A year ago, Washington introduced a new industry that was previously illegal. Not everything went as planned.
When one wins the lottery, a few things typically take place. First, there’s the sense of disbelief and jubilance. Next, folks emerge from the recesses to ask for a piece. Finally, many lottery winners end up with the same result: broke, or at least back in the financial position they started in before they won the lottery. Countless stories detail lottery winnings evaporating after a couple years of reckless spending.
Shauna Mindt and Jenny Carbon know the jubilance of a win. “We were sitting in our backyard when I got the letter from the state,” Carbon recalled. “I didn’t say anything; I just handed it to Shauna. It was shock and awe.”
About the letter: Most lottery winners aren’t notified via snail mail from the state Liquor Control Board, but Carbon and Mindt didn’t win a regular cash lottery. Their prize was a license to open a recreational marijuana shop in Redmond. After the win, the gears started turning, and the duo planned on opening their shop, The Grass is Always Greener, on Leary Way last Fourth of July.
They might not have received cash, but Mindt and Carbon still experienced the other trappings of winning a lottery. Strangers wanted their license; offers ranged from $300,000 to $1.5 million. And, 14 months after, ahem, striking it rich, the two would-be entrepreneurs’ luck hasn’t yielded a penny.
Carbon and Mindt, who still hold their license, were plagued not by an inability to manage a windfall; rather, they were slowed by bad luck and weird regulations. Here’s what happened: The state gave Carbon and Mindt the green light, but the City of Redmond issued a moratorium on pot-related businesses through Sept. 2.
Worse news followed. Initiative 502, the 2012 law that legalized recreational pot in Washington, established 1,000-foot buffers around schools, parks, recreation centers, and other gathering places children might frequent. So most pot stores in Washington are located in industrial areas or spots where alcohol-serving establishments are already located. Always Greener’s Leary Way location was near Redmond’s downtown bars, but there was another problem. The location was too close to Leary Park — an unassuming collection of shrubbery, bushes, and a modest clock tower. Elsewere in the city, there are a lot of parks. And recreation centers. And schools. Furthermore, the city doesn’t allow dedicated retail stores in its industrial areas — it wants retail centered downtown — and it wasn’t going to let a pot store pop up in a residential area. So, throw out industrial areas and draw buffer bubbles around all the gathering spaces, and, voila, there is nowhere in the city for a recreational store.
I-502 legalized pot, but the marketplace really took off last year. That’s when Cannabis City in SoDo became the first recreational store to open, on July 8. From that day forward Washington consumers have been able to, in an act that would make any libertarian grin, legally purchase and consume a federally illegal substance.
Preceded only by Colorado, Washington embarked on a historic venture. Not since alcohol prohibition was lifted in 1933 has a U.S. market emerged for a commodity previously sold only on the black market. And, as one could expect for a new industry, the first year has been wonky.
In the early months, Allie Charneski and Chris McAboy found themselves in a situation similar to that of the Always Greener owners. The duo’s application was among the top four in Bellevue pulled in the lottery, meaning they’d get first crack at opening one of the city’s three allotted stores. Two weeks later, the duo heard from the state again: They were disqualified for being too close to a recreation center. “(The LCB) said,” McAboy recalled, “‘You never should have made it into the lottery in the first place. … There’s nothing you can do; there’s nothing we can do. You’re done.’”
The recreation center in question was a Girl Scouts administrative office and retail store, not a place where Scouts met. In response, Charneski and McAboy mounted their offensive. “It was three weeks of letter writing, phone calls, and face-to-face meetings. We eventually escalated it to sending letters to the chairpeople of the liquor board, the governor’s office, media outlets, just trying to get people to understand.” McAboy and Charneski were preparing to file suit against the LCB.
Finally, Charneski and McAboy received a call from the LCB giving them the go-ahead. On Nov. 2, four months after initially planned, Novel Tree opened.
Challenges for pot-store owners didn’t evaporate once they opened shop, though. They were still selling a federally illegal drug, and in order for the marketplace to exist, some very strict regulations were put into place. The ubiquitous entrance queues were set up to identify customers. Product couldn’t be visible from the street. Any business function that required an out-of-state entity — such as banking — was hindered by involvement with an illegal commodity.
“It wasn’t until August of 2013 that we learned from the (federal) Department of Justice that … they were going to let us build our system,” said Rick Garza, executive director of the LCB, now called the Liquor and Cannabis Board. The feds’ backing off didn’t come without conditions. Regulators had to keep marijuana within state borders, keep it away from those younger than 21, and keep the illegal operations from getting licensed. “So we built pretty strict requirements within a law that was already restrictive,” Garza said.
The result is a tightly regulated industry, far more so than the alcohol market. Every plant is monitored from seed to sale via the proprietary BioTrackTHC system. If product goes unsold and spoils, it can’t just be thrown in the trash; the producer has to dispose of it in a fashion that, to meet regulatory mettle, requires “grinding and incorporating the marijuana plant waste with other ground materials so the resulting mixture is at least fifty percent nonmarijuana waste by volume.”
Think that’s cumbersome? Go to a store, sniff a sample of bud, and then consider the process behind the aroma:
“In order to have a sniff jar on my counter, I have to have a producer-processor log it into the (traceability) system with a manifest (record of transport), deliver it, and attach it to a product in our system,” said Tera Martin, general manager of Green Theory in Bellevue. “When it goes bad in three days, I have to pull it off the floor, re-manifest it back to the producer-processor, have the producer-processor come pick it up (the only folks who can transport marijuana are those who process it), and then the producer-processor is supposed to demolish the product.
“So if you have 30 strains and want 30 sniff jars, that’s a full-time position,” Martin said. “I could hire somebody just to handle sniff jars.”
Washington was bound to suffer through a weird rollout like this. “That’s what happens when you’re one of the first two states to try this,” Garza said. “But remember, Colorado had an easy skate when they did this. All they did was allow people with a medical license to obtain a recreational license, and they were vertically integrated.” Contrast that with Washington’s law, which doesn’t allow vertical integration and had no regulated medical industry to build from. Furthermore, the law wasn’t written to be a failsafe plan for efficacy — it was written just to get the legal-weed ball rolling.
“The No. 1 goal of Initiative 502 was to end the criminalization of people who use marijuana, and to, at the same time, regulate the supply side of the equation,” said Alison Holcomb, the American Civil Liberties Union lawyer who was the initiative’s primary author. “We’d seen states pass decriminalization laws … but we knew that if you’re really interested in tackling the black market, you need to address the supply side of things.”
So what consumers and businesses have had to deal with in Year One is a rough draft, the first crack at making marijuana legal. One step that will hone the market is getting better businesses with more skilled owners. “Any time you try to bring a black market out into the open, you’re going to have a bunch of people that have spent their lives existing in the black market,” said Micah Sherman, a former New York City construction manager who moved to Olympia to open the Raven Grass grow operation. “They’re not going to have experience with dealing with a city official or getting a building permit.”
Business hasn’t been as rosy as expected, either, especially for the glut of producer-processors who are fighting to get their product in stores. As of publishing, there were 562 producers and processers to just 155 retailers open in the state.
“Your returns may not be what you thought they were, and you probably took out loans or used up all your savings,” said Dax Colwell, president of New Leaf Enterprises, one of the largest marijuana producer-processors in the Puget Sound area. “It’s beat up some people pretty bad. They were told this was going to be a new, thriving industry, and it wasn’t set up for people to succeed very easy. There are a lot of hurdles.”
One hurdle is the taxation. An easy way to get politicians and nonusers to favor marijuana legalization is to put dollar signs behind it, and Holcomb took care of that. I-502 directed pot-sales tax to health care, drug-use prevention, and marijuana education, as well as the state’s general fund. To ensure there was enough money to get folks excited, cannabis sales are taxed 25 percent at each level of sale, meaning the price consumers pay reflects three rounds of taxes.
The state’s making more money than expected off the taxes — Garza says the state forecasts its first-year pot-tax haul to be $48 million, 33 percent higher than initially expected — but those taxes are leaving plenty of businesses scraping by. Those taxes eat into margins, and the low margins really hurt when producer-processors have plenty, sometimes hundreds of pounds, of product sitting unsold in their warehouses.
A shortage of pot kept many retailers away from opening in July, but the market has now turned and has a glut of cannabis. In late April, a few hundred pounds of product were sitting in New Leaf’s warehouse. An easy solution, of course, would be for more shops to open. But shops have been slow to roll out. Plenty of moratoriums are still in place, and some owners who secured prime lottery spots are biding their time, while other, more prepared business owners wait in line because of statewide and city caps on the number of retailers allowed.
Holcomb, who helped the state with implementation after her initiative passed, said the lottery had unintended consequences, but it was the state’s only option to distribute 334 licenses among the 1,174 applications it had received by April of last year, when the lottery was held. But, Garza noted, the lottery’s effectiveness has been muted by moratoriums and city zoning rules such as those Mindt and Carbon are dealing with in Redmond.
“Bans and moratoriums create issues with the marketplace being fully functional,” Garza said. “Don’t assume you’ve controlled the black market or the gray market by not allowing a legal market. You’ve still got marijuana being sold in those jurisdictions, and it has been for a long, long time.”
There are other reasons for reform. Though it’s far cheaper than a year ago, pot is still comparatively expensive at the retail locations. Only the cheapest strains, which run about $8 to $10 a gram, are competitive with black-market prices, and those cheap strains don’t yield profits for retailers, Green Theory’s Martin said. Third parties can’t deliver product, so producers must incur that expense. Banking remains an issue. Retailers can’t accept credit cards, and marijuana businesses are granted only checking accounts because banking companies based outside Washington can’t offer services to illegal ventures.
“They were told this was going to be a new, thriving industry, and it wasn’t set up for people to succeed very easy. There are a lot of hurdles.”
There’s not much competition on the retail side, either. Retailers were targeting high-end customers when prices were high, but are now taking a something-for-everyone approach. Even Green Theory, the Bellevue retail shop on Main Street that looks like a high-end cupcake boutique, is hawking zero-margin pot for $10 a gram.
More competition would lead to more differentiation among retailers, particularly on the Eastside, where only eight shops are in business. That added competition will soon be on the way, too, thanks to a pair of bills the Washington Legislature enacted this session.
First, a glut of existing medical dispensaries will be joining the recreational market following the passage of Senate Bill 5052. The bill requires that, by July 1, 2016, any operating pot shop must have a recreational license, and medical shops who have been open before I-502 passed — read, the most established shops — will be fast-tracked for a license via a merit system established by the LCB.
Adding to that wave is House Bill 2136, which could dramatically change the recreational marketplace. With the bill’s signing, the 1,000-foot buffers can go by the wayside; cities can shrink them to 100 feet if they so choose around recreation and child care centers, parks, transit centers, libraries, and some arcades; the buffer around schools and playgrounds will remain at 1,000 feet. The excise taxes at each level of sale will also evaporate — customers will be the only ones paying, 37 percent at time of sale.
Despite the issues, the current market offers glimpses of a more secure future for Washington cannabis, which is clearly defined by the normalization of a product, and its associated culture, that until now has been clouded by illegality. Over time, what some call “cannabusinesses” will simply become businesses.
Take New Leaf Enterprise’s South Park operation, which is a model for modern indoor agriculture. The warehouse is sleek and clean. “The state kind of looked to us as an example,” said Boris Gorodnitsky, who leads New Leaf’s growing processes. “We were already doing most of the things the state asked everyone to do.”
Before I-502, New Leaf was a medical-pot powerhouse. Its products were sold in more than 100 stores, but Colwell and Gorodnitsky targeted the recreational market due to its size and the inevitability of medical regulation. New Leaf is “a long ways from profitability,” Colwell said, but the duo is confident the market will stabilize — so confident they’re doubling the size of their operation. Their under-progress expansion will add 14,000 square feet of grow space. The company currently has marijuana growing under 332 lights; the expansion will add more than 500 lights.
A few miles north, in SoDo, Db3 Inc. is establishing itself as a preeminent producer of cannabis edibles — the popular Zoots treats are made there, as are edibles sold under the Goodship brand created by Cupcake Royale founder Jody Hall. “We’re not a pot company,” said Michael Devlin, a Db3 cofounder. “We’re a food-processing company that just uses cannabis as an ingredient.”
As producer-processors catch up with modern business practices that don’t involve basement grows, retailers are doing their part to make pot stores function as any retail outlet would.
One evening in early May, Green Theory held a party for members of its loyalty club, Green Elite. Most of the guests, though, weren’t part of the club — they were invited by a friend, or lured off the street by the beats from a DJ and the promise of hors d’oeuvres.
The event embodied a new era of cannabis sales. Buying cannabis used to require a huddled exchange with a dealer, but at Green Theory, bass-heavy music pumped through a Main Street storefront. Martin walked around the shop floor, chatting up guests. Hall and Devlin were there, showing off their wares.
To Hall, who turned her cupcake business into an element of local culture, pot is in the middle of a cultural renaissance. Twenty-three states and the District of Columbia have now legalized marijuana in some form, and the majority of Americans support legalization. As acceptance grows, Hall said, you’ll see the country treat pot like wine or craft beer.
In May, Hall attended a viewing party for the boxing match between Manny Pacquiao and Floyd Mayweather. Held at the home of a wealthy Seattle couple, it was a gathering of the region’s social elite. “And there was a bud bar,” Hall said. “They had a whole selection of flower, tons of edibles … and it was sitting right there. Pick your bong, pick your weed, and people were smoking pot as well as enjoying alcohol.”
The real question facing the pot market might not be legal or legislative; instead, it could be social. “When will it become socially acceptable,” Devlin posited, “to come to a party and bring the marijuana product?”
Maybe, at least in Redmond, that will happen when licensed retailers such as Carbon and Mindt are finally able to open a shop. Now that the Legislature has cleared the way for more cannabis-eligible locations in Redmond, the City Council could end Always Greener’s yearlong wait. According to councilman Hank Myers, one of the City Council’s more active proponents of marijuana retail, Redmond can either open up newly available retail districts to Always Greener, or it can amend zoning to allow cannabis shops in industrial areas. Either way, the Always Greener owners are ready for a resolution.
“We really feel the whole gamut of emotion on a daily basis,” Carbon said. “But we are absolutely determined. We don’t see this as just our own business venture. The voters of Washington wanted this, so I see us as ambassadors bringing this to Redmond. We represent the moms and families and everyday people who want to just buy recreational marijuana.”
Editor’s note: An incorrect opening date for Cannabis City ran in the print edition of this story. It has been corrected in this version.