Cannabis revenues to drop – Ceres Courier

Yet another developer agreement for a cannabis retailer was amended by the City Council on Monday in light of a more local competition which will result in less revenue for the city.

The Ceres City Council voted 3-2 to approve changes to the agreement that allows Pacafi Cooperative, Inc., to pay less in fees to operate its Patient Care First dispensary at 1442 Angie Avenue in Ceres.

At the time of the first developer agreement was inked, the Patient Care First began operating in December 2017 with only selling cannabis to medicinal patients. But it later began selling recreational marijuana after California voters approved recreational cannabis use among adults. In the past three years, other jurisdictions like the city of Turlock and Stanislaus County also followed Ceres’ example and began allowing dispensaries, which have cut into sales.

“The market has changed locally,” explained City Manager Tom Westbrook. “In 2017 this was one of the first development agreements by any city within Stanislaus County so we didn’t necessarily know how it would go.”

On Sept. 8 the Ceres Planning Commission gave its approval to the proposed changes.

The new agreement for Patient Care First is valid for a longer time – 10 years instead of the three-year duration – and lowers the payment structure “to be more reflective of the current cannabis business market conditions,” said Senior Planner James Michaels.

The three-year agreement, which is expiring in November, requires payment to the city of a monthly fee of $40,000 if the firm earns $500,000 or less in gross receipts per month. The fee jumped to $50,000 per month for gross receipts between $500,001 and $800,000; $75,000 per month for sales of $800,001 to $1.1 million; and $100,000 monthly for sales more than $1,100,001.

“Because there’s more competition in the marketplace,” said Westbrook, “the applicant has suggested … if they cap threshold could be lowered from $100,000 to $70,000. Staff is okay with that reduction in the cap.”

The new structure lowers the base amount of $20,000 per month or five percent of gross receipts, whichever is greater, and sets a cap of $70,000 per month. The gross receipts factor is modeled on a similar framework utilized by the state for tax purposes.

Westbrook suggested the new agreement be for a 10-year period “as an assurance that if they’re going to spend hundreds of thousands of dollars to fix the building and the parking lot to best utilize and benefit their business, they want to know that they can be there for a period of time.”

The agreement also reflects the state Bureau of Cannabis Control allowing delivery from cannabis retailers.

“They’re just requesting to be able to deliver from their location which staff is not opposed to,” said Westbrook.

Vice Mayor Linda Ryno expressed concern about cannabis deliveries with the potential for thieves stealing packages off the porches or robbing delivery drivers or home customers.

“I just don’t think it’s safe to allow home delivery of cannabis,” said Ryno. “I like the fact that we can control the retail aspect by having security but once they leave that building what’s to say that someone isn’t going to stake them out because the word will get out. And again, now you’ve brought that into residential areas. I’m not comfortable with home delivery.”

She also expressed concern about a 10-year agreement because Kase Manufacturing asked for a 15-year contract and was given five years.

Mayor Chris Vierra noted that cities cannot ban deliveries of cannabis to their residents from retailers such as Amazon or others located outside the city limits.

Councilman Channce Condit supported the 10-year period but insisted on an earmark for public safety despite the fact that cannabis revenues go into the general fund of which 80 percent is spent on police and fire. This time, however, Condit specified that he wants the funds earmarked to help retain public safety employees.

Councilman Mike Kline said he is “scared” of Condit’s idea for earmarks, saying when revenues decrease it must be taken out of public safety. He said with earmarks of 70 percent, the recent changes to the developer agreements would have reduced revenues to police and fire by $252,000 annually.

“With no earmark in it we have the latitude, as a council, to take that $30,000 deduction and reduce where we feel that we can work with and not make a big impact on public safety,” said Kline.

Devin Stetler of Pacafi said deliveries are already happening to Ceres customers from outside and if the council restricted Ceres cannabis retailers from delivery that would mean a loss of revenue. Another Pacafi representative, Rob Roberts, thanked the council for taking the lead years ago which has benefited city revenues.

Mayor Chris Vierra, and Councilmen Bret Durossette and Mike Kline voted in favor of the amendment while Condit and Ryno voted no.

In April the city also amended its developer agreements with Mike Reynolds who operates Kase Manufacturing. The three-year agreement with Kase expired and was replaced with a new agreement for a period of 15 years with the fee paid to the city “more reflective of the current cannabis business market conditions,” according to a city staff report.

Previously Kase was paying the city a monthly fee of $40,000 when the firm earned $500,000 or less in gross receipts that month. The fee was set at $50,000 per month for gross receipts between $500,001 and $800,000; $75,000 monthly for sales of $800,001 to $1.1 million; and $100,000 monthly for sales more than $1,100,001.

The new agreement is now moving to a base amount of $25,000 per month or five percent of gross receipts, whichever is greater.

The legal sale of cannabis is subject to a cannabis specific state excise tax, the standard sales tax, and any local excise tax such as Ceres’ Measure H. The retail sale of medicinal cannabis is not subject to the cannabis specific state excise tax. 

Reynolds said when he entered the agreement in 2017 it was a “blind stab” at what sales would be.

“We took a blind guess on the amount of money that we would pay per month. Knowing where the cannabis industry was at then to where it is now has drastically changed,” said Reynolds, who called the agreement one of the most lucrative for any city in California.

“In all honesty if we continued at $100K there would be no discussion in talking about future revenue (to the city) because I wouldn’t be able to stay open,” Reynolds told the council in April. He said during October and November 2019 the cannabis market took a crash “because you have a lot of bad actors and you have a lot of people who aren’t playing by the rules.”

He said with a floor of $25,000, or 5 percent, the city is still getting a generous deal given that some cities settle for as low as three percent.

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