Illegal Los Angeles Dispensaries Creating Huge Headaches for Legit MMJ Centers

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Scores of illegal medical marijuana dispensaries are still cropping up in Los Angeles and hundreds of existing centers that were supposed to close remain open, creating huge business headaches for owners allowed to continue operating under a new law.

The fallout of the situation is significant:

– Legal, compliant dispensaries are not yet seeing the expected benefits of consolidation, such as increased pricing power and foot traffic.

– Many dispensaries that can remain open under the law but must move further away from schools, parks, churches and community centers can’t find a new location, with owners saying that the illegal shops are occupying the only available spaces. In other cases, owners have used high-priced mapping services to find a suitable building, only to discover after putting tens of thousands of dollars down on a lease that the location doesn’t qualify (ie, there’s a nearby school in a high-rise building that the mapping service didn’t identify).

– Landlords have driven up prices, as demand for dispensary space is high given the new location restrictions and the prevalence of pop-up, fly-by-night centers that are willing to pay huge sums in rent.

– Some of the illegal centers are offering medical marijuana at rock-bottom prices and essentially selling to anyone who comes in the door, allowing them to attract hundreds of customers a day. That’s pushing down prices even further, making it harder for the legit dispensaries to compete. The newer illegal centers often simply move locations when ordered to shut down by the city.

“We are seeing more illegal dispensaries open every day,” said Aaron Justis, chief executive officer of Buds and Roses, a dispensary in Studio City that is on a list of 134 MMJ centers allowed to continue operating. “It’s hard to be optimistic when new stores open weekly and their signs say they are…compliant when they are not, and no enforcement happens against them.”

In May, Los Angeles residents voted in favor of a measure (Proposition D) to force most of the city’s estimated 800-1,000 dispensaries to close. Only the 134 identified centers that were open before a 2007 moratorium can continue operating – a hugely controversial stipulation that has split the MMJ industry.

Los Angeles has moved slowly on the enforcement end. Last week, the city said it has taken actions to shutter 38 dispensaries, adding that it will prosecute additional centers every week. An additional 42 dispensaries also voluntarily closed since spring, according to LA officials.

But the new city attorney has put dispensaries operating outside the law on high alert, saying he will significantly step up enforcement.

“We’re going to see a major difference in the way that operators and property owners perceive the city,” City Attorney Mike Feuer vowed at a press conference last week, according to The Los Angeles Times. “They are going to accurately perceive us as moving effectively and systematically to assure that the will of the voters is, in fact, effectuated.”

Still, the industry is skeptical that LA can effectively shut down most noncompliant dispensaries, given the resources required and the difficulty of identifying the fly-by-night operators. Some dispensary owners also have filed legal challenges to the new law. And certain aspects of the new measure are extremely murky, so dispensary owners and lawyers are interpreting it differently, particularly when it comes to where centers are allowed to locate.

At the same time, dozens of dispensaries on the city’s list of approved centers are no longer in existence. Some owners of these failed dispensaries still hold their original licenses and are now selling them to the highest bidder – even though the law stipulates that the center must have been in continuous operation.

When viewed as a whole, these trends show that LA’s medical marijuana industry is still on shaky ground, and it remains one of the most volatile and uncertain MMJ markets in the country. Or, as one dispensary owner described the situation: “It’s a nightmare.”