West Coachella Valley set for marijuana 'green rush'

On a recent Thursday morning, a crowd gathered in the parking lot of a Desert Hot Springs gas station to welcome the latest new business to the struggling city.

Mayor Adam Sanchez stood in front of the shop's refurbished storefront and cut the ribbon with giant scissors — just as he would for a restaurant, tire store or hair salon — before talking about how perfectly Sun Grow would fit into Desert Hot Springs' healthy "spa city" image.

Sun Grow is the first permitted medical marijuana dispensary to open in Riverside County, outside of Palm Springs.

It's also the first shop to launch as part of a new wave of businesses coming to the western Coachella Valley, contributing to the fast-paced growth of legal marijuana businesses seen across the country.

At least a half dozen more local medical pot stores are expected to follow.

Known as the "Green Rush," a play on the Gold Rush that built California in the 19th century, legal marijuana has grown nationally into a $2.7 billion industry, with half of it in California, according to one industry report.

National cannabis sales for 2015 are expected to climb another 30 percent to $3.5 billion.

"The main draw of this industry is you can make a lot of money if you operate your business well," said Chris Walsh, managing editor of Marijuana Business Media, a company that conducts market research on the marijuana industry and publishes the online Marijuana Business Daily.

"It's not a guaranteed path to being a millionaire by any means," he cautioned.

But the dollars going in and out of a single dispensary can easily reach into the millions. Annual revenues for a store can range from $100,000 for a small operation in a rural area to tens of millions of dollars in a major city, Walsh said.

Sun Grow representatives declined to discuss revenue projections. But they but did say the dispensary was on pace to generate $9,000 in tax revenue for Desert Hot Springs in the first month.

That amount would translate to $90,000 in sales, based on the city's 10 percent medical marijuana sales tax rate.

If Sun Grow's sales continue at that rate, the shop will see more than $1 million in revenue for its first year.

"We're not losing money, which is great," Sun Grow partner George Nassar said, adding that the shop essentially broke even in the first month.

The financial potential of medical marijuana dispensaries is now driving the industry as much as the initial mission of providing patients access to a drug that's used to treat chronic pain and a variety of other ailments.

The limited number of business opportunities only increases the competition.

Palm Springs has three operating dispensaries and has approved a fourth that has not yet opened.

Officials haven't ruled out allowing others in the future, although city staff is still researching the idea and whether more locations should be made available for shops and growing operations.

Desert Hot Springs and Cathedral City — two desert communities with long histories of budget woes — have each capped the number of shops at three for now.

Desert Hot Springs council members earlier this month discussed changing city ordinances to allow for more than three dispensaries — possibly opening the door for all 19 that applied for permits last year.

But council members have delayed any decision until at least next month.

Opening a dispensary can be an investment in itself, and owners also point to high operating expenses, including staff pay, security and government payments.

The application process alone costs at least $13,725 in Desert Hot Springs.

Another factor is how a store obtains its pot.

"If you grow your own marijuana, the potential profit margins are higher because you're growing everything from the time the marijuana seed is planted to when you're selling it to the customers," Walsh said.

Business that gives back

Sun Grow is still completing work on a space in its store at Palm Drive and Dillon Road that will be used to cultivate marijuana.

The software that Sun Grow uses allows city officials to monitor transactions. But the city won't reveal tax revenues from a specific business since it is considered proprietary information.

Nassar, like many dispensary operators, prefers talking about the health benefits of marijuana instead of the money that can be made.

The 30-year-old Hemet native said he and business partner Anthony Lee looked into starting their shop after seeing potential for the plant to help people their parents' ages. Now they see it bettering the lives of customers, which have numbered around 1,000 in the first month.

"Medical marijuana is developing into new ways to help people and, as it's growing, we want to be there to take advantage of those medical benefits," Nassar said.

"We want to be able — with the money we make — to give back to the community. This is a business that can do that, and a lot of people overlook that side of it."

A second dispensary opening in Desert Hot Springs soon will mean more direct competition for Sun Grow. The city requires them to be operated as non-profits.

Opposition from a nearby church has not stopped plans for Brown Dog Health and Wellness to open on Pierson Boulevard in central Desert Hot Springs. The shop is moving toward an April 15 opening.

Brown Dog's president, Andrew Milks, said the dispensary will succeed by having top-quality products and knowledgeable staff.

Nassar made an identical argument when touting the advantages of Sun Grow.

A third dispensary is tentatively set for Paul Road in Desert Hot Springs, although the city has not yet approved the permit. With no building on the land yet, the shop's opening day is likely a long way off.

Milks said Desert Hot Springs could likely support more than those three shops. He supports the city increasing the number of permits, even though it would mean more competition for Brown Dog.

"I just don't know where that number would be," he said.

"With Palm Springs, Cathedral City and who knows what else, it's a weird market. I'm certainly not against more though."

Milks agreed with some Desert Hot Springs council members who have suggested the city remove its three-dispensary cap and let customers decide how many shops the city can support.

Legal fights

A major motivator in Desert Hot Springs is the extra tax revenue that more dispensaries generate for the city, which has been slow to recover from the economic recession and has been forced to make steep spending cuts to avoid municipal bankruptcy.

Cathedral City voters in November also approved marijuana taxes. Although with no dispensaries yet open in that city, there's been no financial benefit yet.

But along with the new revenue stream, cities have been forced to dedicate resources to lawsuits stemming from their dispensary permitting process.

In Desert Hot Springs, dispensary applicant DHS Alternative Healing filed two lawsuits against the city after coming in 16th of the 19 applicants.

The business is hoping a judge will force the city to process its application and issue a license for a medical marijuana dispensary.

Cathedral City also is defending itself against at least two lawsuits from dispensary applicants who did not win city approval.

This includes a lawsuit brought by Cathedral City Councilman Mark Carnevale, whose application did not include the required floor plan details and was deemed incomplete.

A judged ruled March 19 that the city was correct to reject Carnevale's application, although an appeal is possible.

Carnevale has said he became a supporter of medical marijuana after seeing how a lotion made with the plant helped his cancer-stricken wife.

Nick Hughes, the applicant behind another lawsuit against Cathedral City, believes the city is operating under a flawed ordinance that led to his application being rejected.

Officials rejected his proposed shop because it would have been too close to another dispensary, which came in first during the city's random lottery of applications.

Hughes' application was second.

His case also questions the credentials of a manager for an approved dispensary with an expunged criminal record. Hughes is planning to fight the city with the help of an attorney and a Sacramento public relations firm that's previously represented high-profile health care groups such as the California Pharmacists Association.

Hughes said he got into the business because he saw how marijuana helped his father eat and feel better in the last six months of his life, before he died of cancer.

"As Colorado and Washington began to legalize (recreational use) and I saw the rest of the country not moving forward but lagging behind, I saw this opportunity in Cathedral City to take action," said Hughes, who has a background in running real estate and sales businesses.

Walsh said legal fights are common wherever strict permit limits create competition among hopeful dispensary owners.

"A couple of years ago, you rarely heard of lawsuits tied to the licensing process," he said. "That's changed as the industry matures. And in some cases you have more savvy businesspeople involved that know when you don't win there's a legal option."

Along with creating a new niche of the legal profession, Walsh said he's seeing other professionals, such as accountants and advertising firms, specializing in the finer details of the marijuana trade.

"Basically any kind of service that's provided to other industries has a place in this one too," he said.

Expanding legality

An effort underway to legalize recreational marijuana use in California could have voters deciding the issues as early as November 2016.

If that happens, it could mean a huge shakeup for dispensaries throughout the state.

But the outcome will depend on what kind of law the state adopts. And recreational use doesn't have to spell doom for the medical dispensaries.

In Colorado, Walsh said operating dispensaries were the only businesses in a position to sell recreational pot when that state's ban was lifted on Jan. 1, 2014. And in Washington state, high taxes on recreational marijuana have helped keep customers going to medical marijuana dispensaries.

"It could be detrimental to existing medical marijuana businesses or it could be a huge boon for them," Walsh said of legalizing recreational marijuana in California.

Nassar and Milks both named Indio — the Coachella Valley's most populous city — as a promising place for second stores, if the city ever allows dispensaries. They predicted their fledgling businesses would be able to adapt to legal recreational use.

"We're not worried it's going to shut us down at all," Nassar said.

"If anything, it's going to put better product out on the market. It won't have to be hidden."

But Nassar also wondered if legalization could mean his company will someday be competing against brands like Camel and Marlboro.

"We don't always have a lot of choice in where we go with our business, and that's kind of the weird thing," Milks said.

"This whole thing is so new, it's hard to tell how long it will last or if it will develop into something where Whole Foods will carry it."

Reach Barrett Newkirk at (760)778-4767, barrett.newkirk@desertsun.com or on Twitter @barrettnewkirk.

A push to legalize

Supporters of recreational pot are looking at 2016 as an opportunity to ask voters to legalize it in California, which already accounts for half of the nation's $2.7 billion marijuana industry.

In 1996, California was the first state to approve marijuana for medicinal uses. Since then 22 more states and Washington have followed suit.

Four states — Alaska, Oregon, Colorado and Washington — have legalized it for recreational use.

Californians in 2010 voted down a ballot measure to legalize recreational use, which 54 percent of voters opposed. Backers believe attitudes have changed enough to make success a better possibility in 2016.

Did you know?

Palm Springs collected $1,034,346 from its marijuana dispensary tax in 2014.

Similar tax measures won voter approval in Desert Hot Springs and Cathedral City last November. However, with shops in those cities just opening or still preparing to launch, the financial gain those two cities will see from medical marijuana is not yet known.

West valley dispensaries

Seven medical marijuana shops have received permits from west valley cities, but some have not yet opened.

Open medical pot shops

C.A.P.S.

4050 Airport Center Drive, Palm Springs

Desert Organic Solutions

19486 Newhall St., Suite 102, Palm Springs

Organic Solutions of the Desert

4765 E. Ramon Road., Palm Springs

Sun Grow

17003 Palm Drive, Desert Hot Springs

Permitted but not open as of March 27

Brown Dog Health and Wellness

66595 Person Blvd., Desert Hot Springs

Green Cross Pharma

68730 Summit Drive, Cathedral City

Palm Springs Safe Access

1247 S. Gene Autry Trail, Suite A, Palm Springs