OAKLAND'S PLAN TO CASH IN ON MARIJUANA FARMS HITS FEDERAL ROADBLOCK

OAKLAND, Calif. - For a brief, smoky moment last fall, this
economically challenged city seemed poised to become the nation's
most aggressive when it comes to growing and taxing medical marijuana.

Those hopes have been dimmed considerably in recent weeks, though,
since an exchange of letters between the city attorney and federal
law enforcement officials has made it exceedingly clear that
Washington will not tolerate plans for the large-scale marijuana
farms the City Council approved last July. City officials had hoped
to use the massive indoor growing facilities to raise some $38
million annually in fees and taxes at a time when the city is
struggling with a $31 million deficit and 17 percent unemployment.

Polls last summer suggested that voters were likely to pass a
November ballot initiative that would have legalized recreational
marijuana use in California. They did not. But Oakland decided to
proceed with its plans anyway.

Hundreds of well-heeled investors and would-be farmers poured in from
across the country to vie for four cultivation permits. Then, in
December, just weeks before the city was set to issue the permits,
the Council voted to stall the plan after the city's attorney, John
Russo, and a county district attorney warned the Council that the
marijuana cultivation ordinance thwarted state law and that city
officials could be held criminally liable.

On Jan. 14, Mr. Russo wrote a letter to the United States Department
of Justice seeking guidance on the city's legal standing. In a
response, Melinda Haag, United States attorney for the Northern
District of California, warned that "individuals who elect to operate
'industrial cannabis cultivation and manufacturing facilities' will
be doing so in violation of federal law." The letter went on to say
that the Justice Department was "carefully considering civil and
criminal legal remedies regarding those who seek to set up industrial
marijuana growing warehouses."

Mr. Russo has refused to provide further legal guidance to the city
on the marijuana farm issue, forcing Oakland to hire a new legal team
as they consider a revised version of the ordinance.

Desley Brooks, the council member who wrote the revised ordinance,
said the city had little choice but to move ahead with large
marijuana farms. "There are unregulated grow operations in the city,
and we're having fires, home invasions and crime as a result," she said.

Ms. Brooks puts much of the blame for the legal hoopla over the
ordinance on Mr. Russo. "Our city attorney went to the feds and
invited scrutiny," she said.

State law restricts who can grow marijuana to medical marijuana
patients and their "primary caregivers," ruling out the type of
stand-alone marijuana farms originally proposed by the city. Ms.
Brooks's revised ordinance couples the farms together with a
storefront dispensary that acts as "primary caregiver."

"Oakland is the epicenter of medical marijuana in the United States,"
said Allen St. Pierre, executive director for the National
Organization for the Reform of Marijuana Laws. "The Department of
Justice is paying closer attention in Oakland because they're mindful
of the fact that there is enough political and commercial chutzpah to
actually get this done. The only thing stopping these entrepreneurs
from breaking ground tomorrow is this letter from the feds."

When the city gave the green light to industrial-scale marijuana
cultivation, an eclectic group of investors stepped forward.

Among dozens of groups who spent months and hundreds of thousands of
dollars on business plans, consultants and architects was Ben
Bronfman, an heir to the Seagram liquor fortune and fiance of the
rapper M.I.A. Mr. Bronfman leased 11 acres of land by the airport
where he and partners had hoped to install enormous greenhouses that
would produce environmentally friendly marijuana using a massive,
experimental carbon-capturing device. "Cannabis is a more
constructive thing to have in our society than alcohol," he said.

Jeff Wilcox, a former commercial real estate developer turned medical
marijuana advocate, was one of the first in line for a cultivation
permit. He spent $120,000 and two years developing a $20 million plan
to transform a 172,000-square-foot office park he owns into a
high-tech facility capable of growing 23 pounds of medical marijuana
a day, an annual crop worth up to $58 million. In accordance with
city rules, much of that money would have been turned back into city
coffers and into nonprofit organizations.

Many of the investors who flocked to Oakland are now taking their
money and their marijuana know-how elsewhere.

"I applaud the city for pushing the envelope, but it's frustrating
for those of us who spent a lot of time and money on this process,"
said Derek Peterson, a former Wall Street banker turned marijuana
entrepreneur who spent $80,000 on his permit application.

Mr. Peterson is not waiting around for the city to make a decision.
Fourteen states and the District of Columbia now have medical
marijuana laws on the books, providing ample opportunity to grow and
distribute marijuana on a huge scale. Mr. Peterson is applying for a
permit to do just that in Arizona.

"Right now Oakland is far too visible for this kind of investment,"
said Scott Hawkins, who worked as a consultant on a permit
application on behalf of Richard Lee, the founder of Oaksterdam
University, a medical marijuana trade school here. "Investors don't
want to risk their capital in this situation unless things can get
worked out between the City Council and the Department of Justice and
the city attorney's office."