For fledgling pot industry, uncertainty is the rule

EVERETT — Shawn Scoleri has some complaints about chafing government regulations.

Scoleri is in the marijuana business, however, and the regulations are a lot tighter than for other businesses. They’ve also raised a different set of concerns for those seeking to break in to a new industry.

Scoleri, of Everett, runs a medical marijuana dispensary in Seattle. He has applied to operate marijuana production and processing businesses in Snohomish County and elsewhere under Initiative 502.

For pot businesses, uncertainty rules and the rules are uncertain.

The ground rules keep shifting as the industry ramps up. On Thursday, state Attorney General Robert Ferguson issued an opinion that said local jurisdictions can ban marijuana businesses or zone them so strictly as to make them impractical.

Snohomish County has taken a different approach, enacting zoning rules for marijuana businesses that seek to balance the intent of I-502 and the needs of communities, while addressing some of the ambiguities those businesses face in other jurisdictions.

Some ambiguities are unlike those faced by any other business. For example, Scoleri said, how many business owners would sign a lease and pay rent for a 30,000-square-foot warehouse not knowing whether they’ll be allowed to use all of it?

How about setting up a business bank account, knowing that the bank could at any time decide to close it without advance notice because federal authorities consider handling money from drug sales to be money laundering?

Or starting a wholesale company knowing that the competition for a market, already extremely tough, will be further restrained by a fixed number of retail outlets?

“Anyone in my situation would feel exposed,” Scoleri said.

While retail outlets are more visible and capture a lot of attention, their number is capped at 334 statewide by the state Liquor Control Board, the agency charged with regulating the new pot industry. There is no limit on the number of growers and processors in the state, however, and as of Jan. 14 the board had counted 2,817 producer applications.

Of those, 247 have been filed from Snohomish County, the second-highest number in the state after King County’s 484 applications.

But Snohomish County’s number amounts to a 28 percent higher license-per-capita rate than King County’s, and friendlier zoning regulations are probably a significant reason for that.

So uncertain is the environment for pot businesses ­— including its status as an activity that still carries a stigma ­— that of more than 30 license applicants The Herald attempted to contact, most did not return calls or declined to comment for the record.

A sampling of people who have applied for marijuana licenses in Snohomish County reveals a broad spectrum of society:

  • A longtime nursery owner looking to diversify the crop mix on his farm;
  • A single mother of two;
  • A real estate and finance consultant who sees a lucrative financial opportunity in a growing and processing operation;
  • The owner of a medical marijuana dispensary who likes to post on Facebook artfully composed photos of his glass bong in scenic outdoor surroundings;
  • A hotel owner who was just curious about getting into the industry, but who withdrew her application after realizing she couldn’t use the hotel bar as a retail marijuana location.

In addition to the legal ambiguity, other aspects of the regulations pose problems for would-be “green” entrepreneurs.

Marcus Edwards, the chief operating officer of CannaGenesis, which is seeking growing and production licenses in the Stanwood area and Spokane Valley, said finding a warehouse for growing operations has been difficult.

Many landlords are being deluged with phone calls.

“We’ve had far more nos than yeses,” Edwards said.

Some landlords are concerned about technical issues, such as humidity and rust. Others cite legal reasons.

“People are afraid of the government coming in and seizing their property,” Edwards said. This, in spite of assurances that the federal government wouldn’t intervene in a tightly regulated market.

Another area of concern is the 2 million-square-foot total canopy limit on the amount of marijuana allowed to grow in the state. If the square footage of the total number of approved licenses exceeds that amount, the Liquor Control Board will reduce the size of all the licenses. Someone who applies for the largest “Tier 3” license, with a 30,000-square-foot limit, may find themselves approved for only a Tier 2 license, which is capped at 10,000 square feet.

Adam Bluff of Seattle has applied for a large growing site in Monroe. His company, Harmony Farms, also has applied for licenses in Chehalis and Lacey.

Bluff is a general contractor who has built grow rooms for the medical market. Securing real estate remains difficult because he doesn’t know how much space he’ll need.

Another issue several growers mentioned was the unwillingness of banks to work with marijuana companies.

John Knutsen, a businessman who operates several companies unrelated to pot, has applied for a 30,000-square-foot growing license outside Snohomish. He’s worried about running a cash-based business. His bank has refused to work with his marijuana startup.

“We’re going to take socially responsible people and say you can’t run your business through the regular economic system?” he said.

Carrying large amounts of cash could make his operation a target for crime, Knutsen said.

In addition, businesses will have to pay the state 25 percent excise tax on every pot transaction, from plant to packaging to retail sales.

Scoleri predicts these challenges will foster brutal competition, causing the bottom to drop out of the wholesale market and prices to plummet. Many people will be put out of business.

“I think the way Liquor Control has written their rules at this time, they’re setting up a fair number of people for failure right out of the gate,” Scoleri said.

The Liquor Control Board’s Brian Smith said the large number of license applications took the board by surprise. The expectation is that nearly half of the businesses will die within 18 months.

Scoleri is someone who could be considered an industry veteran. He said he’s been in the marijuana business for 16 to 18 years, starting when his father used the drug to manage pain after an organ transplant. He doesn’t smoke pot himself, he said.

He’s had run-ins with the law, pleading guilty in 1997 to a gross misdemeanor charge for possession of a controlled substance (testosterone), and facing felony charges in 2001 (which were subsequently dropped) for allegedly running a marijuana growing operation and stealing electricity from the Snohomish County PUD.

Scoleri’s conviction was long enough ago that it won’t count against him in the state’s point-based system for evaluating applications. Outside of traffic tickets, his record has been clean for the past 13 years.

Staying legitimate in the pot business has been his objective, from paying sales taxes from his medical marijuana dispensary to trying to set up a growing operation that will operate completely within the new laws.

Scoleri said the survivors will be those who offer a higher volume of product while managing their costs most effectively.

One of his strategies is to erect buildings where several different growing operations could locate under one roof ­— although walled off from each other in compliance with the law.

Scoleri also plans on constructing high-ceilinged grow rooms, where more plants can be raised on shelves without increasing the total canopy area.

Jack Remington, a Seattle resident, has applied for a growing license and plans to locate in Scoleri’s proposed Arlington-area facility.

Remington plans to run a smaller growing operation specializing in rarer and slower-growing African and Thai varieties, rather than the more common-variety Cannabis indica plants the larger operations will be mass-producing, he said.

“I’ll be producing less but have a more specialty product on the shelf,” Remington said.

Smaller production amounts also means he’ll be better protected from becoming saddled with surplus inventory in a market with a constrained retail channel.

Another entrepreneur, Brian Laoruangroch of Seattle, hopes to become the Marlboro Man of marijuana, based out of Snohomish County near Monroe.

His company, Prohibition Brands, is taking a high-profile marketing strategy. He’s produced an Internet commercial in which he appears in cowboy getup, calling himself “Sheriff Roach” and riding a stick horse.

Whatever strategy growers hope to use in the green rush, it will play out in a business environment unlike any the state has seen.

Uncertainty still reigns; plenty of people and jurisdictions are anxious about marijuana entrepreneurs hanging out their shingles in their communities.

But those already in the industry hope that will change, with ambiguities resolved and fears abated. Already, Scoleri said, pretty much everyone is within one degree of separation of someone who either grows or uses marijuana.

“The thing that everyone forgets is that those types of people in your community are your neighbors,” he said.

Chris Winters: 425-374-4165 or cwinters@heraldnet.com. Amy Nile: 425-339-3192 or anile@heraldnet.com.

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