Report: New cannabis businesses in Santa Rosa driving industrial development

Nine cannabis businesses, including cultivators, manufacturers and distributors have opened up in Santa Rosa over the past three years, joining three longstanding dispensaries and contributing to about $930,000 in tax revenues from the city’s marijuana industry, according to a new city report.

Another 104 cannabis businesses are trying to gain a foothold in Santa Rosa and have submitted proposals to the city that are in various stages of consideration, including 30 possible new stores.

The figures, generated for a subcommittee of the City Council overseeing cannabis policies, show Santa Rosa is on track to become a hub of cannabis commerce despite a slow start, most clearly seen in disappointing tax revenues that came in far lower than projections.

“Originally people thought, ‘It’s taking over everything,’ but that’s not what we see,” said Raissa de la Rosa, the city’s economic development manager. “It’s normalizing into place as a sector within the diverse economy that we have.”

Santa Rosa has just over 8 million square feet of retail space, and even if all 30 applications for new marijuana stores pass muster, the total space would cover less than 1 percent of retail space in the city, according to the report. The vacancy rate for retail space is about 3 percent.

Retail stores and events like the annual Emerald Cup at the Sonoma County Fairgrounds are some of the greatest generators of marijuana tax revenue for Santa Rosa, responsible for nearly $415,000 in taxes the has city brought in since July 2017, according to the city.

The biggest challenge for Santa Rosa has been development of its plan for new marijuana retail stores beyond the three existing dispensaries: SPARC on Dutton Avenue, Sonoma Patient Group on Cleveland Avenue and ?Alternatives on Hampton Way.

City Council members with the cannabis policy group acknowledged the balance they’ve tried to strike between Santa Rosa’s stated mission to treat cannabis like any other businesses and its commitment to addressing people’s concerns about what it could mean to have pot stores pop up all across town.

Over the past three months, the city has approved a dozen applications for cannabis stores, a wave of activity that’s signaled the strong interest by proprietors in establishing brick-and-mortar retail sites for their product in Santa Rosa. Some of the projects have drawn opposition.

The latest dispute came just two weeks ago over the Fox Den cannabis retail outlet slated to go between a bar/cafe and a preschool near Howarth Park. After more than an hour of dueling public comment from audience members in support and opposition, the Planning Commission approved the store on a ?5-0 vote.

During Thursday’s discussion, councilmen John Sawyer, Ernesto Olivares and Chris Rogers asked staff to pull together a variety of data about the city’s three dispensaries - including crimes, complaints as well as customer demographics - to help provide the public with real information about how stores impact neighborhoods.

“What’s more likely, if you’re worried about your kids accessing cannabis, is they’re going to get it from the neighbor’s yard and not a dispensary,” said Councilman Chris Rogers, noting city data shows most cannabis complaints are generated in residential areas. “Other cities are looking at what we’re doing. The more data we have the better.”

Last year, the city accepted applications for new stores during a limited two-week time period. Thursday, subcommittee members agreed to propose the council soon allow interested retailers to apply at any time.

“I think in time, through natural processes, we can let the market dictate how close these businesses are together,” Sawyer said.

The emerging legal industry does not seem to be generating additional crime within the city, according to Santa Rosa Police Capt. Ray Navarro. He told the council subcommittee during a Thursday morning meeting that officers dealt with “nothing remarkable” from existing businesses or aspiring ones in the city.

Most complaints are handled by code enforcement officers charged with investigating building health, fire and other safety issues. Over the last two years, code officers investigated 36 complaints in residential areas and 30 complaints in commercial areas. The city report provided no information about the nature of the complaints.

Indoor cultivation and manufacturing have been the first sectors of the industry to take hold in the city since legalization dawned in 2018. NorCal Cannabis, which currently has about 100,000 square feet of cultivation canopy in leased buildings off Corporate Center Parkway, just announced it raised ?$27.4 million in private equity funding to increase its local footprint and production.

The activity has added pressure to an already competitive market for the city’s 10.3 million square feet of industrial space and a regional shortage of places for manufacturing businesses.

The cost of industrial space in Santa Rosa has more than doubled over the last four years amid a rush for cannabis entrepreneurs to secure local buildings following marijuana’s legalization in California. Vacancy rates have dropped from nearly ?10 percent in 2014 to just about 5 percent last year, according to city figures.

Cannabis businesses occupy about 5.4 percent of industrial space and could include another 2.66 percent if proposals now in the pipeline are approved.

The city has begun to see interest in building new industrial facilities on vacant lots, according to de la Rosa. Projects are underway on two properties in southwest Santa Rosa.

Santa Rosa staff initially estimated the city would bring in as much as ?$2.5 million in taxes each year from cannabis businesses. The first fiscal year fell short with $468,604, but the city is on pace to potentially double that amount when the tax year closes in June.

Santa Rosa’s tax rates for cannabis businesses are widely considered among the most business friendly in the state. Cultivators pay either 2 percent of gross receipts or $5 per square foot. Manufacturers and retail dispensaries pay 1 percent and 3 percent of gross receipts, respectively. In San Diego, for example, the city has charged an initial 5 percent of gross receipts for marijuana businesses, and the rate will rise in July to 8 percent.

“The city of Santa Rosa has done something that’s better than anywhere else in California,” said Stephen Skinner, a real estate advisor with Santa Rosa brokerage Keegan & Coppin/Oncor International. “That’s how you attract high-quality operators. That’s how you play the long game.”

Competition for space driven by cannabis operators is causing rents to rise in industrial and commercial properties, which could be the needed catalyst for developers to build more industrial facilities in the city, Skinner said. A cannabis business pays about double the average rate of $1 per square foot for a traditional business, and some operators are paying upwards of $4 per square foot, Skinner said.

“What we need are business parks with small industrial incubator units; multi-tenant buildings,” Skinner said.

You can reach Staff Writer Julie Johnson at 707-521-5220 or julie.johnson@pressdemocrat.com. On Twitter @jjpressdem.