OAKLAND EASES OFF ON PLAN TO INDUSTRIALIZE MARIJUANA

OAKLAND - Former construction industry executive Jeff Wilcox has a
$20 million bet riding on the future of marijuana commercialization
in California.

That is what his AgraMed Inc. venture has invested in a warehouse
near the Oakland waterfront and a bid to open a "business park for
the cannabis industry." He hopes to lease the space to pot growers,
bakeries, labs and processing facilities and to create hundreds of
well-paying jobs.

But Wilcox is in limbo after Oakland officials last week suspended a
plan to issue four licenses for factory-scale production of medical
marijuana. Wilcox is only the most pronounced of numerous suitors for
the coveted permits who suddenly have cause to worry.

Oakland City Council members approved the unprecedented plan to tax
and license the industrialization of marijuana in July. At the time,
Oakland was preening as the political epicenter for a California
initiative seeking to legalize pot as a leisure activity and sanction
a marijuana market extending far beyond medical use.

But Proposition 19, defeated by voters Nov. 2, drew the ire of U.S.
Attorney General Eric Holder, who proclaimed the federal government
wasn't going to tolerate retail pot sales in California.

Oakland's ambitious cultivation plan designed to service the existing
medical pot economy and potential recreational use also drew the
suspicion of federal agents, who contacted the city.

Now, the process is on hold amid fears of government raids and
warnings that Oakland's bold pot plan may violate California laws
mandating that medical marijuana businesses operate as nonprofits.

In a Dec. 6 letter to Jean Quan, Oakland's incoming mayor, Alameda
County District Attorney Nancy O'Malley, warned that the city
ordinance offered no "legal or equitable defense" against criminal
prosecution of pot factories opening in town.

City Attorney John Russo said he was contacted in October and again
in November by U.S. Justice Department officials "expressing concern"
over the city's plans.

Oakland hoped to cash in on a 5 percent local tax on proceeds from
the future pot factories that voters approved in November and a 10
percent tax on recreational sales if California voters passed Proposition 19.

But with the initiative failing, District Attorney O'Malley warned,
it was "an open question" if city officials "who aid and abet or
conspire to violate state or federal laws" could themselves be held
criminally accountable.

So last Tuesday, the Oakland City Council voted to rework its
marijuana cultivation ordinance and hold off on granting any
licenses. Officials say they still hope to sanction large-scale
production by amending the ordinance to conform with California's
medical pot laws. The council expects to consider a new draft ordinance Feb. 1.

"We're not giving up," proclaimed City Council member Rebecca Kaplan,
who co-authored the ordinance. "We've always been a leader on this.
This can be done well."

Oakland is the home of Oaksterdam University, the renowned marijuana
trade school whose founder, Richard Lee, helped bankroll Proposition
19. Last year, the city became the first in America to impose taxes
on marijuana dispensaries.

The ordinance, which authorized licensing of cultivation facilities
of up to 100,000 square feet, was intended as more than just a
tax-revenue score. Kaplan argued the ordinance positioned the city to
mainstream and monitor all aspects of California's burgeoning medical
pot trade.

"Currently, there is a lot of cultivation going on without a lot of
regulation," she argued. "So having a way to have licensing and
oversight of production seems like a reasonable thing."

City Attorney Russo backed Proposition 19 as a means to end
"marijuana prohibition" and tax "the largest cash crop in the state."
But after the initiative lost, he told City Council members the
ordinance could violate existing California medical marijuana laws
that prohibit pot-profiteering.

"Because Proposition 19 failed, you can't do things that you might
have done," Russo said. "And that is certainly the case with
for-profit licensing of the production of cannabis."

Though marijuana remains illegal under federal law, Attorney General
Holder announced last year that the Justice Department would not
target medical marijuana patients or providers in states where
medicinal use is legal.

But with Proposition 19 on the ballot, Holder signaled that its
passage could upset that fragile truce. He declared that any retail
pot business would admit to a federal crime by the mere act of paying
its taxes.

Most recently, Russo warned that the Oakland plan could provoke a
backlash if U.S. authorities perceived the operation "as a cover for
a for-profit industrial grow."

California law requires medical pot to be cultivated and dispensed in
nonprofit, members-only patient collectives. Revenues generated by
pot transactions are supposed to cover only the costs of producing
and distributing the marijuana, which may include salaries of
dispensary workers and growers.

The Oakland ordinance called on cultivators to operate "legally
according to state law." But it was vague in spelling out the
relationship between commercial growers and medical pot providers.

By contrast, voters in nearby Berkeley passed a cultivation ordinance
allowing six 30,000 square-foot facilities that specified growers
must be from licensed dispensaries or other medical providers.

Max Del Real, a cannabis industry lobbyist, said Oakland ran into
trouble because its ordinance smacked of naked capitalism.

"Someone can come in and apply for a very large commercial growing
permit with no connection to any dispensary in Oakland," Del Real
said. "They went too fast on this, and now they're trying to reel it back in."

Wilcox is still working to make the idea a reality. An economic study
he commissioned for AgraMed said his 170,000-square foot warehouse
could generate $47 million to $71 million in annual medical cannabis
sales and up to 400 jobs.

Wilcox hopes to get a return on his investment by leasing out the
site to growers and medical pot outlets operating as nonprofits. He
said tenants from pot bakers to growers would pay salaries averaging
$73,000 a year, including $200,000 for top managers and $40,000 for
entry-level workers.

"Oakland is not doing this to thumb its nose at the federal
government," he argued. "They're doing it for economic stimulus."