Santa Rosa invites marijuana businesses to step out of the shadows

Larry Schaeffer has grown marijuana in Sonoma County for more than a decade.

His Cherry Kola Farms outside Penngrove supplies award-winning strains of pungent pot to one of Sonoma County's largest medical cannabis collectives, as well as discerning dispensaries around the state.

But after years of operating in a quasi-legal status as a nonprofit collective, Schaeffer is ready to go legit. He wants to be an above-board business, in an approved location with proper permits, and pay taxes like any other legitimate enterprise.

And he plans to do it in Santa Rosa.

'Santa Rosa wants this industry here,' Schaeffer said. 'I think this is probably going to be the New Age Amsterdam.'

Perhaps more than any other city in Sonoma County, Santa Rosa has signaled its willingness to welcome the cannabis industry in from the shadows.

Back in 2005, it was the first city in the county to permit medical marijuana dispensaries. Two years ago, it lifted a cap that had limited such operations to 500 patients.

Then this year, prompted by new state licensing rules, it opened its doors further. In February it authorized, with proper permits, commercial cannabis cultivation in industrial areas and support services — like testing, manufacturing and distribution operations — in industrial and office zones.

Now, with voters poised to decide in November whether California will become the fifth state in the nation to legalize recreational use of marijuana, the city is accelerating its efforts to write the rulebook medical marijuana businesses will have to live by. The rules could serve as a template for restrictions on future enterprises producing and selling recreational marijuana.

City officials say they see significant economic development opportunities and public safety benefits to bringing an existing unregulated medical cannabis industry into compliance with reasonable local rules.

'We're the fifth-largest city in the Bay Area, located between a major market and port and the supply,' said Councilwoman Julie Combs. 'I think that puts us in an excellent position to get the most public benefit possible from an industry that is here now.'

Fertile ground for industry

To many, Santa Rosa, with its permissive political climate, large educated workforce, central location and diverse stock of commercial real estate, is fertile ground for an industry ripe for rapid growth.

'There's a wave coming, and they are going to catch it,' Schaeffer predicted.

Others in the North Coast pot industry, however, remain wary. They're worried about complying with new regulations and spooked by a recent high-profile raid of a large Santa Rosa-based cannabis extraction operation. They say that for all its political posturing, the city is sending mixed messages about whether it truly wants the industry to set up shop here.

The June 15 multi-agency raid of Santa Rosa-based CBD Guild, a sophisticated manufacturer and distributor of cannabis-infused sprays and oils, sent shock waves through the industry at the precise time the city was urging the industry to submit to regulation.

'I can't bring these members forward if they are afraid of a raid every single time something might go wrong,' Tawnie Logan, executive director of the Sonoma County Growers Alliance, told the City Council following the raid. Her organization represents more than 400 members connected to the county's cannabis industry, including operators, supply companies and attorneys.

Logan pleaded with the council to work with her organization to establish a 'safe harbor' program that would protect existing marijuana operators from law enforcement action once they approach city planning officials to comply with the long list of zoning, building, fire and other regulations.

That makes a lot of sense to Combs, who sharply critiqued the city's Police Department in the wake of the raid. In an analogy drawn from the aftermath of World War II, she likened them to 'Japanese soldiers who are still on an island and fighting a battle that may have ended.'

She openly questioned why such a 'massive show of force' involving more than 100 officers from multiple agencies was needed for what she considered a mere hazardous material complaint at an existing business.

While she acknowledges that she may not have all the facts about what is an ongoing criminal investigation, Combs said she believes it has sent the wrong message to the industry at a delicate time in its transition.

'I'm concerned about the damage this action has done to our city's reputation with an emerging cannabis industry,' she said.

City Manager Sean McGlynn said the city and the industry are engaged in a 'mutual learning experience' about how to best go about something few other cities in the state have been bold enough to attempt.

Being in the forefront has many advantages, from the perspective of economic development, job creation and public safety, he said. But it also presents significant challenges the council will have to wrestle with, particularly in the coming months as the city drafts detailed regulations for the medical marijuana industry.

'There are going to be more bumps in the road, I predict, as we go forward,' McGlynn said.

'This can't be legal'

Visitors to Schaeffer's farm pass through a metal gate and past a long row of redwood trees to arrive at a single-family home outside Penngrove with a series of greenhouses behind it.

A friendly old pit bull mix named Chevy ambles over and offers his back to be scratched.

Schaeffer, a 59-year-old Stockton native, moved to Sonoma County about 30 years ago. After his two sons started growing marijuana about 15 years ago, he joined them in the venture.

Since then they've built Sonoma County Collective into a 1,400-member-strong nonprofit that supplies its patients with a wide variety of marijuana, concentrates and edibles, and also sells excess to dispensaries around the state.

Before entering the farm's greenhouses, visitors pass a large sign that reads 'Medical Use Only, 215. This garden in compliance with H&S Code 11362.5.' Those are references to the Compassionate Use Act, the 1996 ballot measure legalizing marijuana in California for medical use, and the health and safety codes that set out its provisions.

Beside the sign is a long row of plywood boards upon which are mounted dozens of doctor's recommendation forms for the collective's patients. It's not a comprehensive list, but it's large enough to be seen from the air, which is the point.

Schaeffer said law enforcement flies over the area regularly, and he wants them to know he's not hiding anything. Still, some officers who have visited the farm are in disbelief despite the clear documentation.

'They say 'This can't be legal. There's no way this can be legal,' ' Schaeffer said.

It is, he says. But he is also well aware the federal government does not agree.

The federal Drug Enforcement Agency's decision last week denying a request to downgrade marijuana's status as a Schedule I drug alongside heroin means California's medical cannabis industry will likely remain in legal limbo for the foreseeable future. It's also why Schaeffer welcomes the state's efforts to craft a new comprehensive regulation and licensing scheme for the medical marijuana industry, which is scheduled to go into effect in 2018, as well as Santa Rosa's willingness to set up local regulations instead of banning the industry.

Schaeffer said he watched the Planning Commission and City Council votes closely and couldn't believe what he was witnessing, especially given how little interest other cities in Sonoma County have shown in regulating the industry.

'It was heartwarming and amazing when they all voted it in,' he said.

And now he's planning to capitalize on the city's new openness.

He plans to keep the cultivation operation where it is, preferring the mixed light of his greenhouses to the more energy-intensive practice of indoor grows. But Schaeffer plans to shift other aspects of the operation to the city. He has leased a property in an industrial area of southwest Santa Rosa where he hopes to consolidate several functions, including nonvolatile manufacturing of concentrated cannabis products like oils and waxes.

Raid called 'overzealous'

Right now, Schaeffer pays a third party to turn his cannabis into concentrates, but he and his sons would like to do that themselves. It's the same kind of work CBD Guild was doing when it got raided in June. City police, sheriff's deputies and federal drug agents participated in the shutdown of the Circadian Way business and search of related properties.

The CBD Guild produces popular brands of products including Care By Design cannabinoid gel caps and Absolute Xtracts' cannabis oil vape pen cartridges. Prior to the raid, the nonprofit collective's brands were widely distributed in the state.

Police seized hundreds of thousands of dollars in cash, confiscated the company's sophisticated carbon dioxide extraction machines and estimated the business was bringing in millions of dollars per month.

CBD's founding member Dennis F. Hunter was arrested and briefly held in Sonoma County Jail on a $5 million bond before being released without charges.

CBD spokesman Nick Caston has said the company did everything it could to operate 'in full compliance with city, county and state laws.' He derided the raid as 'overzealous enforcement against compliant and accountable medical cannabis providers.'

Santa Rosa Police Capt. Ray Navarro said he couldn't comment on the CBD raid because it is an ongoing investigation.

But he denied Combs' suggestion the police department was out of touch with the council's goals. He noted the department has provided feedback to the council's cannabis police subcommittee and works directly with cannabis entrepreneurs going through the city's permit process.

'We're not doing things in a silo,' Navarro said. 'We're working with the rest of the departments to be consistent with city goals.'

David Guhin, the city's director of Planning and Economic Development, said CBD representatives were explicitly told in January when they sought and received a zoning clearance for their office park location that cannabis extraction was not permitted, and that fire and building department inspections were required. At the time of the raid, neither had been obtained, he said.

Even so, Combs said the police reaction struck her as overkill for an organization that had at least begun the process of getting compliant with city rules not yet formalized.

While the 'timing may have been off,' the organization was clearly headed in the right direction, and instead of being raided and having its money and equipment seized, should have been encouraged to comply with city rules, she said.

'If the message we're trying to send is 'come and be good citizens and get inspections,' then we should've handled it like that,' Combs said.

She notes that the city goes to great lengths to attract new businesses to the area, so it should go to equal or greater lengths to bring businesses that are already here into compliance.

That is exactly what the city is doing, said Councilman Ernesto Olivares, a retired police lieutenant who sits on the council's pot subcommittee.

Olivares said it has been an 'interesting journey' to go from being a cop who arrested people for 'very, very small amounts of marijuana' and 'spindly little plants' to being a councilman crafting rules allowing its legal use — and potentially preparing for the legalization of recreational use on the horizon.

While he's 'very comfortable' with the steps the city has taken to date to forge a collaborative relationship with the industry, Olivares still has concerns. He worries about impaired driving, given the lack of clear enforcement standards, and about how the legalization for recreational use might change the medical cannabis community.

Difficult issues addressed

These and a range of other difficult issues are slated to be addressed by the subcommittee in coming weeks. They include:

­­Dispensaries: Currently, only two dispensaries have been permitted to operate in the city, Peace in Medicine on North Dutton Avenue and Sonoma Patient Group on Cleveland Avenue. Current rules passed in 2005 say they must be located in commercial or industrial areas away from residences and at least 500 feet from youth-oriented facilities, including schools and parks. They also cannot be located in the downtown, which has been a flashpoint in other communities that have legalized recreational marijuana over concerns about how they might change the character of their downtowns. There are also prohibitions on employees having felony convictions and restrictions on operating hours and signs.

The city will need to decide whether it wants to expand the number of dispensaries, change the areas where they're allowed to operate, or their concentration.

Cultivation: Commercial cultivation is allowed in industrial areas with a conditional use permit from the Planning Commission. The city needs to decide how it wants to broaden or limit those zones, and whether it wants to place a limit on the number allowed in certain areas. Odor control, environmental concerns such as chemical storage and waste disposal, and how plants are tracked and traced will all need to be addressed.

Security: Since cannabis businesses are preventing from using federally insured banks, the industry is largely cash based. This creates significant security risks. The city has required testing laboratories, manufacturers and distributors to have security plans that include alarm systems and security cameras that retain video for 90 days. The plans need to be reviewed by the Police Department, but cannot be made public.

Edibles: Food products infused with cannabis oils are increasing in popularity but are largely unregulated. Edibles are addressed in the state Medical Marijuana Regulation and Safety Act of 2015, but since licensing doesn't go into effect until 2018 at the earliest, the city will need to consider a range of issues, including testing, packaging and dosages.

Taxation: Dispensaries charge sales taxes. In Santa Rosa, that's 8.75 percent, with 2.5 percent of that coming back to support countywide and city operations. Santa Rosa businesses also pay up to $3,000 in business taxes annually. Despite claims by the industry that governments are going to benefit economically from taxation, Santa Rosa CFO Debbi Lauchner doesn't expect it. 'I don't see a windfall without a separate tax,' Lauchner said.

Cloverdale in November will be the first city in the county to vote on whether to join the 18 cities with cannabis taxes on the books. The city is asking voters to pass a tax of up to 10 percent on gross sales of cannabis businesses. Santa Rosa has no such immediate plans.

The city's cannabis policy committee hopes to address these and other issues — including limits on personal cultivation, allowable types of manufacturing and a safe harbor program — for a comprehensive policy it hopes to pass by the end of the year. Outside observers say they're impressed with the thought the city has put into the regulations it's passed to date, and say it bodes well for the future.

'This is a darn good first bite at the apple,' said Sean Donahoe, an Oakland marijuana policy advocate who has watched the city's efforts.

When the council subcommittee first came forward with recommendations earlier this year, Councilman Chris Coursey said he was initially hesitant.

'Going down this road does give anyone pause,' he said.

And that's coming from someone who owns a timeshare in Breckenridge, Colorado, and in early 2014 stood in long lines outside the Breckenridge Cannabis Club on the quaint ski town's Main Street after recreational cannabis sales became legal.

He did so, much like a tourist who doesn't drink wine still might come to Sonoma County to visit a winery, for the experience, he said. 
'I was curious. I wanted to see how it worked,' Coursey said, declining to detail his transaction further. 'It was a historic moment. At 60 years old I had never been in a legal pot retail shop.'

He noted that while he and other council members may have had visions of a 'green rush' of businesses coming out of the woodwork to locate in Santa Rosa, it hasn't happened.

'The rush is not rushing very fast,' he said. 'It gives me comfort that we're not creating the Wild West here.'

To date, just three organizations have stepped forward to apply for permits to grow marijuana. That surprised one of the applicants. 'I thought it was a joke,' said Jesse Narvaez, who had visions of waiting in line at City Hall for the right to apply.

The co-owner of a hydroponics supply store with locations in Santa Rosa and Sebastopol, Narvaez is proposing to grow marijuana in an out-of-the-way industrial space on Coors Court in the southwest part of the city.

Narvaez said he became convinced of marijuana's pain-management properties after injuring his back 25 years ago.

While he's technically applying as a collective, Narvaez said he plans to get licensed to sell cannabis for profit.

He hopes to begin operating sometime in 2017, and has no interest in doing so one second before he's 100 percent legally compliant.

'I don't want to be in any gray zone. I want to be in solid black and white,' he said.

You can reach Staff Writer Kevin McCallum at 707-521-5207 or kevin.mccallum@pressdemocrat.com. On Twitter @srcitybeat.