Yvonne Wingett Sanchez

The Republic | azcentral.com

Arizona voters legalized medical marijuana in 2010

Foes of recreational marijuana say Prop. 205 would create a monopoly on legal marijuana sales

For weeks, Bill Myer studied images of Phoenix neighborhoods, pored over zoning maps and drove the streets in search of property that could house a new medical-marijuana dispensary.

Myer, of Phoenix, already owns a dispensary in Glendale, but with state officials poised to award a second round of licenses since medical marijuana became legal in 2010, he hired a surveyor to do measurements once he narrowed in on a site. He found one property that could work and talked to the owner about leasing or buying the building if he gets a license.

“It’s nothing more than a lottery ticket. It’s a $5,000 lottery ticket, basically,” Myer said.

But if he wins, he wins big. That ticket could be worth millions.

The Arizona Department of Health Services, which oversees the medical-marijuana program, has received about 750 applications for the 31 licenses that will be awarded in October. The intense competition for the permits has set off a land rush of sorts, with applicants scrambling to lock down properties in metro Phoenix, Tucson and elsewhere that regulators might deem best suited for new dispensaries.

Proposition 205, which would legalize marijuana for recreational use, would also give medical-marijuana dispensaries in good standing the first shot at the recreational licenses.

That provision of Prop. 205 is controversial because it creates exclusive rights — a monopoly — on who gets to sell legalized marijuana, an industry that is booming in other states like Colorado. Last year, voters rejected an initiative in Ohio in part because it would have limited cultivation of marijuana crops to just 10 chosen properties owned by groups of investors.

“It’s an automatic free pass,” said Jerry Chesler, an attorney who said he acted as a consultant for 16 medical-marijuana applications, of the potential for medical-marijuana licensees to be the first to obtain recreational licenses.

“You’re in the front of the line ... It’s super valuable as a medical license, and then they get you in on what could be a very lucrative recreational business, as well.”

'Marijuana industry really is a real-estate play'

For months, commercial real-estate brokers, attorneys and consultants have been jockeying for access to properties that give them the best chance at getting a license.

State health officials will choose the winners based on which address — located within certain community health analysis areas — will serve the most patients. State officials have hired a consultant to analyze and map where the state’s 100,000 medical-marijuana users live in relation to current dispensary locations, patient-to-dispensary ratios, and other factors.

That information is not accessible to the public because the 2010 medical-marijuana law required broad confidentiality that protects most information about patients and dispensaries. The confidentiality extends to names, medical conditions and addresses.

But marijuana industry insiders have done their own modeling to try to pick winning addresses.

Medical-marijuana facilities generally must be on commercial or industrial properties, and municipalities have their own rules governing where dispensaries can operate.

In Phoenix, there are fewer options because of regulations adopted recently by the City Council that require dispensaries to be farther from schools, places of worship, residences, child- or adult-care facilities, homeless shelters, and other places.

Phoenix officials received 225 requests from June through July — when the state’s application process ended — from potential medical-marijuana applicants who sought information about whether properties met certain zoning requirements, as well as information about the addresses’ proximity to schools and other places.

In the lead-up to the application deadline, Scottsdale received 14 zoning status letters. Mesa received 52 applicants and sent 34 letters of approval to 28 different applicants; several applications were for the same addresses under different business names, and officials denied several.

Marijuana insiders say the new rules in Phoenix have severely limited the number of properties that don’t require variances, a costly and unpredictable process that can cost thousands in attorneys fees and tends to pit property owners against neighborhood activists.

“The marijuana industry really is a real-estate play, and it really sparked off a lot of people searching for, and trying to make various deals to submit their applications,” said attorney Ryan Hurley, who specializes in marijuana law and advised clients on license applications.

Finding the right location

As part of the process, the state requires property owners to verify they have permission to use an address to apply for the license.

In some instances, the industry experts said, applicants offered thousands of dollars if property owners signed letters and entered into contingency deals with property owners. Others proposed to buy property, hoping the location would be close to the highest number of patients.

Some property owners were charging tens of thousands of dollars for use of their addresses. Others allowed their addresses to be submitted by multiple applicants to maximize their chances of getting a tenant who may one day sell recreational marijuana, the industry insiders said.

Insiders said some families and business partners were pooling money to cover the costs of those property agreements, and the state’s application fee, which is $5,000.

“There were people that mortgaged their homes” to cover the costs of finding an address and submitting applications, said real-estate broker Doug Arfa. “People were willing to pay three, four, even five times the going rate for leases because they needed a property — an address — to apply.

“There are some people that actually signed leases and tied up property for months doing that. There’s a lot of people that made real-estate decisions that were, quite frankly, aggressive and risky. There are people that have bought buildings on the fact that they hope they’re going to win. They want to be in the industry so bad, they actually closed on buildings before they got licenses.”

Arizona to vote on marijuana legalization in November

In one instance, Arfa said, an applicant bought a small retail center for the address, knowing they could fix it up and attract tenants if they don’t get a license.

“If they did win, they’d kick out the tenant and set up the dispensary location,” he said.

Not everyone was as sophisticated, Chesler said.

"There are all these people dying to get into the game who were just clueless, who used addresses that may or may not work," he said. "They were coming from all over."

Some applicants, Hurley said, told property owners, “ ‘Here’s $5,000, sign my letter, and we’ll worry about the lease later.’ There’s a low likelihood of winning the medical licenses, but if you do, they will be extremely valuable."

Under Prop. 205, he said, the recreational shops "will be for-profit. You will be able to serve at least 10 times the number of customers.”

Roy Grinnell, a commercial real-estate broker who helped find properties for multiple clients, said he was inundated with calls from people asking him to help them find properties. He was offered bonuses and fees if he could find addresses that met land-use requirements and could be submitted to the state.

"I would get calls from other brokers referring me business," he said. "All these brokers were out there working for all these groups under the premise that they would get a big payoff" if they could find an address that could be submitted.

Is dispensary system 'monopolistic'?

In 2010, voters approved the medical-marijuana program, which allows people with certain medical conditions to carry 2½ ounces of the drug.

The first dispensaries began opening in 2012, after a legal battle with the state over the legality of the law.

The dispensaries were limited to one per geographic region, called Community Health Analysis Areas. The licensee can move to a different location within the area, and after three years, can move out of the area altogether. Some of the original dispensary operators have moved out of their initial areas into more urban areas.

Under the Regulation and Taxation of Marijuana Act that voters will decide in November, the state would tax and regulate cannabis. The initiative would allow adults 21 years and older to buy, grow and possess the drug, with certain restrictions.

Foes of the proposal argue legalization could pose significant risks to public health, safety and welfare.

They are also seizing on language in the measure that would give medical-marijuana dispensaries a “monopoly” on the recreational licenses, which they characterize as self-serving.

The provision was a way for supporters of recreational marijuana to get the buy-in of wary medical cannabis dispensary operators who worried how recreational use would affect their financial investments.

Arizona marijuana laws: 12 things you need to know

Marijuana-legalization foes argue the medical dispensaries — which are heavily financing the recreational campaign — stand to benefit the most from legal cannabis use. Backers of Prop. 205 say the medical-marijuana dispensaries are best-equipped to run the recreational shops.

In court on Friday, an attorney on behalf of a group trying to get Prop. 205 removed from the ballot, questioned whether the pro-campaign has adequately informed voters of the "monopolistic system" being proposed.

"It gives a special treatment to medicinal-marijuana dispensaries," Brett Johnson told Maricopa County Superior Court Judge Jo Lynn Gentry.

Seth Leibsohn, chair of Arizonans for Responsible Drug Policy, recently told the newspaper that medical-marijuana dispensaries included the provision "to protect themselves, clearly, and to benefit themselves — clearly. There’s a lot of money to be made in marijuana sales. They know it. They make it now, and they can make a lot more.

“They’re bringing it (recreational marijuana) in at the expense of the state and everyone else.”

Chesler, the broker who consults in marijuana across the nation, said it’s just business.

“Some of us are very interested in Big Cannabis,” he said. “And to see Arizona really having a lead role — kind of like Virginia is to tobacco — Arizona could be like that to cannabis.”

Follow the reporter on Twitter and Facebook. Reach her at yvonne.wingett@arizonarepublic.com or 602-444-4712.