Struggling California desert towns seek tax bonanza with pot farms

Two years ago, in this desolate Coachella Valley town surrounded by scraggly mesquite, voters heartily endorsed marijuana as a cure for their ailing economy.

For decades, Desert Hot Springs had relied on its steaming mineral waters to lure tourists to local motels for healing baths and spa treatments. But the town of 28,000 mostly suffered. A third of its residents lived in poverty, and the city filed for municipal bankruptcy in 2001. A housing bust seven years later deepened the fallout.

So in 2014, 68 percent of Desert Hot Springs voters approved California’s first local initiative to authorize industrial cultivation of marijuana. With freeway connections to hundreds of marijuana dispensaries in Los Angeles, San Diego and Orange County, the town set out to lure pot entrepreneurs to revive its industrial districts with new construction bursting with cannabis.

Now Desert Hot Springs is home to a pot real estate bonanza, with well-heeled outsiders snapping up land and buildings to develop massive, city-sanctioned grow facilities, capable of producing thousands of pounds of marijuana in multiple yields a year.

Near towering wind farms, a drab warehouse complex is being transformed into a marijuana production center called “Pineapple Park.” Down the street, Santa Ana dispensary operators are readying a cathedral-like cannabis greenhouse. On a remote desert parcel, investors just secured a permit to build a million square feet of buildings to lease out to pot growers.

“Cultivation is going to explode in California,” said Desert Hot Springs Mayor Scott Matas, a marketing consultant, former UPS driver and private post office owner who championed marijuana development in the town near Palm Springs. “We’re being proactive to what’s coming down the pipeline. I’m a conservative. But I saw an opportunity for jobs and revenues. Is it bold? Absolutely. But I think it’s promising.”

68 percentDesert Hot Springs voters who approved California’s first local initiative to authorize industrial cultivation of marijuana

Desert Hot Springs’ pot boom is accelerating after Gov. Jerry Brown in October signed first-ever California regulations that will allow local and state licenses for commercial growers of medical marijuana.

Brown’s signature, and a soon-to-be-established state Bureau of Medical Marijuana Regulation, ushered in a new era for regulating marijuana as a for-profit industry, replacing California’s nebulous rules that merely permitted medicinal users to collectively cultivate and share marijuana.

Wary of the new regulations, which are still to be fleshed out, hundreds of California cities and counties have rushed to ban marijuana businesses even as secretive, unlicensed commercial grow rooms operate across the state. Other jurisdictions, such as Sacramento, have moved guardedly to permit limited commercial cultivation.

Desert Hot Springs is seeking to become an exception, as it counts on a fiscal windfall from a $25-per-square-foot tax on the first 3,000 square feet of marijuana plants and a $10-per-square-foot tax on additional plant space for each new business. The city, which in 2014 had an unemployment rate of more than 10 percent, also has set goals for 20 percent of pot workers to be residents.

With a likely November ballot measure to legalize recreational use in the Golden State, the Riverside County town is one of at least four economically depressed Southern California cities now banking on a revival by licensing and taxing marijuana cultivation.

While state rules permit individual businesses to grow pot gardens of up to 22,000 square feet indoors, Desert Hot Springs last month approved plans that are expected to bring in up to 3 million square feet of production warehouses and greenhouses over the next five to 10 years.

Matas says five recently approved marijuana industrial developments – and a half dozen more in the pipeline – will lease out scores of “cultivation condos” for separate marijuana ventures. He predicts an eventual tax windfall of $20 million a year – $6 million more than Desert Hot Spring’s entire current city budget.

Recently, Matthew Feinstein, CEO of Pineapple Express Inc., a publicly traded marijuana marketing, consulting and business development firm, parked his glistening black Mercedes in Desert Hot Springs near beige metallic warehouses being vacated by a Pentecostal church.

Feinstein, whose company is headquartered on Avenue of the Stars in Los Angeles’ Century City, touted his $3 million “Pineapple Park” venture, a nearly 9-acre marijuana-business-and-production facility.

“It’s the first time it’s legal. It’s the green gold rush,” said Feinstein, 46, a UC Berkeley political science graduate who used to be CEO of a DVD distribution company. He said he “got out of a dying industry and went into a growing industry.”

Pineapple Express is marketing 10-year leases for indoor cultivation and greenhouse facilities at up to $500,000 down and monthly rents of $160,000 – with a three-month break for the first growing cycle. So far, it has lured a marijuana plant breeding company called Clonenetics Laboratories and a grower for Southern California dispensaries. Feinstein said he hopes to sign leases with 13 more cultivating clients.

Feinstein’s company will grow no marijuana itself. But products leaving its warehouses will be packaged under the label “Powered by Pineapple Express,” a branding that takes its name from the weather system as well as a pot strain actor Seth Rogen made famous in the 2008 stoner action film of the same name.

“Everybody is saying California is going for recreational use in November. We’re looking to be the first mover,” said Feinstein, whose company lists a market capitalization of $454 million, with its stock (PNPL) trading recently at around $8 a share. “And when it is federally legal, people like Philip Morris and ‘Big Pharma’ are going to enter this industry. And we’ll be right up there with them.”

Growing hope

Nearby, a firm called CalCann Holding Corp., is planning a $5 million development, including a climate-controlled glass greenhouse. Within a year, it is expected to begin using the desert sun and artificial-light augmentations to produce 8,000 pounds of marijuana buds annually.

The CalCann venture is headed by general counsel Aaron Herzberg, a Newport Beach lawyer, and CEO Chris Francy, a former Philadelphia executive for Internet businesses that sold computer accessories and auto parts. Herzberg and Francy hold licenses for three Santa Ana medical marijuana dispensaries, including the new Orange County Cannabis Club and a soon-to-open store – called Roseanne’s Joint – with actress Roseanne Barr.

At their Cannabis Club, amid brightly lit selections of marijuana buds, Herzberg and Francy spoke ebulliently about their desert cultivation dreams.

“Desert Hot Springs demonstrated that the community was behind the idea that cultivation of marijuana was part of the future of the city,” said Herzberg, a flashy, upbeat figure who used to handle divorce cases for well-to-do clients on the Orange County coast. Now he promises that CalCann will bring “industrial agricultural techniques to marijuana.”

“Why hasn’t this been done before?” Herzberg asked rhetorically. “It hasn’t been done because of prohibition – because you would be raided.”

It was just five years ago that a city-of-Oakland plan to license four 100,000-square-foot indoor industrial farms for marijuana inspired the U.S. Department of Justice to launch a sweeping crackdown on California pot businesses.

But after voters in Colorado and Washington made their states the first to legalize marijuana for recreational use in 2012, pot politics – and development prospects – changed dramatically.

In a 2013 memo, the Justice Department declared that it wouldn’t interfere in states that permitted medical or recreational marijuana if those states enacted “robust controls” and regulations to prevent infiltration by criminal gangs, interstate trafficking or providing pot to minors.

With Oakland just getting back to drafting local marijuana cultivation rules, Desert Hot Springs banks its revival on cannabis.

After the real estate economy crashed in 2008, hopes perished for new suburban housing tracts and shopping centers. Plummeting tax revenue forced the city to cut municipal salaries by 22 percent and slash its workforce from 120 employees to 50. Ten of 32 police officers were laid off or quit.

“Desert Hot Springs got left in the dust for many years,” said Maria Lease, who runs The Spring Resort & Spa. On a hilly expanse overlooking the town, tourists in terry cloth robes lounge at a pool, mineral spas and massage rooms set amid cactus gardens.

Desert Hot Springs spa resorts bring in $1.4 million in tourism taxes – not enough to sustain the city. So Lease looks hopefully at the warehouses and some ready-to-build lots rimming the distant desert, far from downtown and neighborhoods. They will be the first to blossom with marijuana. Other approved pot industrial sites, lacking water and power connections, will take years to develop.

“We have a lot of open land. It’s an ideal location,” Lease said. “Our City Council was smart enough to pursue this early. I’m glad they did.”

Elsewhere in Riverside County, Cathedral City is advancing plans to permit commercial marijuana production in business parks north of Interstate 10. Coachella passed an ordinance authorizing pot growing in an area zoned for auto wreckage.

And 95 miles from Desert Hot Springs, Adelanto, a high desert town in San Bernardino County with four prisons and abundant Joshua trees, just issued 27 permits for marijuana production. It is positioning itself as an eager rival.

Two years ago, Adelanto faced a fiscal emergency after voters in the town of 33,000 residents (including more than 3,000 inmates) rejected a utility tax to rescue city coffers. Now officials expect 1 million square feet of warehouse space to fill up with marijuana, with pot business adventurers promising that bountiful gardens will make the town’s money woes disappear.

Pot pitch

Few marijuana speculators rode into Adelanto with more verve than F. Freddy Sayegh.

A Pasadena lawyer with ties to the entertainment industry, Sayegh is a legal consultant for marijuana dispensaries. He produces medical marijuana trade shows and helped brand a hash-oil-infused cannabis strain – called “Caviar Gold” – as a premium line for dispensary shelves.

In Adelanto, a hardscrabble patch near Victorville, Sayegh found a wanting city with empty warehouses. He spent months pitching city officials on licensing commercial cultivation. He presented documentaries by CNN’s Dr. Sanjay Gupta that discussed marijuana as medicine with stories of seizure-plagued children benefiting from non-psychoactive cannabis tinctures.

Sayegh found a political partner in City Council member John “Bug” Woodard Jr., a shaggy-haired real estate broker, local music festival promoter and proud “red-neck hippie.”

In 2014, Adelanto had a soaring budget deficit despite revenue from its public and private jails. Woodard ran for office promising to rescue the town by attracting marijuana cultivation.

“We had a city that was going broke and was doomed to shut the doors of City Hall,” Woodard said, adding: “Everybody shuddered when I mentioned the ‘m’ word – and I got elected anyway.”

In November, the city approved a 30-day application period for businesses seeking cultivation licenses in an ordinance that called for 50 percent of pot jobs to go to local residents. Adelanto is aiming a still-to-be-drafted taxation plan – with fees similar to Desert Hot Springs – for the November ballot.

Until then, the city is charging $7,000 permit fees and negotiating interim “fiscal mitigation impact fees” to increase funding for police, fire and other city services, said senior planner Mark de Manincor.

Recently, Woodard joined Sayegh as the lawyer, in a blue suit and intensely managing the presentation, led two dozen people through a warehouse complex that was abandoned by a yacht manufacturer in 2010.

Sayegh’s venture, Adelanto Research Technologies, plans to use 56,000 square feet of the six-building facility for a marijuana grow room, an edibles kitchen and a packaging center, which will seal pot products in dispensary-ready blister packs. He said the site would be producing marijuana yields by the end of the year.

“Nothing leaves here in turkey bag,” said Sayegh, alluding to the scenario of medical marijuana growers toting satchels of weed to sell to marijuana stores. “It’s all got to be branded, protected, packaged and have fine quality medication.”

On the tour was Victor Lewis, a Caribbean music promoter who manages Ky-Mani Marley, son of the late ganja-savoring reggae artist Bob Marley. Lewis said he was scouting the warehouse for cultivating a Ky-Mani Marley marijuana brand – “Maestro by Ky-Mani Marley” – that “I think his father would approve of.”

Woodard took it all in with immense satisfaction.

“This is going to be the biggest thing in the world – right here,” he said. “We’re going to blow everybody’s mind.”

Industry takes root

Adelanto’s aggressive pot business push scared away Herzberg and Francy of CalCann Holding Corp., which was looking to build marijuana greenhouses in both Adelanto and Desert Hot Springs.

They believed Desert Hot Springs had put in place a well-crafted development plan. But they saw Adelanto as zooming forward with no taxation program and lacking details on local regulations.

“The city was moving too quickly for its own good,” Francy said. “When a city is at risk, we are at risk.”

CalCann Holdings hardly lost out in Adelanto. The company had invested $350,000 to buy 5 acres to construct a pot production facility there. It recently sold the property for $1.8 million, reaping a sizable profit as other investors jumped into a frenetic real estate market.

The desert frenzy is stunning to Hezekiah Allen, a former marijuana farmer from Humboldt County who is executive director of a lobbying group, the California Growers Association.

Allen said revenue aspirations of struggling towns hoping to exploit cheap land values to industrialize marijuana face significant competition. California’s multi-billion-dollar pot industry is already ripe with established urban and rural medicinal growers as well as illicit cultivators who want to convert to the state-regulated market.

“California is not under-producing cannabis,” Allen said. “We have an oversupply. And speculators coming in are not responding to market conditions.”

Assemblyman Rob Bonta, D-Oakland, a sponsor of California’s new medical marijuana regulations, said pot production permits in Desert Hot Springs and Adelanto can expect approval under the future state Bureau of Medical Marijuana Regulation “as long as they are consistent with state guidelines.”

“If Desert Hot Springs allows for these so-called ‘cultivation condos’ and they’re not barred by state law, that’s something this industry should feel comfortable looking into,” Bonta said.

Bonta said California is in “a dynamic era of massive change” for marijuana. Matas, the Desert Hot Springs mayor, hopes it leads to rebirth. He said pot tax revenue can help the city redevelop its downtown, repair crumbling roads and build tourism infrastructure.

Several years ago, Desert Hot Springs ran off its only dispensary. Now it has five permitted marijuana stores. Town officials also recently met with Kyle Turley, a former NFL offensive lineman and medical marijuana advocate. Turley is considering opening a therapeutic spa resort for ex-athletes who use cannabis instead of opioid painkillers to treat long-term injuries.

Already coming to town is Dan Osborne, 54, a former computer engineering consultant who went into the marijuana cultivation business after his fiancé was stricken with cancer years ago. Osborne founded a cannabis plant-breeding company, Clonenetics Laboratories, which he says has created “the largest living genetics library” of marijuana strains.

Osborne employs six people in a discreet, unregulated cultivation facility far outside city limits. He breeds and nourishes cannabis plants under 24-hour indoor lighting that prevents plants from blooming with the psychoactive buds that make them valuable. Fearful of police raids for pot, he wholesales plants at low cost to medical growers who bring them to flower and harvest the marijuana for sale.

Now Clonenetics is a licensed medical marijuana cultivator with the city of Desert Hot Springs, and expects to open at the Pineapple Park complex within two months. The company intends to hire 20 new employees, paying wages of $15 and up, while expanding its genetics line to produce cannabis products for dispensaries.

Osborne expects his workers to be a visible presence in Desert Hot Springs – recognized in their white Clonenetics logo lab coats or blue polos bearing the brand “Powered by Pineapple Express.”

“Oh, it’s a wonderful feeling,’ he said. “It will be nice to wear those around town and be proud of what we do.”

Source: The Sacramento Bee



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