a CUP, the latter of which must receive approval from the Planning Commission and final approval from the City Council.

COVID-19 caused a delay in MedLeaf’s permit process, but after two years, the business finally received a greenlight to operate in May 2020 and opened for business two months later.

Challenges were far from over for the business. Originally supposed to be the only legal medical cannabis delivery business in North County, the pandemic prompted rules to change to allow more outside delivery businesses access to MedLeaf’s territory.

Originally the city of Vista was only going to allow storefronts and no delivery services for medical cannabis businesses, but that changed because of COVID-19, which increased the need for more delivery services in general. This change coupled with MedLeaf’s restriction to only non-storefront delivery and the city’s medicinal restriction slowed down progress for the business.

“The first year was really hard,” Hannawi said.

Starting a cannabis business requires a significant amount of money. MedLeaf’s five-founding owners spent approximately $1.2 million just to start the business — paying rent on the building until it could actually open, hiring staff and drivers, owning its own fleet of delivery vehicles with thousands of dollars worth of insurance costs, and paying more than $20,000 in city startup fees and thousands of dollars for state licensure fees as well.

The restriction to medicinal-only meant that the business could only sell to California residents with a medical recommendation. While MedLeaf’s nearby competition was also restricted to medicinal, Vista businesses had the advantage of storefronts. Additionally, several delivery businesses with licenses outside of San Diego County began selling recreational cannabis products in the region, taking away even more of MedLeaf’s potential patients and profits.

Things completely changed earlier in June after the city loosened its regulations to allow cannabis businesses access to the recreational, or adult-use, cannabis market.

“It was like night and day,” Hannawi said.

After that, the business experienced a growth spurt requiring its owners to hire more people and add to its fleet of vehicles.

“Right now we’re at a good place,” Hannawi said.

Hannawi said she enjoys working with the city and giving back to the very same community where she and her brother and co-owner Justin Baker grew up.

Each of the different cannabis license use types has different tax rates that were established after Oceanside residents voted on Measure M last November, which allowed the cannabis businesses in town to be taxed. The tax went into effect at the beginning of this year.

On a monthly basis, retail businesses like MedLeaf must pay 5% of their gross receipts, manufacturing must pay 2.5%, distribution and nurseries both pay 2%, and cultivation pays 1.5%.

Proceeds from these taxes could be used for any lawful general government purpose, including enforcement against other illegal cannabis businesses.

The city has so far collected about $45,866.19 in cannabis tax revenue as of early October. But that number could eventually reach $1.4 million annually once the city’s cannabis program reaches its full potential, according to HdL Consulting.

Retail cannabis businesses like MedLeaf must pay 5% of their gross receipts every month. Photo by Samantha Nelson
Retail cannabis businesses like MedLeaf must pay 5% of their gross receipts every month. Photo by Samantha Nelson

As of right now, despite having nearly two dozen licenses issued, MedLeaf, Left Coast (manufacturer and distributor) and Zenleaf (cultivator and nursery) are the only three cannabis businesses currently operating and generating cannabis tax revenues for the city.

Two other manufacturing and distribution combos, J&K Manufacturing and Buddiez, have already acquired both their license and permits and are in the process of obtaining their building permits.

Another licensed cultivator on Sleeping Indian Road will soon be pursuing its CUP once it wraps up changes to its ownership structure, Cervantes said.

Unlike MedLeaf, which didn’t require many changes to its location other than security enhancements, other cannabis businesses have to deal with development fees associated with necessary site improvements for operation.

Zenleaf, which holds both cultivation and nursery license and CUP, is only operating on the nursery side of things until it can build out its site to provide additional greenhouses and structures for cultivation. Its location in South Morro Hills already had a greenhouse in place, where its nursery is currently housed.

In its nursery, Zenleaf prepares small clones of cannabis plants and sells them to licensed cultivators, who then grow out plants to produce the flower that is sold as the various types of cannabis products found in dispensaries.

Owner Michael Boshart, who also has another cultivation site in the city of San Diego, is concerned about a recent $250,000 impact fee he received from the city that he has to pay in order to ready his Oceanside location for cultivation.

Though the city requires developers across every industry in town to pay impact fees, other industries don’t have the additional fees that come with being a cannabis business like Boshart does. In addition to improving his own site, Boshart was also responsible for re-slurrying part of North River Road at the front entrance of his business.

Deputy City Manager and Development Services Director Jonathan Borrego said the city has programs in place that allow businesses to defer their development impact fees once the construction of a building or structure is complete.

Like MedLeaf, Zenleaf was one of the first cultivators to obtain his licenses in the city, yet three years later he is still unable to fully operate that side of his business.

“If I was a brewery, I would be up and running, but I’m a cannabis company,” Boshart said. “Cannabis is federally prohibited, and there’s a lot that comes with that, and on a state and city level we’re treated, taxed and regulated differently than a normal business would be.”

Being treated differently because of the industry Boshart is in is something that Hannawi, who has a background in real estate, has also experienced.

“Most people would love me if they were to meet me on any other business landscape besides cannabis,” she said. “If I put cannabis in front of my name, it’s funny how fewer people will talk to me.”

Regardless of the stigma behind cannabis, at the end of the day both Hannawi and Boshart say they are just like any other business.

Boshart also finds the lack of continuity of cannabis regulations between cities as well as the state challenging.

Every city runs its cannabis programs differently. Oceanside city staff like Cervantes frequently studies how other cities run their programs and compares their methods to see if any changes could be made to improve the program’s efficiency here.

“That’s something we try to do with any of our programs,” said Jonathan Borrego, deputy city manager and development services director.

Borrego explained that any changes that fall within the code can be made by staff, but anything that would require changes to the code must go through City Council first, like the switch from medicinal-only to allowing adult-use cannabis.

Cannabis crops at ZenLeaf nursery in Oceanside. Photo by Samantha Nelson
Cannabis crops at ZenLeaf nursery in Oceanside. Photo by Samantha Nelson

MedLeaf owners hope to see another big change to city code come down the pipeline sooner rather than later: storefront dispensaries.

Right now, only delivery services are allowed from retail cannabis businesses in Oceanside, something that Hannawi believes is holding the city back.

“There is a lot of tax revenue being left on the table because we aren’t storefront,” Hannawi said.

Allowing storefronts could benefit not only its residents through tax revenue but its tourism industry as well, Hannawi explained.

“If you are going southbound (on Interstate 5), we are the first city that anybody enters in San Diego, and if you’re going northbound we’re the last,” she said. “The amount of consumers that would come into the city to spend their money to create those revenue dollars is vast.”

Storefronts are more appealing due to the volume of people they can see versus delivery only.

“One budtender could see six to eight people in an hour, while with delivery-only we can see about three to four,” Hannawi said.

Borrego said that in order for staff to explore the option of changing to storefronts, City Council would have to give them direction to do so first. Council would also have to approve the change to allow storefronts as well.

Deputy Mayor Ryan Keim said the council will inevitably have to discuss whether or not storefront dispensaries should be allowed in town. Though he isn’t completely opposed to the idea of storefront dispensaries, he has some major concerns — namely if storefronts will increase minors’ access to cannabis.

“With more availability, the more access you have,” he said. “We have to have a sound policy that addresses that.”

According to Keim, he understands that legal dispensaries aren’t likely to risk their business by letting underage buyers access their stores, but that doesn’t necessarily stop a friend or relative who is of age from going in and buying a product for an underage person like what occasionally happens with alcohol or tobacco products.

“We need to look at those challenges that are similar to the regulations for alcohol retailers and make sure these businesses are going to do their due diligence in taking every possible precaution to prevent underage access,” Keim said.

When it comes to cannabis regulation, Keim prefers the city to take a slower pace, watching how other cities regulate and learning from their mistakes. He also doesn’t think Oceanside needs to be in competition with neighboring Vista and other cities over cannabis and accruing tax revenue.

“Tax revenue should not drive those policy decisions,” Keim said. “I’m not in a race to make more money at the expense of negative health impacts.”