How San Jose Went from Being the ‘Wild West of Weed’ to a Bastion for Legal Cannabis

When longtime cannabis evangelist Steve DeAngelo envisions the future of weed in Silicon Valley, he starts to sound like Steve Jobs.

Since the Jan. 1 legalization of recreational marijuana sales in California, the founder of the Harborside mega-dispensaries in San Jose and Oakland, has been all about encouraging “new adopters,” tech-jargon-tinged promotional efforts and, of course, lowering his industry’s tax bill.

“We’ve got a new, super innovative way for people to experience the aroma of cannabis,” DeAngelo says of a technology Harborside is developing in response to tighter state rules on offering old-fashioned smells of products prior to purchase. In fact, the mystery sensory enhancer will actually be part of a blind marijuana scent-testing contest planned at Harborside. “The person who guesses the largest number of strains correctly is going to get a prize,” he says.

The mobile apps, iPad ordering system and dizzying array of marijuana derivatives stocked in the sleek, natural wood display cases at Harborside are a local illustration of an industry-wide effort to professionalize and modernize pot. In San Jose, that process has also entailed a profound shift in city policy, from the freewheeling days of more than 120 unregulated dispensaries as recently as 2014 to a center of gravity in California’s high-value legal weed industry.

Now, with many affluent neighboring suburbs still clinging to complete or partial cannabis retail prohibitions, San Jose has become the de facto—if accidental, or at least reluctant—weed capital of Silicon Valley.

The city developed its regulatory framework after then-Councilman Pierluigi Oliverio proposed in 2009 allowing collectives to operate in exchange for a tax to fund street maintenance and a police department that had been hammered by city budget cuts and personnel departures. “If San Jose is not proactive and does not establish a set of parameters,” Oliverio argued, “then we may find ourselves behind the eight ball”

San Jose netted just $500,000 from the cannabis tax in 2013. But revenues have since soared to of $10.5 million in the latest fiscal year, according Wendy Sollazzi, who heads the city’s Division of Cannabis Regulation.

“San Jose is essentially your regional market,” says Sean Kali-Rai, a former city staffer turned cannabis lobbyist and founder of the nascent Silicon Valley Cannabis Alliance, a trade association much like a chamber of commerce.

The reckoning to reach this point was painful for some, winnowing several dozen dispensaries operating in the city in 2014 down to 16 licensed retailers in today’s legal market. For those who survived the back-tax payments, moves to comply with stricter zoning rules and an overhaul of the local cannabis supply chain, however, the reward has been a rapid increase in demand as other cities struggle with starting a regulatory system from scratch.

“San Jose has a drastic head start,” says Amanda Ostrowitz, founder and CEO of cannabis regulation software startup CannaRegs. Instead of implementing a new licensing system like other cities, she says, the same 16 dispensaries licensed to sell medicinal cannabis prior to Proposition 64 were also granted sales rights for recreational cannabis this year.

As a result, dispensary operators say a sizable amount of their business also comes from neighboring jurisdictions in Santa Clara, San Mateo and San Mateo counties. Affluent tech hubs including Palo Alto, Cupertino, Sunnyvale and many others have either banned cannabis sales or allowed only limited delivery services—an extension of political anxiety about preserving “local control” of state policies that also pervades debate about housing, transportation and many other development issues.

For San Jose’s surviving legal cannabis purveyors, though, the payoff has been big.

“I have clients saying they’ve seen sales grow 30, 50, 100 percent this year,” says Kali-Rai, who represents several local dispensaries through his Los Gatos-based lobbying firm Jackson and Main.

Assemblyman Ash Kalra (picture with microphone) joined California's "weed czar" Lori Ajax and other state officials for the Silicon Valley Cannabis Alliance's inaugural event last month.

Cracking Down

San Jose’s weed economy didn’t sprout overnight, and it definitely didn’t grow without controversy.

When Marc Matulich decided to get into the San Jose marijuana business in 2010, he realized he was entering a legal gray zone. The founder of Coleman Avenue’s mod, aviation-themed Airfield Supply Co.—the dispensary formerly known as the South Bay Healing Center—recalls things being very different before the statewide green rush.

“I think I was looking on Craigslist and just randomly reaching out to properties I saw,” Matulich recalled of the company’s original Saratoga Avenue location. “It was a different time. We kind of wanted to be discrete and not draw too much attention to ourselves.”

San Jose’s earliest cannabis legalization policies date back to the late 1990s, after California’s first-in-the-nation vote to allow medical use with the Proposition 215 campaign centered on the drug’s potential to treat residents suffering during the AIDS crisis. A local turning point came in 2010, when San Jose residents approved the Measure U ballot initiative to tax marijuana sales—not legalizing dispensaries, per se, but allowing them to operate if they paid taxes.

Many complaints, petitions and draft laws later, regulators moved to ramp up enforcement in late 2013, when a staff report to the City Council recommended new limits on where dispensaries could operate. Areas near schools, churches, residential neighborhoods and downtown would all be off limits. State setback rules would ultimately look similar after Prop. 64, but the initial proposal in San Jose set off a more than two-year process of licensing dispensaries for the first time—an effort that kicked off a scramble among those trying to stay in business.

“There were probably only 25 decent properties in San Jose,” Matulich says. “There were bidding wars on purchases and leases. The landlords probably benefited the most.”

Among the most controversial proposals, which was later altered by a dispensary-backed referendum, was a requirement that dispensaries vertically integrate, growing, processing and packaging all products from seed to sale.

“It essentially required me to go out and start a new company,” DeAngelo says of a new grow operation in Monterey County started amid the uncertainty. Still, he says, the change was necessary, since many unlicensed shops didn’t test their products and cut other corners in an effort to undercut the prices of larger dispensaries like Harborside.

Under a mandate from then-San Jose Mayor Chuck Reed to “keep it out of our neighborhoods, keep it out of our schools and keep it away from our kids,” an enforcement crackdown in 2014 focused on unlicensed storefront retail businesses.

“It was definitely a challenge,” says San Jose police Sgt. David Woolsey, who now oversees cannabis enforcement for the city.

Aside from a handful of ongoing criminal cases from the period before the city’s licensing system rolled out in 2015, Woolsey says San Jose continues to grapple post-Prop. 64 with unlicensed delivery services and cannabis-centric churches that advertise their offerings online. The city recently contacted two unnamed “online platforms” advertising such products, he says, though how the city intends to follow up remains unclear.

The owners of Coleman Avenue’s mod, aviation-themed Airfield Supply Co. have been doing business in San Jose since long before the state-sanctioned green rush. (Photo by Greg Ramar)

Canna Caucus

As the sun set in a quiet corner of South San Jose on a recent weekday, a crowd wearing a mix of tailored suits, Hawaiian shirts and branded startup swag was still trickling into the sprawling, hacienda-style Hayes Mansion.

Inside a ballroom accented by lime green lights, a German shepherd loosely tethered to one attendee looked up hopefully at small groups politely chatting over baked brie and $10 beers. Like any business event worth its salt, the programming kicked off with the word from the sponsors—two marijuana-focused professional services firms—and a jab at the government.

“How are California regulations treating you?” quipped a man in a plaid button-down and leather sneakers, rousing a polite laugh from the crowd.

“Clearly, we’re being overtaxed.”

The “#CannabisCaucus” hosted this month in San Jose by marijuana lobbying group the National Cannabis Industry Association revolved around the newly-legal industry’s most pragmatic concerns, from tax complaints—total state and local taxes hovering around 40 percent, a premium that growers and dispensaries say still drives some consumers to the black market—and banking problems to underlying anxiety about the feds.

For Ostrowitz of CannaRegs, San Jose is often framed culturally within the Bay Area as relatively white collar compared to the “Wild West” of Oakland and San Francisco’s perpetual efforts to try to “be progressive.”

“I think of San Jose as the corporate one,” says Ostrowitz of CannaRegs. “They follow a process to a ‘T.’ It’s like your boardroom-style meeting.”

Steve Levine, an agribusiness attorney with the firm Husch Blackwell, says San Jose is closer than other cities in California to more tightly checked markets in Colorado.

“This is what a regulated market looks like,” Levine says. “There are lots of rules.”

Among the rules that dispensary operators hope to revisit are San Jose’s 10 percent local tax rate and zoning rules that “ghettoized” dispensary locations, DeAngelo says of the city’s current mandate for locations in industrial areas.

Woolsey says city staff has not been directed to reevaluate zoning, but lowering local taxes and adding new licenses for manufacturers of marijuana products and testing facilities are both on the table for as soon as later this year.

In the meantime, DeAngelo and his peers aim to use their growing presence in Silicon Valley to expand the industry.

“We’re really trying to capitalize on the innovation that exists here that’s taken tech from an industry that was burgeoning and turned it into this worldwide phenomenon,” National Cannabis Industry Association events manager Brian Gilbert says. “That’s the initiative we’re trying to bring to our industry.”

The audience at a #CannabisCaucus event at San Jose's Hayes Mansion last month.

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