Oregon Marijuana Industry Gives Initial Recreational Regulations a Thumbs-Up

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By John Schroyer

Several stakeholders in Oregon’s marijuana industry are giving state officials a pat on the back for the temporary recreational cannabis rules they adopted last week.

“I’d give them a B,” said Shane McKee, the owner of Shango, a medical cannabis grower and dispensary company that plans on applying for nine rec licenses.
“Overall, they listened to folks in the industry.”

McKee said there are aspects of the rules that are “less than desirable,” such as a prohibition on using promotions, discounts and coupons to draw in customers.

But when taken as a whole, he feels that the regulations are adequate and present opportunities for businesses of all sizes to get involved.

“It looks like…they’re going to allow many people to join the marketplace at a smaller scale, and decide where it goes from there,” McKee said.

The state also seems willing to work on some of the more controversial aspects of the regulations, which were set by the Oregon Liquor Control Commission (OLCC).

One of these areas revolves around limits on cultivation operations. Tier 1 growers are limited to 5,000 square feet of indoor cultivation space or 20,000 feet outdoor. For Tier 2 growers, it’s 10,000 feet indoor and 40,000 feet outdoor.

“There were a lot of people in the community who were not happy about those caps,” said Sam Chapman, the head of New Economy Consulting, which works with cannabis businesses.

But, he said, the OLCC struck a deal with some of the stakeholders so that local governments can apply for exceptions to those limits for cannabis growers in their jurisdictions. And he expects some local officials to take advantage of that.

“It comes down to geographical politics. In southern Oregon, you have a lot of canopy that already exists down there,” Chapman said. “A lot of localities are also just interested in creating jobs.”

The fee schedule for companies that want to apply starting in January is also “reasonable,” McKee said. Businesses will have to pay $250 to apply for permits, while actual licensing fees will run from $3,750 for smaller growers to $4,750 for retailers, processors and labs, to $5,750 for larger growers.

That’s cheaper than the fee structure in Colorado, but more expensive than in Washington.

Oregon is set to follow Colorado in an arguably much more important way, however: There won’t be a cap on the number of business licenses to be issued. That means the free market will end up sorting out which companies survive and which ones don’t after the industry matures.

Portland attorney Amy Margolis also had good things to say about the OLCC’s work, but she added that there’s still plenty of refinement ahead.

“They’re not really quite done. Those rules came out, but we’re still waiting on things,” Margolis said, such as the actual application forms for businesses. “We have hundreds of applications to fill out, so I need those before December.”

There are also several other questionable rules, Margolis said, such as a water rights provision for cultivators.

“The water rights are really crazy. It requires you to either have water rights or a municipal water source. And a lot of people in Oregon have water trucked in, so they might be disallowed from cultivating,” she said.

There’s also lack of clarity on smaller questions and provisions, Margolis said, to which the OLCC simply hasn’t made up its mind.

“A lot of the answers are, ‘We haven’t decided yet,'” Margolis said.

Many also expect significant changes to the rules between now and June, when permanent regulations will be adopted. Indeed, the state legislature has already signaled its intent to tweak some of the rules.

A major provision that lawmakers are widely expected to revisit is the residency requirement for ownership stakes in a recreational company.

Under the temporary rules, a given rec business must have at least 51% ownership by Oregon residents who have lived in the state for at least two years. That directly limits the role that out-of-state investors can play in the industry, and it’s something the legislature is expected to change.

Margolis also expects lawmakers to tackle the issue of whether shops can sell both medical and recreational cannabis, which would require passage of yet another bill in the five-week legislative session that begins in February.

Currently, the Oregon Health Authority is overseeing the state’s MMJ program and dispensaries, and that responsibility may be transferred to the OLCC in order to consolidate regulatory powers. (Colorado and Washington State each have a single agency that oversees both medical and recreational cannabis, for example.)

The next big step is the application and licensing process, which begins Jan. 4.

That’s where Margolis expects to see the most hiccups because there will be almost certainly a flood of applications turned in to the OLCC in the first few months of 2016.

She pointed to the fact that 280 MMJ dispensaries out of 315 listed with the Oregon Health Authority applied to begin selling recreational cannabis (which they were allowed to start doing on Oct. 1). All the dispensaries will have to go through the OLCC application process at some point next year if they want to continue selling recreational cannabis after the end of 2016.

The OLCC will also be fielding applications from would-be rec growers, infused product manufacturers, wholesalers and laboratories, not to mention a host of other businesses that will want to open rec shops.

“This is the-devil-is-in-the-rollout. That’s where the pain is going to be,” Margolis said.

Chapman added that a lot of applicants also probably haven’t yet taken into account that they’ll need the support of local officials wherever they intend to operate. Each rec business will need a local government to sign off on a land use compatibility statement for the OLCC before it can begin legally operating.

And there are still varying local regulations to take into account for businesses depending on where they want to locate.

“There’s going to be a whole second chapter of regulations that they need to follow in quite a few instances,” Chapman warned. “All these local cities and counties have very broad rulemaking authority when it comes to time, place and manner.”

John Schroyer can be reached at johns@mjbizmedia.com