GOLD FROM GREEN IN A GRAY AREA

You Might Be Surprised Who Profits From the Semi-Legal Marijuana Trade

A gentleman with a neatly trimmed beard stands at the counter of an
Arcata business on a weekday morning and asks the clerk for an eighth
of an ounce of Trainwreck, a popular strain of sinsemilla marijuana.
The young woman on the other side of a glass partition, who looks to
be a typical Arcata college student, reaches under the counter and
produces a bag of fresh green buds. She pours a portion into a paper
cup set on an electronic scale, then carefully transfers it to a
plastic bag.As she does so, the customer asks questions about other
strains available. He's looking for some variety. He ends up buying
small bags of several different kinds, paying the going rate - $40
per eighth of an ounce - with a handful of $20 bills.

Variety is definitely something the Humboldt Cooperative (popularly
known as THC) has in spades. A display behind the glass shows an
array of 20 varieties of sinsemilla buds available to those with the
proper doctor's recommendation. A dry-erase board above them tells
whether the individual variety is a sativa strain, an indica strain or a cross.

The counter also holds a row of small, colorful, hand-blown glass
jars for sale, along with copies of an autobiography by Grateful Dead
bassist Phil Lesh. A bulletin board on one side of the entrance is
crowded with fliers for rock and reggae concerts. A framed poster on
the other side of the door shows a Native America smoking a peace
pipe. The overall feel of the place is more akin to a crowded little
head shop than a doctor's office or pharmacy. But this is a head shop
hippies in the '60s only dreamed about, one where the sale of pot is
legal - at least under state, county and city law. This is an
officially sanctioned medical marijuana dispensary.

A billowing cloud of controversy surrounding medical marijuana has
made it the hot topic du jour in Arcata. Last month, after an indoor
medical marijuana growing operation burned in a rental house, the
subject jumped from the front pages of local newspapers to the City
Council chambers. City staff from the planning, fire and police
departments had been chewing on the perceived problem at weekly
confabs for over a year, but the house fire moved the issue to the
forefront of public debate.

Worried homeowners, pot activists and representatives from the
business community all took their turn at the microphone at the Oct.
17 City Council meeting, as did Humboldt State University President
Rollin Richmond. Dressed in his usual dark suit and tie, Richmond
weighed in on the negative impacts of the marijuana business,
touching on housing issues, fire safety and danger from "the criminal
element associated with marijuana growth."

"This community has waited too long to deal with this issue," he
said. "It's now in your laps because you've let it lapse before."

Richmond then turned the mic over to his colleague Vincent Feliz, a
pony-tailed drug and alcohol counselor from the university who said
he finds it "scary" that Humboldt regards marijuana culture in such a
"complacent" manner.

"It's in the mall - we have a Trainwreck sweatshirt," Feliz said.
"Humboldt County is known [for] marijuana. It's affecting recruiting
at Humboldt State and anyone who wants to come into the county."

After challenging the older generation to smoke the stronger pot
grown today and see how different it is, Feliz stated what may seem
an obvious fact: "It is a money-making business."

It's true, there's gold in those green buds. How much is anybody's
guess. Since 1996, when California voters passed Proposition 215 and
legalized marijuana for medical use, the drug has slowly been working
its way out of the shadows. There's still not much data on the
marijuana trade - almost none on the black market side and precious
little on the medical marijuana gray market. That said, according to
a report in The Economist magazine last month, pot is California's
biggest cash crop, surpassing grapes. Everyone agrees, it's a
lucrative business.

And that fact might make things difficult for those who, like
Richmond, oppose the ever-expanding marijuana trade in Humboldt
County. In Arcata, at least, some high-powered members of the
business establishment are getting their taste of the proceeds. So is
the public. It's not just the problems of the marijuana trade in the
City Council's lap - it's the profits, too.

It's not news to anyone that plenty of legitimate businesses are
thriving off the marijuana gray market. Examples? Take a look in the
new phonebook and you'll find a dozen or more hydroponic supply
businesses. Know anybody who grows hydroponic tomatoes or lettuce?

But with medical marijuana becoming more and more mainstream, even
straight businesses are getting their cut. One such business is the
Danco Group, Arcata's largest contractor and real estate company. The
Humboldt Cooperative is only one of four medical marijuana
dispensaries in Arcata. Danco is currently landlord to two of those
dispensaries, and it's building a brand-spanking-new facility right
off the Arcata Plaza for another of them.

Danco manages the large building that once housed Arcata's Isaacson
Ford auto dealership, at the corner of Sixth and I streets. The
building complex is currently home to two medical marijuana
dispensaries - the Humboldt Cooperative and the Humboldt Patient
Resource Center - as well as a hydroponics store. Both dispensaries
grow marijuana on site. (Danco manages the property through one of
its arms, Danco Property Management. It's owned by a land partnership
called RUI Partners, whose ownership is not clear.)

You'll also see the Danco name in the window of the former P.C.
Sacchi Chevy dealership next door to the Arcata Post Office,
immediately off the Arcata Plaza, which is currently being remodeled.
Soon the Sacchi building will be home to Humboldt Medical Supply
(HMS), a medical marijuana clinic currently located in a hole in the
wall office on Eleventh Street. HMS's plans will feature an "intake
area," where patients will be able to purchase their marijuana, as
well as a large growing operation. The Sacchi property belongs to JBL
Plaza Associates, a partnership between three prominent local
businessmen - "J" for Dan Johnson of Danco, "B" for local realtor
Mark Burtchett and "L" for Paul Lubitz of Holly Yashi Jewelry.

In an e-mailed statement, Danco spokesperson Lindsey Myers emphasized
that all the facilities strictly comply with the law.

"In the case of the Sacchi building, Danco Builders has been hired to
build a new space for HMS," she wrote. "All construction is specific
to the intended use and according to Uniform Building Code." As for
the businesses in the Isaacson lot, Myers said that the marijuana
operations there carry insurance policies and have promised not to
engage in "illegal" activities.

"They are commercial tenants and we manage their leases just like any
other commercial tenant," Myers wrote. Myers declined to give exact
figures, but she said that Danco's rental rates for the three
dispensaries are comparable to other commercial properties in the city.

The city of Arcata has been intimately involved in the project
underway in Danco's revamped Sacchi building, which will also host a
new Rita's Mexican Restaurant, next door to HMS. The restaurant side
will have to undergo a long series of inspections with everyone from
the building and health departments to the fire marshal making sure
all systems meet strict institutional standards.

There will be far fewer hoops for the dispensary, as there aren't
established standards specific to facilities for growing, processing
and distributing marijuana. As Arcata Community Development Director
Tom Conlon explained, all that's required at this point is a business
license and a building plan that meets building code regulations.

"All we care about is that it's located in the appropriate zoning
area and that the building is safe, as far as the electrical
systems," he said. "The wiring and breakers have to be the right size."

There was one element of the HMS building design that Conlon's
department weighed in on. According to Conlon, an early draft of the
layout for the business indicated that the majority of the space
would be used for a growing operation. That goes against a provision
of the code for businesses in the downtown commercial district, since
the grow is considered a manufacturing use. Regulations call for less
than 50 percent of a building's floor space be used for manufacturing
operations. The designs were revised accordingly.

Perhaps it's appropriate that the majority of medical marijuana
dispensaries in Arcata will soon be located in the town's old auto
dealerships. Once upon a time, those businesses were among the
biggest contributors to the city of Arcata's budget. They took in
plenty of cash, and so passed on a great deal of sales tax revenue to
the city. Now, reinvigorated with marijuana dispensaries, those old
buildings have the potential to once again make a substantial
contribution to the city's bottom line.

There's a common misconception when it comes to the medical marijuana
trade. Probably because the business has its roots in the black
market, most assume that no one involved pays taxes.

The question came up in passing when the Arcata council was
deliberating on medical pot issues. When discussion turned to a
proposal to cap the number of dispensaries, Councilman Paul Pitino
brought up a salient point: He'd noticed that one of the
dispensaries, the Humboldt Cooperative, was listed as "one of the
largest sales tax payers in Arcata," in a recent city report on tax
contributions.

"Are we going to arbitrarily limit something that's funding the
city?" he wondered aloud.

Dennis Turner of the Humboldt Cooperative is proud of the fact that
his business pays its taxes. He's owner of what he claims is the
largest dispensary in Arcata - and by extension, in Humboldt County,
since there are currently no dispensaries outside the Arcata city
limits. Turner told the City Council that the Cooperative serves
5,200 patients and buys from "over 80 growers." That's on top of the
product that the Cooperative grows at its Isaacson's facility.

"We got a state of California sales permit the day we opened," he
noted in a recent interview. He claimed that his was one of the first
dispensaries to do so, and that his letters to the state Board of
Equalization helped inspire that agency's decision to establish an
official system for collecting taxes on medical pot.

"We're extremely interactive with government," he said. "We don't
have any issues with that. We know what to do and we do it. So we pay
our taxes. We got our federal tax ID number and started 1099-ing the growers."

That's right - it's not just sales tax that's paid by those
associated with the dispensary. The growers pay income tax too, at
least some of them.

"I don't want to give exact numbers, but we have a lot of growers,"
said Turner. "They're all on 1099s. So we have a bunch of taxpayers
on our hands - good people, decent people."

As Turner spoke with a reporter at the co-op, a dispensary employee
interrupted to say that a grower has come in who needed to fill out
his 1099. The young man, clean-shaven with close-cropped hair, stood
on the other side of the glass. A digital photo identifying him was
displayed on a computer screen on the counter. An office worker in
the back produced a form, the grower filled it out, the transaction
went through and was duly recorded. At some point a quarterly report
will be sent to the IRS regarding the sale.

What happens if the grower subsequently fails to report his income
when (and if) he files his taxes? "The IRS sends us a list of those
who don't pay their taxes," Turner explained. "They told us, 'For now
on you will withhold 25 percent or 28 percent [from that client] and
send it in quarterly.'"

He admits that some growers balk at the prospect of reporting pot
income to the IRS or having income tax withheld - they take their
business elsewhere and don't return.

For his part, Turner says he's been waiting for the city to get
around to addressing the issues surrounding dispensaries and grow
houses. "It's been a long time coming," he said. "You need rules. You
need standards. You need parameters for these places.

"This is what I call 'gray zone programming,'" he said, echoing a
recurring theme regarding regulation of medical marijuana. With 215
and 420, much is left to interpretation. There's not much black and white.

"If we don't regulate we're going to lose out. When I started this, I
wanted to bring accountability to medical cannabis. Remember there
were no rules and regulations for any of this at all," which meant
the operators have had to make up their own rules.

At its Oct. 17 meeting, the Arcata City Council set up a "medical
marijuana working group" to study the medical marijuana industry in
Arcata, and to devise policies to limit its negative impact. And
though the working group has yet to meet, city officials are already
thinking about how to tackle the problem.

Where will the council and its working group take the issue? It's
hard to say, but everyone agrees that Proposition 215 is here to say.
And there seems to be a consensus that the city should get more
involved in the marijuana trade by encouraging growers to limit
operations to the city's commercial and perhaps industrial areas.

Community Development Directory Tom Conlon won't be around to see the
fallout - not as a city employee, anyway. He's set to retire before
the end of the year. But he still has some ideas on potential parameters.

"The clinics and co-ops should go in some specific zone so we know
where they are," he said. "We should look at standards about
relationship to sensitive neighbors like schools and parks. If people
are growing for other than their own personal use, we think they
would have to be in the commercial or industrial zone."

As far as other standards regulating grows, Conlon would just as soon
see Arcata set them far stricter than the county guidelines, which
allow for 100 square feet of growing space and three pounds processed
marijuana. He'd rather see the city use the state's minimum: six
mature plants and eight ounces of processed pot.

"That would be for residential zones," Conlon said. "We're saying you
could go crazy in the commercial areas ... Nobody's going to be
building a new sawmill, and the Hershey Bar and Toyota factories
never appeared, so we're looking at other uses. Why not a medical office?"

It may be worth noting that Conlon's interest in this issue may
extend beyond his employment by the city. As he intimated during a
break at one of the council meetings last month, his home in the
Arcata hills is between two grow houses.

For the most part, Arcata Police Chief Randy Mendoza has been quiet
when it comes to medical marijuana. But he does have his own opinions
on where he'd like to see things go.

"I hope the city will come up with an equitable plan that will
restrict the location of large grows to specific areas, that they are
limited to the central business district where they belong," he said.

Having lived in Arcata for almost 30 years, Mendoza says he knows
people from "all over the political spectrum. Friends who describe
themselves as progressive used to tell me 'Marijuana is a victimless
crime, leave it alone.' Now they're saying, 'You've gotta do
something.' I see the political consensus changing here."

Vice Mayor Mark Wheetley has been studying the issue, looking
primarily at the public safety angles. As to residential grows, he
definitely favors standards that discourage conversion of entire
houses for production.

"We should begin looking at smart ways to create
environmentally-friendly energy-efficient operations," he said. "I
wouldn't be opposed to taking a look at doing some pilot projects,
seeing if we could use warehouses or some of the storage facilities,
retrofit them with solar and smart irrigation systems, high level of
security, energy efficient lighting."

There wasn't much talk of the financial impact of the business of
producing and selling marijuana at the city's Oct. 17 council
meeting. An exception was a somewhat disjointed speech by Steve
Gasparas, owner of the city's fourth marijuana dispensary, the Arcata iCenter.

Clad casually in a hooded jacket and ball cap, he addressed the
council after President Richmond and Vincent Feliz and disputed their
suggestion that Humboldt County's association with marijuana is a
negative thing. On the contrary, he sees weed as a boon to the local
economy, something that should be encouraged.

The dispensary operator figures without it, "this town would be half
of what it is. Eureka wouldn't be what it is. It just brings in so
much money." In his mind the pot trade is what "makes this area
survive. It would just be another community along the coast if we
didn't have it going as well as we do. Arcata embraces it and that's
why it's doing so well."

It's not likely you'll find everyone in the business community
signing on to that way of thinking, but there's no denying that
there's a seed of truth in what he says. Like it or not 215 is here
to stay, and so is the money that comes with it.