EDITOR’S NOTE: This is part of The Coast News’ three-week series on marijuana in North County.
VISTA — After two ballot measures, Vista residents finally legalized recreational cannabis.
In 2016, California voters approved a statewide measure, Proposition 64, but the Vista City Council did not vote to allow for marijuana-related businesses. Two years later, residents passed Measure Z, which opened the door for 11 medicinal cannabis dispensaries.
The early success of medicinal cannabis in Vista seemingly turned the tide amongst council members, who later approved recreational marijuana this past summer. Since then, the cities of Oceanside and Encinitas have followed suit, although Encinitas residents had to first pass Measure H to force its elected officials to act.
While Vista has positioned itself as the industry leader for cannabis, Oceanside is looking to break through, especially since the city’s cannabis business tax rate is 5%, compared to 7% in Vista, as established by Measure Z.
“They have to maintain a medicinal permit and they can also do adult use,” Vista City Clerk Kathy Valdez said of the transition to adult use. “The state has adult or adult and medicinal licenses. They have to maintain both.”
First to market
Vista was the first North County city to allow retail adult-use cannabis stores to operate as they transitioned from strictly medicinal to adult-use earlier this year. About two years ago, the city of Oceanside approved delivery-only, adult-use cannabis, with MedLeaf being the first to set up shop in the city. Oceanside is now moving forward with adult-use cannabis at a 3% tax rate.
The city of Encinitas also needed a resident-led ballot measure to force its council to incorporate marijuana businesses into the city. Currently, the city is in the process of working out the legal hurdles, but some, such as Laura Wilkinson Sinton, said the city is slow-walking the process.
The Escondido City Council recently voted down a proposal to allow cannabis, while Carlsbad and San Marcos voted to keep cannabis illegal years ago.
Every North County city voted in favor of Prop. 64, with Encinitas having the highest percentage at 65.2% and Escondido the lowest at 52.1%.
“Essentially, we are looking at an epic failure of local elected officials to deploy their voters’ wishes and enact sound, data-based public policy,” Sinton said. “They are missing the astounding revenue, and inadvertently driving crime — the opposite of what they are charged with protecting — their own law enforcement and public safety for their constituents.”
Measure Z had specific requirements and timelines, forcing the city to act faster than it may have liked. Valdez said once the businesses were identified, owners were responsible to open them when they could. The first dispensary opened in Oct. 2019, said Valdez, who heads the city’s Cannabis Management Program.
The final dispensaries opened this year for various reasons, but the city incorporated potential tax revenues into its two-year city budget estimates. Valdez said the city took its lumps with the implementation of Measure Z but has now grown to have a deeper understanding of the industry.
Councilman Joe Green was one of the biggest supporters of transitioning to adult-use cannabis, especially after revenue projections and the city’s ability to adapt to business owners’ concerns.
“We couldn’t modify or add any conditions,” Valdez said. “I think if it was something that came from the city, there would’ve been other requirements on it. It was really just getting familiar with the state’s process.”
Valdez said the city had to adjust its tax revenue for Fiscal Year 2020-21 due to an explosion of growth, increasing the projections from $1.3 million to $3 million. And in its next two-year budget cycle, the city is budgeting $4 million in revenue for FY 2021-22 and 22-23; although the city is expecting at least $5 million for each year.
The city also approved delivery, manufacturing, distribution and testing facilities, with the last three categories allowed two businesses each. Valdez said there have been several manufacturing and distribution applications, but none for testing facilities, although there have been inquiries.
“We heard from folks throughout the year as we were implementing the cannabis businesses,” she added. “There was particular interest in testing, so it’s interesting that we haven’t received any applications. I think it’s much more expensive than people think and I don’t know if it’s as profitable.”
In a revenue context, cannabis has been a boon for the city, even helping to pull it out of a deficit and creating a surplus during the COVID-19 pandemic, a time that saw other municipal budgets struggling.
Valdez said the city also hired HdL Consultants to assist with inspections and processing licenses. Jesse said he’s been inspected twice by HdL, but nothing yet from the state.
As for HdL, the company has come under fire from numerous cities and businesses and is the subject of several lawsuits citing unfair scoring practices on cannabis permit applicants and “pay to play” schemes, according to several media reports.
The City of Fairfield canceled its contract with HdL, demanded its money back and suspended giving out licenses, according to The Daily Republic.
Three cannabis businesses in Chula Vista each filed lawsuits over the past several years, citing the city and HdL didn’t follow the rules approved by the city, according to the San Diego Union-Tribune.
In Vista, no retailers have filed a formal complaint with the city regarding its process and contract with HdL.
Cost of business
Jon Jesse and Daniel Wise, owners of Vista’s Dr. GreenRx and The Cake House, respectively, said the application process was simple and easier than in other cities. However, Jesse said the 7% tax rate is a cause for concern as retailers struggle to break even.
However, the likelihood of changing the tax structure would be difficult, Jesse said, as it would take another ballot measure to overturn the rate set in Measure Z.
Because of low margins and the cost of product, labor, security, rent and insurance, to name a few, most retailers make very little profit, Wise and Jesse said. Wise said he is able to scale because he has multiple locations, thus is able to buy in bulk and can save money.
For a one-shop owner like Jesse, buying in bulk isn’t an option because cannabis is a perishable item with an expiration date. Jesse said he cannot afford to buy 10 pounds of one cannabis strain because his customers may not like it, so it will sit and take up space.
Since the industry is so competitive, and with restrictions on the number of retail stores allowed in a specific municipality and high taxes, it presents a challenge, Jesse said. He said it becomes a numbers game and volume is what keeps most businesses afloat.
As for the end of the rainbow, Jesse said the asset, or the business, is what has the value and where store owners will make money if or when they decide to sell.
“When we first opened … 30-50 people walked out because they weren’t going to get a note and you’re talking about $50 per head,” Jesse said. “The competition is huge, and the margins are very small. It’s all about volume.”
One victory for the industry, though, was earlier this year the Vista City Council opted to recalculate its fee schedule for business with and without delivery. Originally, the city approved fees of more than $20,000 per business on a recommendation from HdL Consultants.
However, the council reversed course and lowered the fees, which is an annual payment to operate.