It sounds like a Silicon Valley tale: Eugene brothers Paul and Brice Sherman and friend Adam Chase launch their startup with a year of 80-hour workweeks and nearly $200,000 in seed money.
The Monroe Street warehouse where they lease 2,500 square feet was built a half-century ago and looks it from the outside.
But the team is not producing the latest high-tech innovation. They’re focused on commercial production of recreational pot products.
The cannabis-laced snacks and waxy hash oil they’re supplying to marijuana dispensaries is an unprecedented use of the old factory.
“We want to offer all different types of (pot) extracts,” said Paul Sherman, who last year formed Willamette Valley Alchemy with his brother and friend.
Their company is one among scores of Lane County applicants seeking state permission to grow or process recreational marijuana on a commercial scale. Of the 712 cannabis production and processing license requests filed with the Oregon Liquor Control Commission’s marijuana division since Jan. 4, 84 are in Lane County.
Like Sherman, a number of the applicants already were producing for medical marijuana retailers. But growing or processing recreational pot for sale through retailers, as the state continues to phase in the recreational use of pot, holds promise of much higher sales volumes and far greater profits, these entrepreneurs hope.
The state keeps the businesses’ identities secret while it reviews their applications. But building permit applications filed with local planning departments reveal the budding local marijuana growing industry’s scope. In west Eugene alone, these businesses are spending millions of dollars to buy, lease and renovate dozens of industrial buildings. Across rural Lane County, applicants are setting up pot greenhouses to comply with security standards set by state marijuana regulators.
Aplicants want to fill parts of 36 west Eugene industrial buildings with as much as 290,000 square feet of marijuana grows or processing sites, permits show, enough to fill nearly three quarters of Matthew Knight Arena with pot.
At least 32 applications have been filed with the Lane County Land Management Division for outdoor pot grows on land in unincoporated Lane County. Even more, at least 64, have applied to grow or process marijuana indoors, within Eugene city limits.
“It’s happening in a big way, and it’s still happening,” Eugene real estate broker John Brown said of the rush to acquire real estate. “I want to know who is going to smoke all this dope?”
Chase and the Sherman brothers compare their company to a small craft brewer. They say the state’s emerging market for legal recreational pot sales is a chance to reach more customers and eventually add employees. Currently, only medical marijuana dispensaries can sell pot, both to medical marijuana card holders and recreational buyers. The dispensaries will be allowed to sell extracts and edibles starting next month. Within a number of months, the state will let retailers focus solely on recreational pot. Many dispensaries have said they will convert into recreational-only stores.
Barriers to entry
But the new market poses challenges, too: Steep startup costs keep early profits close to nil, while banks largely shun lending to a business that’s illegal under federal law.
“We just want to be legitimized, we want to do this as an official business, not just some behind-the-scenes-type operation,” Paul Sherman said. “You can make a lot more money on the black market if you want to. We’re paying taxes. We feel like if everyone really starts to do this stuff the right way, there’s a lot of opportunity.”
Growers and processors aren’t the only ones sensing opportunity. Eugene businessman and developer Bill Sokol saw a chance to quickly fill a building with tenants, so last year he built a 20,000-square-foot warehouse on Roosevelt Boulevard in Eugene. Soon it will be filled entirely with pot grows.
“I was just following the demand,” Sokol said. “I don’t have a crystal ball, but I do know that there is a demand for warehouse space, and it was generated specifically from the demand from the marijuana industry.”
One of the growers taking space in Sokol’s building is Justin Howard, 33, a Eugene resident since third grade and a marijuana grower for 15 years.
Howard said he was arrested a decade ago on a misdemeanor marijuana growing charge. Today, he’s leased 10,000 square feet in Sokol’s warehouse, with financial backing from as far as Pennsylvania and plans to employ 20 people growing cannabis for the Eugreen Health Center dispensary on Obie Street. He’s applied for a state recreational commercial grow license.
“I like the medical aspect (of the marijuana industry) more, but I feel like it’s a limited market,” Howard said. “So I want to show that if you’re going to be in recreational cannabis, it can still be grown with passion.”
In it for the money
But others view their pot venture purely as an investment, growing green to make green.
New York marijuana real estate firm Kalyx Development spent months scouring Oregon last year before finding what it was looking for: an empty 107,000-square-foot factory on West Third Avenue that once produced computer hard drives and later bottled water.
“We were looking at properties in Portland, and we had found a couple we liked, but we decided to expand our geographical search,” Kalyx CEO George Stone said. Kalyx bought the building from the Eugene Water Electric Board for $3 million last summer.
The firm, whose backers include wireless communications and bank executives, real estate, restaurant and hotel property managers, plans to spend a few million dollars more dividing the building into 10,000-square-foot spaces, which it’ll rent to licensed growers, he said.
“Eugene is a very progressive area. We thought that it would be receptive to the use,” Stone said. “We expect we’ll have tenants be able to be successful in that kind of environment, and over time generate a good return.”
Investors such as Kalyx have deep enough pockets to buy buildings mortgage-free or fund their own construction.
But much of the industry is operating on razor-thin margins, shut out from access to credit from lenders, cannabis advocates say. The heads of Bank of America and Wells Fargo have said they won’t open accounts for anyone profiting from marijuana sales. Neither will Eugene-based Pacific Continental Bank.
“It is our policy to follow federal law against providing banking services to marijuana-related businesses,” Pacific Continental spokesman Michael Dunne wrote in an email.
Many property owners, wary of losing a construction loan or having a bank account closed, are charging marijuana operators 40 to 100 percent more in leases than non-cannabis businesses, said Tim Campbell of Campbell Commercial Real Estate.
“Our hands are tied as brokers or property owners that have loans,” Campbell said. Banks “are treating it like it’s still a horrible thing. … It means the risk factor for somebody to build warehouses or grow operations and lease them out to the marijuana industry is so high, there is a premium to be paid.”
Plus, many west Eugene industrial buildings, built decades ago as small factories, lumber storage sheds and other uses, aren’t equipped for the electric and water-intensive marijuana grows.
“We’ve had some transformers burn up in the last year and seen some service lines burned” by medical marijuana growers shorting their power systems, Eugene Water Electric Board spokesman Joe Harwood said. The problem hasn’t been widespread, though, and most growers are working with the utility to upgrade their buildings’ electric capacity, he said.
It’s a necessary but grueling financial drain for Jarrod Kaplan, owner of Sugartop Buddery. He wants to set up a 5,000-square-foot pot grow in a former fencemaker’s warehouse on Ocean Street in west Eugene.
The sprinkler system he must install to meet city and state rules will cost three times as much as his first estimate, on top of a $3,750 application fee to the state, plus fencing and security costs.
“We’re probably going to have to find more investment,” Kaplan said.
But the bank freeze remains the biggest drag on the market, say many growers, processors and advocates for the industry.
Willamette Valley Alchemy can’t deposit its revenues in a savings account, or get a loan. Neither can TJ’s Organic Provisions, a Eugene retail dispensary and medical marijuana grower.
“It’s so difficult to pay people, so difficult to have a legitimate business,” owner Travis MacKenzie said. “When you have an employee, you have to do things like pay workers’ compensation, pay insurance, pay taxes. It’s difficult to do, because we can’t bank.”
That’s just one of several financial pitfalls for his business. He projects his gross sales will be $1.8 million to $2 million in the first year, but that he’ll just break even.
Marijuana still is classified federally as a Schedule 1 controlled substance, more dangerous than cocaine, methamphetamine or oxycodone. MacKenzie and others in the industry can’t deduct business expenses when filing taxes, since the IRS considers pot sales to be drug trafficking.
TJ’s hired a payroll service to handle its cash. Some businesses have found creative ways around the banking issue, but many others are stuffing hundreds of thousands of dollars in $20 bills into shoe boxes.
“Somebody might come in and shoot you, steal your money, ambush your car break or break into your dispensary,” said Amy Margolis, executive director of the Oregon Cannabis Association and an attorney with Emerge Law Group in Portland. “Plenty of people are operating in cash, and it’s dangerous.”
The only hope for the pot industry hinges on Congress rescheduling marijuana as a lower-risk drug, Margolis said.
Last year, Oregon U.S. Sens. Ron Wyden and Jeff Merkley introduced the Marijuana Businesses Access to Banking Act of 2015 in Congress.
But there’s been no follow-up action since it was referred to a Senate banking committee, and Congress’s attention is elsewhere, Margolis said.
“I don’t have much hope” for a solution, she said.
The roadblocks are baffling to growers like MacKenzie, who figures some of his less business-savvy counterparts will fold under the financial challenges.
“Why not be in favor of supporting a new, multi-billion dollar business in this country?” MacKenzie said. “I employ like 40 people, at least part time, and every single one my employees makes well over minimum wage. That’s something I think as a society we should embrace.”
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More Marijuana articles »
Today: Scores of Lane County residents hope to set up commercial recreational pot grows
Monday: A Eugene restaurant family segues into the commercial pot-growing business
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