Law and Legislation Committee
March 15, 2022

Susana Alcala Wood, City Attorney Jorge Oseguera, City Auditor Mindy Cuppy, City Clerk Howard Chan, City Manager John Colville, City Treasurer Law and Legislation Committee Report
915 I Street, 1st Floor
Sacramento, CA 95814
www.cityofsacramento.org

File ID: 2022-00262 March 15, 2022 Discussion Item 05

Title: Comprehensive Study of the Cannabis Industry Workshop (Part 1)

Location: Citywide

Recommendation: Conduct a workshop on a comprehensive study of the cannabis industry and the City’s cannabis program.

Contact: Davina Smith, Cannabis Manager, 916-808-4772, [email protected] ,
Zarah Cruz, Program Specialist, 916-808-8925, [email protected], Office of Cannabis Management, Office of the City Manager

Presenter: Representatives from Economics & Planning Systems, Inc. (EPS)

Attachments:
1-Description/Analysis
2-Sacramento Comprehensive Cannabis Study (EPS Study)

File ID: 2022-00262 Discussion Item 05
March 15, 2022
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City of Sacramento

Description/Analysis

Issue Detail: The City has commissioned a study of its cannabis program and the cannabis industry in Sacramento to track the evolution of industry trends and practices, evaluate the City’s existing regulatory framework, and help guide future policy development in regulating cannabis.

The study was conducted by Economics & Planning Systems, Inc. (EPS), a land use and economics consulting firm with expertise in real estate development and land use issues and public policy in all phases of the urban life cycle. EPS has offices in Sacramento, Oakland, Los Angeles and Denver and maintains public and private sector clients throughout the United States.

Topics that were covered in the study include land use, real estate value, ownership of cannabis businesses, social equity, labor and workforce development, and taxation and other economic impacts of the cannabis industry in the city. In conducting the study, EPS studied the trends in Sacramento’s cannabis industry; analyzed data related to above subject matters; and interviewed property owners, current and potential business owners (e.g., participants from the Cannabis Opportunity Reinvestment and Equity (CORE) Program and representatives from Property Business Improvement Districts (PBIDs)), and neighborhood associations. The firm also conducted a comparative analysis of similar jurisdictions that regulate cannabis businesses, both in California and out-of-state.

EPS will provide the Law and Legislation Committee (Committee) with oral presentations on the data and findings, as well as recommendations from the study at a series of workshops intended to elicit public comment. At the end of these workshops, it is intended that staff will take the Committee direction, along with public comment, and bring forward recommendations to the relevant committees and the Council.

Policy Considerations: Two of the topics to be covered in the initial workshops will have a policy impact on ordinances, two of which will expire in May 2022, namely the moratorium on the changes in the ownership of storefront dispensaries and the limit on the number of delivery operations in the Southeast Industrial Area. Long-term actions have been deferred on these two items pending the outcome of a wholistic study of the industry. The third topic to be covered in the initial workshops covers the question of undue concentration of cannabis businesses in District 2. The issue was heard by the Planning and Design Commission in the summer of 2021 and recommended the adoption of new buffer zones around cannabis business. However, this Committee continued the item until EPS has concluded its study and presented its findings.

File ID: 2022-00262 Discussion Item 05
March 15, 2022
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City of Sacramento

Economic Impacts: None.

Environmental Considerations: This action is exempt from the California Environmental Quality Act (CEQA) because it is the adoption of an ordinance, rule, or regulation that requires discretionary review, including environmental review, and approval of permits, licenses, or other authorizations to engage in commercial cannabis activity (CEQA Guidelines sections 15061(B)(1), California Business and Professions Code section 26055(h)) and because it does not have the potential for causing a significant effect on the environment (CEQA Guidelines section15061(b)(3)).

Sustainability: Not applicable.

Commission/Committee Action: Not applicable.

Rationale for Recommendation: Staff has no specific recommendation for this workshop and defers to the Committee to consider the EPS report and public comment, and provide specific directions by topic, if deemed warranted.

Financial Considerations: None at this time.

Local Business Enterprise (LBE): Not applicable.

Final Report
Sacramento Comprehensive
Cannabis Study

Prepared for:

City of Sacramento, Office of Cannabis Management

Prepared by:

Economic & Planning Systems, Inc. (EPS)

March 8, 2022

EPS #212060

Table of Contents
Introduction ................................................................................. 1 Study Focus Areas, Approach, and Methodologies .................................... 2 Issues Overview ................................................................................. 4 Chief Findings .............................................................................. 7 Primary Conclusions ............................................................................ 8 Additional Considerations ................................................................... 12 Overview of Cannabis in Sacramento .............................................. 15 Growth of the Industry ...................................................................... 15 Location of Industry Function Groupings ............................................... 25 Economic Trends in the Cannabis Industry ..................................... 29 Introduction ..................................................................................... 29 Macro-Level Trends ........................................................................... 29 National Trends ................................................................................ 39 State Trends .................................................................................... 42 Local Trends .................................................................................... 48 Ownership Considerations .................................................................. 55 Taxation Considerations ..................................................................... 65 Concentration ................................................................................... 74 Real Estate and Neighborhood Impacts ........................................... 81 Overview ......................................................................................... 81 Potential Negative Concerns ............................................................... 87 Contrasting Geographies: Long Beach, Seattle, Denver, and Oakland ....... 92 Real Estate and Neighborhood Impact Indicators and Findings ................. 95 Cannabis Impacts on Industrial Real Estate ........................................ 101 Industrial Findings .......................................................................... 103 Residential Real Estate .................................................................... 110 Cannabis Economic and Fiscal Impacts in Sacramento ..................... 127 Economic Impact Analysis ................................................................ 127 Fiscal Effects of the Cannabis Industry on the City General Fund ............ 131 Selected Bibliography ........................................................................ 135

Appendices
Appendix A: Fiscal and Economic Impa ct Analysis Methodology and Detailed Tables
Appendix B: Initiatives in Other States
Appendix C: Comparison of Cannabis Land Use Regulations: Sacramento, Oakland, Long Beach, Seattle
Appendix D: Comparison of City of Sacr amento and State of California Cannabis Regulations
Appendix E: Real Estate Mark et Analysis Support Figures Appendix F: Cannabis Business Crime Data

List of Figures
Figure 1. Consumer Cannabis Spending at Sacramento Retailers ..................... 16 Figure 2. City Sacramento Consumer Spending in 2021 .................................. 17 Figure 3. Gross Receipts by Industry Function Group ..................................... 18 Figure 4. Trends in Licensed Cannabis Businesses per Year ............................. 21 Figure 5. Cannabis Supply Chain Diagram .................................................... 25 Figure 6. City of Sacramento Distribution of IFGs .......................................... 26 Figure 7. Wholesale Cultivator Profitability .................................................... 33 Figure 8. Cannabis Retailer Revenues and Costs ............................................ 37 Figure 9. Annual Growth of Legal Versus Illicit Cannabis Sales in the US ........... 40 Figure 10. Cannabis Product Composition ..................................................... 41 Figure 11. Estimated Licensed and Unlicensed Retailers by Region ................... 43 Figure 12. Average Price for Cannabis Flower by Retail Type ........................... 43 Figure 13. State of California Cannabis Tax Revenues—2018-2021 .................. 45 Figure 14. Quarterly Licensed Cannabis Sales per Capita by California Region .... 46 Figure 15. Consumer Spending on Legal Cannabis in Sacramento .................... 48 Figure 16. City of Sacramento Gross Receipts by Industry Function Group ........ 49 Figure 17. City of Sacramento Occupied Square Footage by IFG ...................... 50

Figure 18. City of Sacramento Gross Receipts per Square Foot by IFG .............. 51 Figure 19. City of Sacramento Cultivation Floor Area Growth ........................... 52 Figure 20. City of Sacramento Distribution of Cannabis IFGs ........................... 82 Figure 21. Industrial Floor Area by Council District ......................................... 84 Figure 22. City of Sacramento Cannabis Buffers and Available Land ................. 85 Figure 23. Detail of Cannabis Businesses in Council District 2 .......................... 88 Figure 24. Detail of Cannabis Businesses in Council District 3 .......................... 89 Figure 25. Detail of Cannabis Businesses in Council District 4 .......................... 89 Figure 26. Detail of Cannabis Businesses in Council District 5 .......................... 90 Figure 27. Detail of Cannabis Businesses in Council District 6 .......................... 91 Figure 28. Distribution of Cannabis Businesses in the City of Long Beach .......... 93 Figure 29. Distribution of Cannabis Dispensaries in the City of Seattle .............. 94 Figure 30. Retail Occupancy & Rent: Citywide and Cannabis Analysis Zones ...... 96 Figure 31. Retail Occupancy & Rent: D4 Overall and D4 Cannabis Analysis Zones.......................................................................... 97 Figure 32. Retail Occupancy & Rent: Representative D4 Cannabis Analysis Zones.......................................................................... 97 Figure 33. Retail Occupancy & Rent: Districts Overall and Cannabis Analysis Zones.......................................................................... 99 Figure 34. Industrial Real Estate Metrics by Building Size and Class ............... 102 Figure 35. Industrial Occupancy & Rent: Citywide and Cannabis Analysis Zones........................................................................ 103 Figure 36. Industrial Occupancy & Rent: D1 Overall and D1 Cannabis Analysis Zones........................................................................ 104 Figure 37. Industrial Occupancy & Rent: D2 Overall and D2 Cannabis Analysis Zones........................................................................ 105 Figure 38. Industrial Occupancy & Rent: Representative D2 Cannabis Analysis Zones........................................................................ 106 Figure 39. Industrial Occupancy & Rent: D4 Overall and D4 Cannabis Analysis Zones........................................................................ 107 Figure 40. Industrial Occupancy & Rent: Representative D4 Cannabis Analysis Zones........................................................................ 107 Figure 41. Industrial Occupancy & Rent: D5 Overall and D5 Cannabis Analysis Zones........................................................................ 108

Figure 42. Industrial Occupancy & Rent: Representative D5 Cannabis Analysis Zones........................................................................ 108 Figure 43. Industrial Occupancy & Rent: D6 Overall and D6 Cannabis Analysis Zones........................................................................ 109 Figure 44. Industrial Occupancy & Rent: Representative D6 Cannabis Analysis Zones........................................................................ 110 Figure 45. Industrial Occupancy & Rent: D7 Overall and D7 Cannabis Analysis Zones........................................................................ 110 Figure 46. Home Values in the Sacramento Region ...................................... 111 Figure 47. Home Values in Sacramento Neighborhoods ................................ 112 Figure 48. Home Prices within ¼-Mile of Cannabis Production Uses ................ 114 Figure 49. Home Prices Near Cannabis Production Uses in Council District 2 .... 116 Figure 50. Home Prices Near Cannabis Production Uses in Council District 6 .... 118 Figure 51. Single-Family Home Sales within One-Quarter Mile of Dispensaries . 120 Figure 52. Economic Impact Analysis Components ....................................... 129

List of Tables
Table 1. City of Sacramento Gross Receipts by Industry Function Group ........... 15 Table 2. Cannabis Employment by Industry Function Group ............................ 18 Table 3. Top 10 Industries by Employment in City of Sacramento .................... 19 Table 4. Licensed Cannabis Businesses per Year ............................................ 20 Table 5. Overview of Cannabis Industry Function Groups ................................ 24 Table 6. Cannabis Businesses by Function Group per Council District ................ 27 Table 7. Key Multinational Cannabis Companies ............................................ 31 Table 8. Annual Licensed Cannabis Sales per Capita 2018–2021 ...................... 47 Table 9. Industry Function Group Characteristics ........................................... 53 Table 10. Local Tax Comparison .................................................................. 66 Table 11. Licensed Cannabis Businesses by Council District ............................. 83 Table 12. Sacramento Cannabis Businesses by Zoning Classification ................ 86 Table 13. Cannabis Business Floor Area Concentration by Council District ......... 87

Table 14. Home Prices Near of Cannabis Production Uses ............................. 115 Table 15. Home Prices Near Cannabis Production Uses in Council District 2 ..... 117 Table 16. Home Sales Near Cannabis Production Uses in Council District 6 ...... 119 Table 17. Home Sales Near Cannabis Dispensaries ...................................... 121 Table 18. Robberies and Burglaries at Cannabis Businesses in Sacramento ..... 124 Table 19. Robberies and Burglaries by Cannabis Business Type ..................... 125 Table 20. Summary of Economic Impacts ................................................... 130 Table 21. Summary of Fiscal Impacts ........................................................ 132 Table 22. Detailed Summary of Fiscal Impacts ............................................ 132

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Sacramento Comprehensive Cannabis Study
March 8, 2022
Economic & Planning Systems, Inc. (EPS) 1
Introduction
The City of Sacramento (City) has retained a team led by Economic & Planning Systems, Inc. (EPS) to conduct a comprehensive cannabis study (SCCS/Study).

The Study is directed to the City and is intended to inform public policy pertaining to land use, fiscal/economic, and other regulatory/policy topics. The industry is continually on the verge of significant change. After only a handful of years of legalized adult cannabis consumption in Sacramento, the timing for this Study is ideal as the City considers regulatory options. The Study revolves around the following four questions:

1. What is the scale of the industry and its constituent elements in Sacramento?

2. How does the industry affect the City’s economy, real estate, and neighborhoods?

3. Does the industry cover its related City service costs and generate surplus revenue to the City?

4. Based on the literature and case studies, what are some possible directions to explore regarding appropriate municipal oversight of the industry? After a brief overview of the footprint of the industry in Sacramento, national, State of California (State), and local industry performance metrics and trends are discussed relative to industry performance and tax receipts. Case studies of other jurisdictions and key literature review findings are included, providing the basis for comparing and contrasting industry regulatory techniques. Several qualitative trends and issues are examined to establish a foundation on which the components of a successful regulatory framework can be identified. For example:
 Where and under what conditions have jurisdictions regulated industry to ensure sustained health, resulting in a sustainable source of revenue?  Can big tobacco, big pharma, or private equity be combined with local stakeholders in a strategy to capture wealth in the local community?  What tools and techniques are jurisdictions using successfully to ensure that significant benefits accrue to communities in need?
 What is the most direct path to wealth creation? What cities have tried other approaches, and how do the results contrast with Sacramento’s? For example, does it make sense to facilitate major industry interests if the result is a larger and more stable flow of tax proceeds, with expanded funding for local causes or entrepreneurial support beyond the cannabis industry?

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The ideal regulatory framework for the City depends on the City’s expressed priorities. Cannabis is a dynamic, complex, new industry, highly subject to changes in market conditions and federal regulations. There is a total of 5 years of data on operating adult use cannabis in California. It is often cited as an engine for social restitution, economic development, health/wellness, and public services provision. Yet, industry and government are often not aligned in these efforts, which also reflects its relative newness and its challenge to long-time social convention, as well as legitimate concerns regarding youth exposure and other societal ills.

The cannabis industry has been prominent in California for many decades, and the illicit market remains dominant today. The State has been roundly criticized for its high excise tax, which places legal cannabis in California at a consumer price disadvantage and contributes to an overall cost burden that has become problematic for small and medium-sized operations in Sacramento, and which favors larger players with deep pocket investors that can survive a period of minimal or negative cash flow while gaining market share. Cultivating and growing a local niche of small Cannabis Opportunity, Reinvestment and Equity (CORE), woman-owned, and other sought-after owner groups in Sacramento may require a concerted effort, expanded Office of Cannabis Management (OCM) resources, and supportive policies addressing the headwinds these firms face.

A legitimate case can be made for leveraging Sacramento’s excellent geographic and political position in the State to allow arguably inevitable large firm growth to facilitate the generation of more stable and predictable tax revenue. Again, being precise about intended outcomes will help the City sort through candidate options and approaches.

Study Focus Areas, Approach, and
Methodologies
A major priority of the Study is to understand how other jurisdictions have handled these issues and options, as well as understanding the greater body of literature on the emerging practice of cannabis regulation. EPS organized its review of policy approaches across the following categories:

1. Land Use Regulation. Comparable city land use regulations related to the location of the various cannabis industry sectors and adjacent uses.

2. Ownership: Structure and Ability to Transfer. Explore the range of ownership structures in the industry from sole proprietors to large organizational models with the intent to understand current trends and operational specifics across the range. In particular, how is ownership controlled and monitored by various jurisdictions?

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3. Taxation and Fees. Investigate trends regarding the primary sources of tax revenue generation from the cannabis industry. In particular, decreasing or increasing reliance on the use of any types of taxes, changes in the tax rates applied since legalization, and the introduction of exemptions. Identify other jurisdictions’ strategies for allocating additional tax revenues.

A variety of methodologies are leveraged to provide a comprehensive overview of industry dynamics. More specific and detailed discussions of methodologies are included in the following chapters. Highlights are provided here:
 Multi-City Case Studies. Following an initial period of evaluation, several cities were chosen to serve as primary case studies, including Long Beach, Oakland, Seattle, and Denver. Case studies were carried out to compare the industry and regulations comprehensively, including but not limited to dispensary ownership regulations and approaches. These case-study findings are woven into the ensuing report on a topical basis. Interviews were held with City cannabis management leaders in Oakland and Long Beach covering a full range of topics as case-study follow-ups.
 Literature Review. As an augmentation of case studies and interviews, EPS conducted a comprehensive literature review. A list of documents accessed is provided in the Bibliography. Documents were drawn from a combination of academic, industry, government, and popular press sources.  Stakeholder and Key Informant Interviews. The EPS team conducted wide-ranging and confidential interviews among industry practitioners and representatives, government officials, academics, industry associations, Property and Business Improvement Districts (PBIDs), developers, consultants, lobbyists, neighborhood activists, and community members.  Real Estate Performance Evaluations (Leasing and Sale Trends). EPS conducted detailed evaluations of all cannabis concentrations in the City, focusing on performance metrics applying to both commercial district and residential neighborhood impacts. A variety of commercial database applications were used in these evaluations, as described in Chapter 5.  Fiscal Impact Analysis. EPS examined the impact of Sacramento’s cannabis industry on the General Fund of the City to evaluate how the complete set of revenues generated by the industry and related activities relates to public service costs caused by the industry. It should be noted that the analysis builds on departmental funding levels currently in place; however, sensitivity analysis is provided, testing increased service levels for certain departments most acutely impacted by the industry.

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 Economic Impact (Input-Output) Analysis (EIA). The EIA measures the total economic contribution of the industry to Sacramento County,1 in terms of jobs and economic output. This metric includes primary buyer/supplier transactions with the entire spectrum of entities doing business with the industry, as well as the expenditure of employee salaries in the local economy.

Issues Overview
The Study represents an effort to identify best practices in the regulatory oversight of the industry and to assess various options for the City.

The industry is continuously evolving. Over time, it is expected that federal decriminalization and regulation will substantially change the industry dynamics.

In anticipation of sweeping changes, the industry is moving quickly to consolidate and vertically integrate
2 to thrive in a larger but increasingly competitive market.

Consumer acceptance is partially a function of innovative design, packaging, marketing, and branding. Small entrepreneurs are hard pressed, with pressure from larger corporate-backed interests on one side and the black market on the other. Even highly organized and competent enterprises operating in this space in Sacramento are often unable to turn a profit and in some cases are behind on State and federal taxes.

Hence, small locally owned enterprises are also under pressure from both market conditions and tax burdens. Calibrated tax rates and reduced barriers to entry may be needed to bolster these businesses. However, the best opportunity for the industry to fund targeted programs may be reliant on the inevitable advent of big business. On one hand, this may appear to contradict several public policy objectives, including the ongoing goals of the City’s CORE program, but may provide a larger, long-term pool of revenue to fund alternative entrepreneurial and restitutive programs.

Can the City effectively incent collaboration to reduce front-end infrastructure costs? How have other cities managed to sort through these and other challenges? How can the City best harness market forces and an understanding of industry economics to benefit its local citizens and business community?

1 The federal Bureau of Economic Analysis county-based data provide the basis for input-output multiplier analysis; therefore, analysis by county or groupings of counties is more reliable than sub-county areas.
2 Vertically integrated businesses combine one or more industry functions, typically to achieve greater efficiency or to support increased market share.

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Cities such as Denver offer some clues. Several years ahead of Sacramento and other California cities in legalization of both medical and recreational cannabis, Denver has effectively assimilated the industry and the culture around it and become a related tourist destination of sorts. Retail districts are replete with upscale cannabis storefront dispensaries that blend in with a variety of other boutiques.

From an economic development perspective, a key consideration is the spillover effect the industry may have on other sectors in the Sacramento economy.

Is cannabis a viable and worthwhile pursuit as an industry providing broad benefit to the City? Further, is it an appropriate industry worthy of directing persons or groups/cohorts toward, or should more broad-based skills be emphasized across more general categories of employment and business management/ownership? An integrated approach to regulation and taxation will produce maximum benefits such as optimal usage of tax revenues and other industry-generated funds supporting reduced barriers to entry. Tax rates in Sacramento are not excessive compared to other major cities studied. The most vulnerable community entities are highly sensitive to costs of all types, including tax rates. The strongest vertically integrated users have comparatively little sensitivity to tax rates and other imposed costs.

Cannabis is a complex and challenging industry, and not a “training ground” for the inexperienced. Later in this study, EPS posits that training initiatives be spread more broadly across multiple skill sets and industries.

Based on research conducted for and represented by this report, the local legalization and taxation of the industry is related to the following interrelated issues and factors:

1. Restitution. The War on Drugs is generally accepted to have damaged individuals, households, and cultures. There is a national effort among many jurisdictions, including Sacramento, to make reparations through increased access to business equity ownership in a young and volatile cannabis industry.

2. Economic and Community Development. Does cannabis contribute to or harm the City’s efforts to grow and diversify and to train its labor force? How does it affect the neighborhoods proximate to industry facilities? Does it support growth in asset values, attract tourists, and contribute to the local arts and culture milieu? What is the importance of the industry to the City and regional economy?

3. Fiscal. The industry generates significant revenues to the City General Fund, but are current tax rates sustainable in terms of facilitating a healthy and growing local cannabis sector?

4. Health and Well-Being. For many, cannabis-derived products offer alternative and potentially low-harm benefits for medical uses and may offer a growing range of applications as further research and analysis continues.

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This Study concerns itself primarily with topics #2 and #3 stated above. While topic #1 will be further evaluated in planned follow-ups to this analysis, case- study information provided from other U.S. cities is presented as a facilitation of further study. Topic #4 will be informed over time as additional research commences, potentially at such time federal prohibition of cannabis is lifted.

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Chief Findings
A considerable portion of the unregulated industry is large and sophisticated, sharing many practices and a common long-standing culture with the emerging legal industry. Certainly, for elements of the unregulated market that routinely damage the environment, violate labor practices, and create other societal harms as a basis of their operational strategies, a viable case could be made for reduction of illegal grows and their portion of supply. Nevertheless, beyond basic common-sense measures, the correction of the legal cannabis market cannot be based on, or even primarily focused on, enforcement.

Economic incentives are the primary solution. However, the City cannot unilaterally correct the cannabis policy headwinds originating from the State, a partner with which to lobby for reduced excise taxes, introduction of a percentage cultivation tax, and strategic enforcement.

A central problem confronting these businesses is the amount of periodic debt over income. It is not uncommon to see otherwise viable small operations in Sacramento struggling to pay State and federal income taxes. Current Internal Revenue Service (IRS) provisions (Section 280E) preclude otherwise common business practices such as asset depreciation. For Sacramento’s local owners and operators, might it make sense to reduce costs of operation and start-up in support of creating a thriving local culture ahead of the gold rush in the offing? Large and vertically integrated interests are gaining momentum in North America, with a deeply financed mergers and acquisition wave sweeping the U.S., and California in particular. Sacramento is a major focal point in the State’s cannabis industry and has a strong position for future growth, if desired. Is there a rational policy regime the City can advance that provides additional support to vulnerable small and local operations over the next 3 to 5 years, while the industry and the government sort out the rules and regulations on which locals and their investors can base investment decisions?
Success in Sacramento may require the ability to command price premiums and an experiential package that goes beyond cannabis and extends to local culture.

Denver has established success in this regard. Dispensaries in Denver are welcomed in their communities, similar to the mostly positive reception in Sacramento’s Midtown. Increased quality of experience, brand awareness (local preference) on the revenue side, and appropriate training, financial assistance, and reduced unit costs through economies of scale (shared facilities) are further explored in this report based on case studies of other cities.

These case studies and supporting research suggest that cannabis revenues can be targeted to the local equity/entrepreneurial culture, facilitating the opportunity to leverage their skills into emerging opportunities.

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Primary Conclusions

1. The industry is growing and diversifying rapidly at the local, regional, State, national, and global levels.

Based on taxes remitted to the City by cannabis businesses, the cannabis industry in Sacramento took in more than $800 million in 2021. The industry’s 2021 income is more than 3.5 times the income of the industry during the first full year of legalization in 2018. Consumer spending at Sacramento’s cannabis retailers has increased rapidly, with annual year-over-year increases of 51 percent and 42 percent, respectively, in the past 2 years.

2. Dispensary sales indicate Sacramento is a net exporter of cannabis to the region and other parts of California.

With approximately $270 million in estimated taxable (excluding medical use) sales in Fiscal Year (FY) 2020/21, Sacramento experienced sales exceeding $500 per person in the City. As discussed in this report, reliable estimates of legal per capita consumption are under $200, indicating that about 60 percent of sales are oriented to other jurisdictions in the region and to pass-through buyers. As a result, an increase in the number of dispensaries will further strengthen Sacramento’s export position in the short term by adding $40 million to $60 million in additional sales to be profitable. However, it is likely additional jurisdictions may enter the market to compete for a share of the potential tax revenue. In addition, local dispensaries are losing market share to delivery services (also known as “non-storefront dispensaries”), a category that is gaining market share following the e-commerce model.

3. A short-lived spike in industrial rents following legalization appears to have eased.

Many of the industrial areas that are well-suited for cannabis production facilities experienced dramatic spikes in asking lease rates in 2018 on the heels of legalization. The rent spikes, which likely were due to a combination of real demand and speculation, appear to have moderated, though pricing pressure resulting from the growth of e-commerce and distribution remains.

4. Cannabis businesses have not had a negative impact on other nearby retail or industrial uses.

An analysis of lease rates for retail and industrial uses in the areas surrounding cannabis businesses found no pattern of negative impact on the marketability of surrounding areas, as demonstrated by asking lease-rate trends for available spaces.

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5. Cannabis businesses have not had a negative impact on nearby home values.

A comparison of home sales values within one-quarter mile of dispensaries and those within larger control groups for the same areas found that proximity to dispensaries does not reduce home values relative to other homes in the same general area.

6. Cannabis businesses have not created increases in crime beyond the levels generated by other businesses.

The proliferation of cannabis businesses in Sacramento has not generated a proportional increase in crimes targeting these businesses, suggesting that the enhanced security measures employed by these businesses are a strong deterrent to crime.

7. Cannabis is important to the City General Fund.

Cannabis generates a fiscal surplus nearing $20 million annually to the City General Fund. The contribution of cannabis to the City’s General Fund indicates potential to increase OCM resources as needed, including various services to smaller minority- and woman-owned operations that are vulnerable in today’s economic and policy environment, including incentives to sustain CORE entrepreneurs.

8. Cannabis is a significant driver of the Sacramento County and City economies.

The industry generates $2.3 billion in economic activity in Sacramento County, supporting approximately 12,500 jobs annually. Based on the City’s share of total Sacramento County economic activity, it is estimated that $2.0 billion and 11,000 jobs are located in the City.

9. The industry is on the cusp of a profound change with federal legalization combined with massive and ongoing technological innovation.

Vertically integrated companies with deep pockets are already establishing a position in Sacramento and the State. Large, well-capitalized players are able to sustain major losses as they gain market share and future control of the industry. Even without near-term legalization, major research efforts have ramped up, informing diversified product development. Of notable concern, the imposition of additional federal excise taxes on legalization could further create pressure on the industry absent corresponding reductions in costs at the State or local level.

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10. Smaller local players may be partially protected through “protectionist” policies of the City.

Local industry interests have indicated margins are too thin to be sustainable.

Larger corporate interests are also losing money in many cases, often as an overt strategy to gain market share. Examples of useful steps to protect smaller players may include reduced costs across the board, training subsidies, and other tools and techniques suggested by case-study research, combined with assistance and incentives to create local marketing/branding premiums. Absent local intervention, large firms will use deep pockets of funding and operational efficiencies to gain market share and drive small players out. The causes are manifold and cannot be attributed to a single cause. High State excise taxes, combined with federal tax and banking restrictions, as well as the imposition of local industry taxes of normal magnitude all combine to create a cost burden that needs to be addressed.

Importantly, current City limitations on the granting or transfer of ownership is problematic for local operators, and (as discussed in this report), a “hybrid” approach discouraging “permit flipping” such as the City of Oakland’s may strike the right balance.

11. A major cultivation oversupply is working its way through the market, with prices dropping precipitously.

Contributing to the problem, unregulated grows in California maintain an unregulated price advantage, while contributing to a current glut of supply (both legal and illegal). Cultivation in Sacramento has increased dramatically since 2018. However, the high cost burden for legal production makes it infeasible to compete with the unregulated market. Multiple sources report that California cultivators are growing three times as much cannabis as can be consumed in the State, which is both flooding the market and feeding product to the illicit market.
3 Something akin to “price parity” between the legal and illicit market will need to be achieved to eradicate the problem, similar to what Colorado has achieved.

12. Sacramento is well positioned to command a strong position in the State’s trade of legal cannabis, even after federal legalization.

Sacramento is well-located in the State, appealing to the powerful distribution functions, which are at the heart of the industry’s economics. Access to large Northern California consumer populations, relatively low costs of labor and land, and access to State policy makers all place Sacramento in strong position for future cannabis growth and development. However, given the advent of major greenhouse cultivation sites emerging throughout the State’s coastal valleys, it seems likely cultivation will gradually seek out other locations, reducing pressure on Sacramento’s industrial districts.

3 Forbes, Chris Roberts, “It’s gonna be a bloodbath”; Epic Marijuana Oversupply Is Flooding California, Jeopardizing Legalization, August 31, 2021.

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13. The industry does not appear to produce negative economic effects on commercial and residential districts.

The industry has settled into most districts with minimal negative impact. In many cases, the capital investments in cannabis business facilities and other neighborhood improvements have resulted in positive overall impact. Detailed analysis of commercial and neighborhood economic effects in the City’s areas of concentration (Districts 2 and 6 in particular) indicate the industry has not substantially changed local market behavior. Over time, the industry will seek to migrate to areas having a competitive advantage. The Denver case study suggests the industry is likely to be economically and culturally assimilated into the City over time. One important area raised by stakeholders is continued efforts to ensure that youth are protected from inappropriate marketing, such as billboards that promote cannabis use.

14. Local areas of potential saturation concern include cultivation and delivery services in Districts 2 and 6.

This analysis looked at several indicators of over-concentration, including an examination of the root zoning causes of the issue, as well as other measures such as ratios of establishments to population and interviews of stakeholders.

However, as discussed in this report, it is likely that the market will “shake out” over time, and it may not be necessary or productive to place barriers on these uses. Cultivation is currently capped at 2.5 million square feet (approximately 10 percent of total industrial space). While CUPs have been granted for the total amount, space used for cultivation is well below the cap, at about half of the allowed square footage. As discussed in this report, demand for this use in Sacramento appears to have tapered somewhat, suggesting that the cap may not be reached.

15. Many small and local firms need assistance in funding start-up capital or ongoing operations.

The City can help to sustain the local industry until significant business opportunities open up with relaxed federal regulation. In some cases, incentives for providing shared capital benefitting multiple firms can be explored. There is potential for techniques such as creating a local revolving loan fund, seeded by above-referenced General Fund proceeds generated by the industry. Other options for expenditure of tax revenue might include improved City services needs (public safety, permitting times, etc.).

16. While OCM has been successful in obtaining major grants from the State to fund specific needs, a sustained allocation of revenue for said purposes will be more predictable than the pursuit of grants.

OCM budget needs should be further examined, and case-study lessons from Oakland and other locales may offer lessons regarding the need to monitor or enforce the complex types of equity transfers and investment activity that are transpiring in the industry. Also, business operating permits (BOPs) struggle to keep pace with ownership transfers and complex shared-use arrangements

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of business operations. Based on supplemental discussion and analysis, the City could increase its OCM resources. At the same time, simplification of ownership transfer and other requirements may reduce demands on staff time. A range of ownership options are offered by Oakland and Long Beach, as discussed in this report.

Additional Considerations
In addition to using the fiscal surplus identified in this report as seed funding for a revolving loan fund program for all cannabis start-ups to reduce operational costs and barriers to entry, it may be advisable to open up the range of industry-funded benefits to establish a broad, cross-sectional skill base for victims of the war on drugs to allow for both non-management employment in this industry and to open the door to participation in other industries.

Sacramento is on the precipice of a new era in its economic development, with epochal projects such as Aggie Square and others expected to grow and diversify several industries related to the life sciences cluster. A strategy of providing broad-based skills training to communities in need may be appropriate as a path to directing interested CORE applicants back into a cannabis industry facing continued federal illegality, intense economic pressures and transformation, and major corporate consolidation and vertical integration.

A potential exists for Sacramento to leverage competitive advantage to extract maximum benefit from the evolving industry as it takes residence in Sacramento and simultaneously provide real opportunities for social equity applicants to gain market share and generate wealth. The question is, how can CORE equity participants and applicants be best served? Existing CORE permit holders absolutely need the ability to transfer ownership to be viable. Currently, all CORE members can transfer ownership interest in their businesses in the same manner as non-CORE businesses, with the exception of the new Storefront permits, which must stay 51 percent CORE for 10 years. However, to retain CORE benefits, the business must stay at least 51 percent CORE.

Similar to a land trust incorporating deed restrictions in the field of affordable housing to the exclusion of realized capital gains, should these permit holders be denied the same opportunity as non-CORE owners to realize their maximum potential nest egg as they sell their business? The 3-year vesting period as is being considered for Oakland social equity owners may be an avenue to providing this opportunity without the threat of permit flipping being seen in Chicago. The argument against CORE owners selling 100 percent of their dispensary ownership to the highest bidder is that if the purchasing owner is a non-CORE owner, then a CORE opportunity is removed from the pool. This is solely predicated on Sacramento’s dispensary limits.

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An alternative scenario may be possible, whereby Sacramento positions itself to accommodate the industry on its regulatory terms, with the goal of levying the maximum sustainable taxes to generate funds applied to a broadened range of training across multiple industries. Tax rates in Sacramento are relatively consistent with other major cities studied. The most vulnerable community entities are highly sensitive to costs of all types, including tax rates. In contrast, the strongest vertically integrated users have comparatively little sensitivity to tax rates and other imposed costs.

Should the City support local players for a defined period of time or pivot to accommodate the large and powerful industry that will influence the industry in Sacramento and California? Depending on expressed priorities, both options are possible. If well integrated, industry forces may be marshaled to constitute a strengthened and better funded local policy program to the benefit of those in need.

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Overview of Cannabis in Sacramento
Growth of the Industry
Based on taxes remitted to the City by cannabis businesses, the cannabis industry in Sacramento is estimated to have generated more than $800 million in gross receipts in 2021, as shown in Table 1. The industry’s 2021 income is more than

3.5 times the income of the industry during the first full year of legalization in 2018. Delivery, distribution, and cultivation now represent a significant portion of the legitimate cannabis economy, accounting for 12 percent, 21 percent, and 24 percent of the total cannabis industry’s income in 2021, respectively.

In addition, these 3 sectors all took in more than $100 million in gross receipts in 2021.

Table 1. City of Sacramento Gross Receipts by Industry Function Group

Industry
Function
Group 2013 2014 2015 2016 2017 2018 2019 2020 2021
Dispensary [1] $35.9 M $57.5 M $84.2 M $117.4 M $129.9 M $138.8 M $161.0 M $219.9 M $295.8 M Delivery [2] - - - $0.001 M $0.001 M $7.5 M $25.2 M $60.6 M $102.0 M Distribution [3] - - - - - $6.7 M $23.4 M $93.9 M $173.3 M Testing [4] - - - - - $0.5 M $1.5 M $4.1 M $9.0 M
Microbusiness [5] - - - - - - $0.9 M $2.9 M $3.8 M Manufacturing [6] - - - - - $49.2 M $40.7 M $8.9 M $41.0 M Cultivation [7] - - - - $0.0 M $15.8 M $36.3 M $69.0 M $195.5 M TOTAL $35.9 M $57.5 M $84.2 M $117.4 M $129.9 M $218.6 M $289.0 M $459.3 M $820.4 M Source: City of Sacramento; EPS.
[1] Dispensary includes storefront only.
[2] Delivery to consumer.
[3] Distribution between industry functions; includes broader logistical services. [4] Testing of cannabis products.
[5] Microbusiness is a small operation with activities crossing functional areas. [6] Manufacturing includes processsing of raw ingredients and production of products. [7] Cultivation is growing and harvesting cannabis plants; only allowed indoors in Sacramento.

Estimated Gross Receipts (Millions, per year)
Note

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Consumer spending on cannabis products in Sacramento, measured by gross receipts at delivery and dispensary businesses, was nearly $400 million in 2021, as shown in Figure 1. The share of consumer spending on cannabis products at delivery-only dispensaries has grown from 10 percent of spending in 2018 to 40 percent in 2021, with nearly $200 million in spending at delivery-only dispensaries in 2021.

For context, bars and restaurants in Sacramento took in approximately $744 million and liquor stores took in approximately $80 million in 2021.

Spending at Sacramento dispensaries in 2021 was roughly comparable to spending at gas stations ($408 million) and more than double the spending at clothing stores ($198 million) in 2021, as shown in Figure 2. 4 Figure 1. Consumer Cannabis Spending at Sacramento Retailers

4 2021 consumer spending in other categories based on ESRI Business Analyst’s Retail Profile. $36 M
$57 M
$84 M
$117 M $130 M $146 M
$186 M
$281 M
$398 M
-
$50 M
$100 M
$150 M
$200 M
$250 M
$300 M
$350 M
$400 M
$450 M
2013 2014 2015 2016 2017 2018 2019 2020 2021
Dispensary Delivery
Source: City of Sacramento Office of Cannabis Management, EPS.

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Figure 2. City Sacramento Consumer Spending in 2021

Gross receipts across most types of cannabis businesses in Sacramento have increased every year since legalization. The various permitted activities in the cannabis industry are generally categorized into 7 major groupings, known as Industry Function Groups (IFGs),5 which are described in detail and summarized in Table 5 later in this chapter). Table 1 and Figure 3 provide citywide summaries of gross receipts for each of the IFGs.

Gross receipts for manufacturers have not followed the same growth trend as the other IFGs. In the first year of legalization, manufacturing was the second-largest cannabis business sector in the City by gross receipts, taking in nearly $50 million. However, revenues for manufacturers have not matched the growth of the overall industry, with manufacturers taking in only $41 million in gross receipts, although this figure is a marked increase over their performance in 2020, when they took in approximately $9 million.

5 A vertically integrated business may include multiple functions, but each function area generally will require a separate business operating permit, unless it is a microbusiness. -
$100 M
$200 M
$300 M
$400 M
$500 M
$600 M
$700 M
$800 M
Consumer Spending in 2021
Source: City of Sacramento Office of Cannabis Management, ESRI Business Analyst Retail Marketplace, EPS.

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Figure 3. Gross Receipts by Industry Function Group

Based on results from a survey of cannabis businesses conducted by the City’s OCM, it is estimated there are approximately 8,000 people employed directly by the cannabis industry in the City, as shown in Table 2. Further, it is estimated that more than half (53 percent) of those employed in the industry are in the cultivation sector, making this by far the most labor-intensive sector of the industry in Sacramento.

Table 2. Cannabis Employment by Industry Function Group (2021)

Dispensary
Delivery
Distribution
Testing
Microbusiness
Manufacturing
Cultivation
-
$50 M
$100 M
$150 M
$200 M
$250 M
$300 M
$350 M
2015
2016
2017
2018
2019
2020
2021
Source: City of Sacramento, EPS.

Square Feet per Full
Time Employee
(FTE) [1]
Estimated Employee
FTE's
Industry Function Group
Cultivation 375 4,224
Manufacturing 450 457
Distribution 150 1,363
Retail 150 709
Delivery 100 1,216
Total 7,970
Source: City of Sacramento; EPS.
[1] Square feet per employee assumptions are based on intial data provided by the Office of Cannabis Research pertaining to a survey of local cannabis businesses within the City.

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As shown in Table 3, cannabis is in the top 10 industries by number of employees in the City, contributing significantly to the local economy. For further discussion of the cannabis industry’s impact on the larger economy and the finances of the City, see Chapter 6.

Table 3. Top 10 Industries by Employment in City of Sacramento (2021)

In addition to increasing gross receipts overall, the number of cannabis businesses has increased each year since legalization in 2018, with particularly strong growth in 2020, when the 112 new licenses issued more than double the amount of licensed cannabis businesses from 2019. Growth in 2021 has slowed somewhat, with only 46 new businesses added.

Rank
Number
Employed in
City of
Sacramento [1]
1 25,000
2 11,500
3 11,400
4 10,800
5 9,000
6 8,900
7 8,500
8 8,300
9 8,000
10 7,800
Source: IMPLAN, EPS.
[1]
Cannabis [2]
Other Real Estate
IMPLAN is a private economics firm that provides data and software for analyzing local and regional economies.

Employment data from IMPLAN is available at the County
level - City estimates for Sacramento were produced from this data by adjusting IMPLAN totals based on the proportion of total County residents that live within the City (83 percent) and rounded to the nearest 100.

Industry
State Government
Local Government - Education
Transit and Passenger Transportation
Individual and Family Services
Full-Service Restaurants
Hospitals
Limited-Service Restaurants
Emploment Services

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As shown in Table 4 and Figure 4, the number of cannabis businesses has increased every year since legalization. Cultivation businesses now account for 35 percent of all licensed cannabis businesses, up from 23 percent in 2019, and growth in delivery businesses has been strong as well, mirroring the growth in delivery businesses’ gross receipts. Despite issuing zero licenses for delivery dispensaries in the first year of legalization, there are now 58 licensed delivery dispensaries, making it the second largest industry function group by number of licenses.

Table 4. Licensed Cannabis Businesses per Year6

6 Real estate, floor area, and crimes analysis is based on data provided by the City’s OCM in July 2021. Data provided in January 2022 show 264 licensed cannabis businesses—to be consistent throughout the Study, any discussion of cannabis businesses in Sacramento refers to the data provided in July 2021.

New Total New Total New Total New Total
Industry Function Group
Cultivation 9 9 13 22 47 69 20 89
Distribution 1 1 7 8 20 28 7 35
Manufacturing 3 3 8 11 9 20 7 27
Transport 0 0 1 1 2 3 0 3
M i c r o 0 00 0 3 33 6
L a b 4 40 4 0 40 4
D e l i v e r y 0 0 1 81 8 3 14 995 8
Storefront 30 30 0 30 0 30 0 30
Total 47 47 47 94 112 206 46 252
Source: City of Sacramento Office of Cannabis Management, EPS. 2020 20212018 2019

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Figure 4. Trends in Licensed Cannabis Businesses per Year7

7 Storefront dispensaries were not included in this chart because their numbers have not changed since legalization. Microbusinesses, testing laboratories, and transport-only businesses were excluded as there are relatively few of these businesses, and excluding them improves the chart’s legibility. See Table 4 for more detailed information.
89 58
35 27
0 10
20 30
40 50
60 70
80 90
100
2018 2019 2020 2021
Active Licenses
Cultivation
Delivery
Distribution
Manufacturing
Source: City of Sacramento, EPS.

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The major IFGs are summarized below:
 Cultivation. Indoor cultivation in Sacramento is heavily concentrated in the City’s industrial zones in Council Districts 2 and 6. Cultivation expanded rapidly in Sacramento and elsewhere in the last few years; however, long- term trends point toward extensive indoor grow operations in California’s coastal regions. While cultivation is land intensive and can introduce odor concerns, it continues to be an important component of smaller-scale, vertically integrated “microbusinesses” that prefer to directly control product from seed to final product. Capital costs are very high at the outset. The use generates a substantial fiscal benefit to the City. While some continued growth is likely advisable for the health of the industry, cities around the country are beginning to place limits on this use.
 Manufacturing. While manufacturing is a relatively small use in terms of industry footprint, is makes a useful contribution to the City’s local economy with skills and other crossovers to other manufacturing. This use is at the center of the creative process in the cannabis industry and features high start- up costs and specific technical skills among employees. Progress on IRS depreciation limitations and banking limitations will be helpful to this function.

Shared facilities are a potential necessity, offering the possibility of pairing CORE participants and other small operators with larger vertically integrated firms where proper incentives can be put in place.
 Distribution and Logistics. Characterized by warehouse, office, and fleet parking uses, distributers occupy a central position in the industry as the “connective tissue” between cultivators, manufacturing, and retail.

Distributors pay cultivation and excise taxes to the State and are at the center of the “burner permit” problem in California, whereby product is legally purchased (and taxes paid) from cultivators, then sold in the unregulated market. Current lawsuits allege the State has turned a blind eye to excessive cultivation resulting in California while realizing the benefits of the flat tax on cultivation (itself an identified problem). This use is a natural fit in the Sacramento Region and generates major fiscal benefits to jurisdictions.

Operator interviews indicate that sustaining operations is more difficult than start-up challenges. The industry requires sophisticated executive skills and relies on various emerging software products. Multi-State Operators (MSOs) are prevalent in this sector.

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 Non-Storefront Dispensaries (Delivery). Delivery services are growing quickly and steadily gaining market share relative to bricks-and-mortar dispensaries. This function has very low barriers to entry and uses mostly unskilled labor, with the exception of management. Like dispensaries, these services provide a major fiscal benefit to the City. These services are heavily concentrated in industrial areas such as District 6. It is expected that these establishments will undergo considerable shake out as the market matures.  Dispensaries. Effectively retail operations, these stores are major fiscal contributors and are heavily staffed by modestly paid and trained “budtenders” and management personnel. Current limitations on the transfer of ownership to non-CORE firms in Sacramento have inhibited the ability of local owners to find buyers.
8 Along with non-retail dispensaries, an estimated
60 percent of product is sold to consumers outside the City. An additional 10 dispensaries, as allocated by Sacramento, would increase the export share and could be met with additional regional competition as additional jurisdictions enter the market. Other cities offer some interesting alternatives to qualifying their respective “equity participants,” as discussed in this chapter. The City of Oakland is considering using a 3-year vesting period 9 after initial BOP issuance to help eradicate “permit flipping” among applicants not otherwise interested in owning and operating. Oakland currently allows an open transfer of ownership for non-equity owners, but only allows equity owners to sell their business to other equity owners. As part of this approach, if a local brand for CORE products can be established which commands a price premium which loyal customers are willing to pay, all manner of retail cannabis outlets in Sacramento may have a basis to compete more effectively on an ongoing basis, providing the potential to continue operations without selling to outside investors.

8 A 1-year moratorium on all ownership transfers is set to expire in May 2022. Otherwise, ownership interest in a permit is allowed to change provided there is continuity in ownership. The permit may not be “sold”.
9 Oakland adopted a 1:1 non-equity to equity ownership policy for all cannabis permits.

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Table 5 provides a synopsis of the characteristics of these components of the cannabis industry in Sacramento.

Table 5. Overview of Cannabis Industry Function Groups (IFGs)

IFG (1) Characteristics
Cultivation Sacramento - indoor only
High power requirements for indoor operations
Odor draws neighborhood complaints from certain facilities Evolved into element of sophisticated corporate operations Some concern of underutilization of urban industrial land Manufacturing Industrial facility small to medium size
Contribution to City economic structure
High start-up costs, significant infrastructure
Requires working knowledge of technical processes
Seamlessly integrated into vertically integrated businesses Good technical sector with cross-over, retain and encourage Supports other sectors of economy
Distribution Warehouse, fleet parking, office
& Logistics Sales, marketing, marketing, customer care, functions High security requirements and costs
Farmer, manufacturing, and sale outlet relationships
Can arrange logistics around testing, packaging, other value adds Can be vertically integrated with emphasis on distribution, Sophisticated multi-disciplinary operations
Executive level skills, knowledge of industry, taxation, packaging, testing, and all other aspects of industry
Regional coverage beyond Sacramento
Sacramento viable as distribution location - good fundamentals Non-retail dispensaries Warehouse plus office
(delivery service) Unskilled labor with exception of management 50% drivers, also dispatch and management
Gaining significant market share from dispensaries following e-commerce trends in general
Have created significant concentrations in industrial areas Dispensary Effectively a retail operation
(bricks and mortar) Performs well in a variety of retail environments Losing market share to delivery companies
Significant start-up costs
Owners transitioned from medicinal to recreational, capped at 30 Major movement among MSOs to control market share (M&A) Budtenders make minimum wage plus or slightly more plus tips Sacramento = major exporter to region
(1) Excludes "microbusinesses", which are a combination of above components, often in a campus.

Also excludes testing, which is normally located in standard office and R&D uses.

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Figure 5 below illustrates the linkages between these major components by way of the industry supply chain. Of note in the supply chain is the relative importance of the distribution function. These entities collect and pay cultivation and excise taxes to the State and have control over what product gets to market through their relationships with cultivators, manufacturers, and retail dispensaries. They are increasingly MSOs as these entities seek market share in California and other domestic U.S. cities ahead of expected federal legalization. This trend is further detailed in Chapter 4.

Figure 5. Cannabis Supply Chain Diagram

Graphic reprinted from the Legislative Analyst’s Office December 2019 report, “How High? Adjusting California’s Cannabis Taxes.”
Location of Industry Function
Groupings
As shown in Figure 6, the cannabis industry is not distributed evenly throughout the City. The central areas of the City, such as Midtown, contain a large proportion of the City’s licensed storefront dispensaries, while Districts 2 and 6 contain the majority of cannabis production, manufacturing, and distribution uses, as shown in Table 6. Based on the new City Council districts adopted in December 2021, Council District 8 is the only district in the City without a licensed cannabis business. However, Council Districts 1, 3, and 7 only have a total of 4 cannabis businesses between them.

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Figure 6. City of Sacramento Distribution of IFGs

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Table 6. Cannabis Businesses by Function Group per Council District

The uneven distribution and concentration of cannabis businesses is due to 2 primary factors: (1) the location of zoning districts that permit cannabis uses and (2) the location and availability of industrial buildings well-suited for cannabis business users. Table 6 shows the distribution of cannabis businesses across the Council Districts. Neighborhood and real estate impacts as a result of this distribution are explored in further detail in Chapter 6.

1234567 T o t a l
Industry Function Group
C u l t i v a t i o n 1 1 9024 6 30 89
D i s t r i b u t i o n 07025 2 10 35
M a n u f a c t u r i n g 06114 1 50 27
T r a n s p o r t 0000030 3
M i c r o 0300120 6
Subtotal Production 1 35 1 5 14 104 0 160
L a b 0300010 4
Delivery 0 10 0 11 3 34 0 58
Storefront 0 7 1 10 3 8 1 30
Total [1] 1 55 2 26 20 147 1 252
Source: City of Sacramento Office of Cannabis Management, EPS. [1] Includes businesses with active licenses as of July 2021.

City Council District

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Key Chapter Findings
 The industry is growing and diversifying rapidly at the local, regional, State, national, and global levels. Based on taxes remitted to the City by cannabis businesses, the cannabis industry in Sacramento took in more than $800 million in 2021. The industry’s 2021 income is more than 3.5 times the income of the industry during the first full year of legalization in 2018.

Consumer spending at Sacramento’s cannabis retailers has increased rapidly, with annual year-over-year increases of 51 percent and 42 percent respectively in the past 2 years.
 While consumer spending at storefront cannabis dispensaries grew steadily from 2013 to 2021, spending on cannabis delivery sales has grown dramatically in the last 4 years, accounting for more than a quarter of cannabis retail sales in Sacramento in 2021.
 The cannabis industry is now among the top 10 employment sectors in the City, with approximately 8,000 workers, half of whom are estimated to be in the cultivation sector.
 Council District 4 (Midtown) continues to have the highest concentration of storefront dispensaries in the City, while District 6 contains more than half of the City’s non-storefront delivery dispensaries.
 District 6 contains a majority of production-related cannabis operations, with 104 of the 160 such operations in the City (as of July 2021); District 2 has the next highest production concentration with 35 operations (as of July 2021).

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Economic Trends in the
Cannabis Industry
Introduction
This chapter describes overarching trends in the industry, followed by trends nationally, statewide, and in the City. It includes case studies of Long Beach, Oakland, Denver, and Seattle on issues of ownership, taxation, concentration, and social equity initiatives.

Macro-Level Trends
For centuries, cannabis has been used for its medicinal, as well as psychotropic, effects. Two events in the 20th century—the 1925 International Opium Convention, which effectively banned its exportation worldwide, and the 1937 Marijuana Tax Act, which banned hemp and cannabis production in the United States—effectively created a worldwide prohibition on cannabis cultivation, distribution, and consumption. During this prohibition, cannabis continued to be cultivated and consumed illegally worldwide. In the 1970s in the Netherlands, cannabis began to be used legally, both medicinally for cancer treatment (and later HIV/AIDS) and recreationally following decriminalization. Over the past half century, cannabis has become increasingly important for both its therapeutic and mood-enhancing qualities.

International Market Dynamics
Increasing legalization for both medicinal and recreational cannabis is driving a global market that is projected to grow from $28.3 billion in 2021 to $197.7 billion in 2028, an annual growth rate (CAGR) of 32 percent.10 North America dominates the international market and was valued at $16 billion in 2020.

As the first of the G12 (industrially advanced) nations to fully legalize cannabis, Canada has become the leader in the medical cannabis sector. During the past couple of years, the nation’s federally licensed industry has expanded into medical cannabis markets such as Australia, Germany, and Brazil. Canadian capital and operating experience are being leveraged in more than a dozen overseas markets.11

10 https://www.fortunebusinessinsights.com/industry-reports/cannabis-marijuana-market- 100219
11 Ibid.

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A 2018 report discussed the dynamic of cross-border stock listings, merger and acquisition deals, partnerships between entities from different countries, and breakthrough export and import policies allowing international movement of cannabis products, primarily for medicinal purposes.
12 However, the international
picture is evolving rapidly; cannabis usage is at varying stages of legality and decriminalization in several countries in Europe, South America, and parts of Asia.

In many countries though, cannabis is expected to remain illegal in the near term.

International research and development are contributing to an evolving product market. Continuous developments in extraction and infusion, along with standardization of products, is contributing to global popularity and demand for both medicinal and recreational cannabis products. More than 130 cannabinoids have been isolated in cannabis plants, and those have fueled wide-ranging research and development efforts for both medical and recreational purposes.

Super clone plants are being developed with the intent to highlight specific elements and significantly increase tetrahydrocannabinol (THC) percentages through concentrates.

Multi-national corporations are consolidating and expanding into international markets. Arena Pharmaceuticals, Inc., a biopharmaceutical company, is focused on developing and delivering medicine to American and Swiss patients.

In addition, it’s expanding into the Asian market via a partnership with Everest Medicines.13 In December 2021, Arena Pharmaceuticals, Inc. was acquired by pharmaceutical giant Pfizer for $100 per share in an all-cash transaction, for a total equity value of approximately $6.7 billion.

Recently, increased legalization and product development have attracted major multi-national corporations across a wide range of interests, including pharmaceuticals, beverages, and plant sciences. Table 7 shows the top multi- national interests in the industry.

12 An Overview of Cannabis Legalization Around the World, Omar Sacirbey, MJBizDaily Report, 2018.
13 Bojana Petković, Insider Monkey, August 13, 2019.

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Table 7. Key Multinational Cannabis Companies

Before legalization of recreational cannabis in California, the State was already considered an international epicenter of cannabis production. This has not changed as a result of legalization. To the contrary, international companies have significantly increased their pursuit and acquisition of California cannabis businesses throughout the supply chain.

Developing a National Industry
Across the nation, the legal cannabis industry has naturally organized itself in a range of industry function groups (IFGs) that make up the seed-to-sale supply chain, as described in Chapter 3. As the industry evolves, new IFGs are becoming more clearly defined as research and development (R&D) becomes increasingly important to the industry and support for consumption lounges potentially generate a new retail IFG.

Cultivation
Cultivation is becoming increasingly sophisticated, gravitating toward greenhouse mixed-light cultivation as a more sustainable approach to indoor growing and producing the highest quality flower product. Mixed-light cultivation focuses on the plant’s growth and maturity with the goal of harvesting high-quality flower in

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significantly reduced growth cycles using a fraction of the electricity and minimizing water usage through advanced irrigation techniques and treating and reusing irrigation water.

Sacramento vertically integrated cannabis company Natura has erected multiple new greenhouses as part of their master plan expansion. Glass House Farms, near Carpentaria, has the capacity to produce 113,000 dry pounds of sellable cannabis with its more than 500,000 square feet of greenhouse space. With its recent acquisition of 5.5 million square feet of former tomato greenhouses in Camarillo, Glass House Farms expects the facility to produce more than 180,000 dry pounds of sellable cannabis. The facility includes an on-site well, water treatment facilities, an automated roof-washing system, supplemental lights, and natural gas cogeneration facilities producing power, heat, and CO2, and at 6 million total square feet, Glass House Farms is the largest California cannabis cultivator.

NUGS, a vertically integrated corporation, recently signed a Memorandum of Understanding (MOU) to acquire a Sacramento cannabis cultivation facility spanning more than 15,600 square feet, with the potential to accommodate an estimated 500 grow lights. It is estimated to produce 2 to 3 pounds of premium exotic cannabis flower per light per harvest across an estimated 5.75 harvests per year, suggesting an upside potential of more than 7,000 pounds of premium cannabis flower per year, or more than 14 pounds per light. At 2021 prices ($1,800/lb. for premium flower), that represents $12,600,000 per year.

Simon Yu, CEO of NUGS, commented, “This deal represents the potential to sharply increase our premium cannabis production capacity and materially augment our status as an emerging leader in the vertically integrated California cannabis marketplace. We have already amassed years of experience refining our cultivation methods and strains in an outdoor framework with our NUGS Farm North site. Adding a top-tier indoor cultivation operation stands to help us further build upon that success and drive more volume in the premium flower market, which has powerful implications, given our recent expansion into the dispensary marketplace with our MDRN Tree downtown LA dispensary location. The combination grants NUGS expanding operations at both ends of the farm-to-sale model.”
14 Although the trend is moving toward more sustainable practices, cultivation continues to include both outdoor and indoor production of cannabis flower.

Nationally, wholesale cultivation has been under severe operational pressure in recent years as the price of flower has dropped dramatically as the number of legal cultivators has increased, but illicit product has continued to circulate in the market. Additional pandemic-related challenges resulted in significant levels of unprofitability in 2020, as shown in Figure 7.

14 Preeti Singh, SA News Editor, SeekingAlpha.

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Figure 7. Wholesale Cultivator Profitability

Manufacturing
Bioavailability is essentially absorption of a product as a percentage of the dose of the product being consumed. In the cannabis industry, increasing bioavailability is driving manufacturing R&D. With vaporizing bioavailability at 36 percent to 61 percent, smoking flower at 25 percent to 27 percent, and edibles at 4 percent to 12 percent, one of the primary areas of R&D in cannabis manufacturing revolves around increasing bioavailability in manufactured products. In cannabis, flower is flower (packaging is the primary area where manufacturing engages flower products), and all other products are manufactured. “Traditionally there were only three types of cannabis products available to most consumers on the black market: flower, hash, and homemade edibles. While flower remains the top- selling product category in today’s legal market, production of concentrates and infused foods and beverages has become more sophisticated over the years, and a much wider array of tetrahydrocannabinol (THC) containing goods—from transdermal patches to dry powder inhalers—are now accessible.”15 One evolving area of extraction technology has been focused on better bioavailability of cannabinoids and the elimination of less desirable and more harmful delivery methods such as smoking or vaping. Other methods of delivery that help with the bioavailability of cannabinoids by circumventing metabolism (including sublingual, or below the tongue; transdermal patches; and topical sprays or creams) continue to be developed and are increasingly in demand by

15 John S. Forrester, Lisa McTigue Pierce, Bob Sperber, May 27, 2021, PowderBulkSolids.com.

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consumers. The isolation of molecules is an extremely high value product as it’s been reported that both cannabigerol (CBG) (16) and cannabinol (CBN) (17) isolates, for example, can bring between approximately $30,000 and $50,000 per kilo.16
These extraction and manufacturing practices are generating infused products ranging from topicals (skin products) to highly concentrated consumables. Unlike the more established cultivation landscape, this product area is highly unpredictable in terms of consumer demand preferences and is subject to the watchful interest of established consumer packaged goods companies. Even with highly publicized efforts announcing household names in alcoholic beverages investing in infused beverage product lines, market surveys of industry revenue figures indicate that consumers have not made a measurable shift towards cannabis infused products at the expense of established competitors. This leaves the door open for smaller regional enterprises to consider developing carefully crafted products, but such initiatives should likely be of a restrained nature to avoid the crippling losses that are more tolerable for publicly traded companies with stable international product lines.

In the City, there are 26 active BOPs ranging from boutique social equity manufacturers to large-scale infusion manufacturers, creating gummies, candies, tinctures, topicals, tablets, and capsules, as well as major extraction facilities.

Nearly all Sacramento manufacturers are operating out of pre-existing industrial buildings. These manufacturers are involved in extraction, infusion, and production, with some providing distribution and services directed at cultivators, as well as vertically integrated seed-to-store operators. Manufacturing in the Sacramento cannabis industry provides broad opportunities in an extremely dynamic market.

Distribution
Distribution companies in the California cannabis product chain have three fundamental responsibilities: collect the pre-sale dry cultivation taxes from the cultivator when they pick up the product, document the track-and-trace sequence through manufacturing and testing, and collect the excise tax from the retail dispensary when delivering the retail product to market. Many of the larger companies provide manufacturing and testing facilities as well.

This vertical integration provides opportunities to develop partnerships with favorable brands and control supply to retail dispensaries. Others develop relationships with premium cultivators and manufacturers, providing them with packaging, storage, quality control, testing, and distribution, in addition to inventory management, order scheduling/tracking, and cash collection services.

16 May 5, 2021, David Hodes Cannabis Science and Technology, May 2021, Volume 4, Issue 4, pages 20 to 26.

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The State’s Type 11 license allows the distributor to provide a wide range of services. The largest of these offer their services statewide, with business relationships extending to hundreds of cultivators, manufacturers, and dispensaries.

The increasing importance of the distribution function is one of the most significant national trends in the cannabis industry. Within the industry, significant competition for market share has led to a drive toward vertical integration, particularly among the manufacturing and distribution IFGs. The prospect of future national legalization provides added incentive for this consolidation, to both respond to new national competition and expand into other markets in anticipation of a national logistics chain.

The industry’s prospects for future profitability are demonstrated by the recent mergers & acquisitions (M&A) activity, with larger corporate or other equity- backed entities seeking to maximize market share across state lines and national borders, even in the absence of any federal regulatory framework enabling interstate commerce. For example, Cresco Labs (Cresco), a Chicago-based vertically integrated company valued at more than $5.8 billion, is making major acquisitions in both the medical and recreational arenas.

Cresco’s cultivation footprint across 8 states is in excess of 828,000 square feet with 221,000 of that in California. In addition, their acquisition of Origin House is unique in that “Cresco wasn't looking to simply buy retail licenses, grow farms, and processing sites. Rather, it found that the best way to grow sales and infiltrate the largest marijuana market in the world (California) was to acquire one of the very few companies to hold a cannabis distribution license in the Golden State. Buying Origin House allows Cresco Labs to get its products into approximately 575 California dispensaries, representing about 65% of all legal retail locations in the state.” In addition, as the nation’s largest legal market and a State synonymous with high-quality marijuana, comparable to its reputation in the wine industry, large cannabis interests from other states and other countries are motivated to find a way to enter the California market.

As the legal cannabis industry continues to expand in California (about 36 percent of California communities allow some form of cannabis), consolidation will continue, and smaller operators will face intensifying competition.

The State also provides Distributor Transport Only licenses, which allow the distributor to transport cannabis goods between non-retail licensees but not to any licensed retailer (or the retailer portion of a licensed microbusiness), except for immature cannabis plants or seeds. A Distributor Transport Only licensee has the option to select “Self-Distribution” during the application process. This distributor may only transport cannabis goods that the licensee has cultivated or manufactured. In addition, a Distributor Transport Only self-distribution licensee is not permitted to transport cannabis goods cultivated or manufactured by other

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licensees or to hold title to any cannabis goods, unless they are authorized to do so under another State-issued license.

Testing Labs
Testing labs provide the services to ensure the cannabis product that gets to the market is consistent with the requirements of the California Department of Cannabis Control. They test for terpenes, pesticides, potency, microbial contaminants, residual solvents, heavy metals, mycotoxins, and water activity.

Some will also offer their customers other services whether they are looking to develop a new product, perfect an existing one, identify potential contamination in their facility, or identify a new strain they are developing. There are only 4 BOPs in Sacramento. With the increased emphasis on new product research, this IFG would appear to have growth potential.

Storefront Retail Dispensaries
Retail storefront dispensaries are the only public onsite venue for cannabis users to view finished product, discuss various strains with budtenders, and purchase cannabis products. Like any retail establishment, they range from extravagant destination centers with classes and events to no-nonsense, low-cost outlets in industrial districts. Upon entering and checking in with a receptionist, customers are often led from the reception area into the primary retail area and greeted by a budtender who provides one-on-one service. Today, dispensaries carry many products such as nearly all forms of cannabis for consumption, equipment, and company lifestyle items.

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Figure 8. Cannabis Retailer Revenues and Costs

Graphic reprinted from MJBizDaily Factbook.

Non-Storefront Retail Delivery
Retail delivery businesses fall into two categories. Most dispensaries operate delivery like mail carriers. Stores receive orders, which are then loaded into a vehicle and sent to the customer. Called “hub and spoke,” this delivery method is reliable and low-cost, but often slow, much to the frustration of the store and consumer alike. There is a large untapped market in California. The State legalized recreational marijuana in 2016, but it is only sold in 35 percent of the State. The remaining 65 percent does not have access to a dispensary. This could be for several reasons, including lack of resources to develop regulations or a legal prohibition on the sale of cannabis in retail stores.

However, in a 2020 ruling, a Fresno, California, judge affirmed the right to deliver to these areas by dismissing a lawsuit by 24 California cities seeking to ban deliveries.
17 Some delivery-only dispensaries are carrying an inventory of product in the vehicle. California allows operators to work out of a vehicle with $3,000 worth of inventory, and $5,000 worth if the merchandise includes pre-orders.

There are legislative efforts to increase the in-vehicle inventory size to between $10,000 and $25,000. With these mobile dispensaries, customers order on an app

17 Matt Burns@mjburnsy / 8:32 AM PST•November 16, 2021

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from the available inventory in a nearby vehicle. But the predominant trend in the industry is to have a bricks-and-mortar warehouse for product and vehicle storage, as well as an office and dispatch center. With this model, customers can order from the entire inventory that the delivery dispensary has on hand.

Consumption Lounges
New California legislation enables local jurisdictions to allow the preparation or sale of non-cannabis food or beverage products by a licensed retailer or microbusiness in an area where cannabis consumption is allowed. This new legislation has the potential to significantly alter the cannabis consumption/food service landscape. A cannabis consumption lounge license in California allows the following activities:
 Smoke, vaporize, and ingest cannabis or cannabis products on the premises of a retailer or microbusiness.
 Prepare and sell non-cannabis food or beverage products in compliance with all applicable provisions of the California Retail Food Code by a retailer or microbusiness.

A cannabis consumption lounge license in California also has multiple restrictions, including age restrictions, visibility, alcohol and tobacco prohibitions, and other operational restrictions.

A cannabis consumption lounge license in California, is a Type 10-Retailer license with a specific consumption cafe/lounge destination. At this time, consumption on site is not allowed in Sacramento. However, the integration of consumption lounges into the City has the potential to significantly increase opportunities for entry into the industry as license holders could partner with existing restaurants and create shared facilities with minimal up-front capital.

Vertical Integration
Eventual federal legalization and the ongoing expansion of legalization in other countries will continue to drive vertical integration in the industry. As it rapidly evolves into a mature industry with a growing global presence, it will begin to resemble other mature industries. The geographic distribution of activities along the supply chain will begin to align along patterns similar to other consumer product industries, as functions gravitate toward locations that provide the optimal combinations of production inputs and costs. For example, large scale cultivation will tend to seek lower land costs and ideal weather conditions (low humidity and cool nights), larger consumables manufacturing facilities will tend to gravitate toward metro fringe locations, and major distribution operations will expand their presence across the transportation network.

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National Trends
The efforts of an increasing number of states to adopt cannabis legalizing frameworks in light of the ongoing federal prohibition and continued listing of cannabis as a Class 1 Drug has led to a patchwork of regulations in each state, without federal oversight.

The legal recreational and medical cannabis industry in the United States developed over the past decade, beginning with Colorado and Washington in 2012. Following legalization in those 2 states, the US Department of Justice issued the Cole Memorandum, stating that the federal government would only intervene in state-sanctioned cannabis production in instances of failure to prevent criminal involvement, sales to minors, or illegal diversion to other states.

These first 2 states were joined by Oregon and Alaska in 2014. All 4 states instituted market-based licensing systems, similar to the regulation of alcohol sales in states without state-run alcohol monopolies. Since then, all but 13 states have legalized medical cannabis sales, and the number of states allowing adult- use sales will likely continue to grow, resulting in estimates of $100 billion in economic impacts annually within the next 5 years.18

18 MJBizDaily Factbook.

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The figure below illustrates recent and projected growth in legal adult-use and medical cannabis sales in the U.S., compared with declining sales of illicit cannabis, as most states that have legalized marijuana sales have seen notable decreases in illicit market sales. Of the remaining illicit sales nationwide, California continues to be a primary supplier.19
Figure 9. Annual Growth of Legal Versus Illicit Cannabis Sales in the US

As the demand for cannabis products has increased, the composition of the product preferences has also evolved, with growth in edible products from 8 percent of total sales in 2018 to 11 percent in 2021. A spike in vaping in 2019 has reduced moderately but continues to account for about a quarter of sales.

Flower product for smoking remains approximately half of sales volume.

Figure 10 provides an illustration of the composition of cannabis product sales.

19 MJBizDaily California Market Woes.
$5.9 B $9.1 B $11.5 B $13.0 B $14.0 B $14.8 B $15.5 B$7.4 B $11.2 B
$13.4 B
$18.2 B
$21.8 B $25.0 B $27.4 B
$66.3 B
$58.9 B
$0 B
$10 B
$20 B
$30 B
$40 B
$50 B
$60 B
$70 B
2019 2020 2021 2022 2023 2024 2025
Billions of Dollars
Estimated Annual Growth of U.S. Legal Cannabis Industry 2019-2025
Adult-Use Sales Medical Sales Illicit Market
Graphic Data Courtesy of New Frontier Data
2021 Mid-Year Market Update

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Figure 10. Cannabis Product Composition

Data preceding widespread legalization found that 30 percent of users in the United States drive approximately 70 percent of demand for cannabis.20 The extent to which these heavier users drive legal versus illicit sales is not clear.

However, it has been found that storefront dispensaries tend to be frequented by older consumers (aged 38+), likely out of a combination of ability to pay higher prices and stronger aversion to illicit activity.

Following the end of Prohibition in the 1930s, the achievement of price parity between legal and illicit alcohol markets was the primary factor reducing the size of illicit operators, and the same patterns will likely hold true for cannabis. Price parity will be the primary path toward eradication of the illicit markets that exist across the country, most notably in California, with its entrenched illegal industry.

In addition, consumers are likely to prefer legal products if there is a perception of good quality control.

But the unregulated industry remains sophisticated in its scale and interstate logistical capabilities, sharing many operating practices and sometimes supply chain partners with their established in-state legal counterparts. Certainly, elements of the unregulated market that systematically damage the environment, violate labor practices, and threaten public safety as a result of their operational practices are prime targets for stepped-up enforcement at the State and local

20 Marijuana Policy Group data cited in June 24, 2016, Econlife article by Elaine Schwartz, “How Price Changes in Marijuana Markets.”
Edible, 11%
Extract, 11%
Flower and
Preroll, 50%
Vape, 26%
Other, 3%
Share of US Cannabis Sales by Product Type
Graphic Data Courtesy of New Frontier Data 2021
Mid-Year Market Update

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levels. However, the daunting challenge of transforming large swaths of labor and resources that power the illicit industry into a legalized framework is more likely to be accomplished by thoughtful regulatory policy design than any targeted surge of law enforcement activity.21
Regulatory requirements for licensing and operating guidelines in some of the largest State cannabis markets have facilitated vertical integration and consolidation of supply chains within plant-touching functions. However, the absence of federal legalization and existing local regulations have prevented these market actors from absorbing licensed medical dispensaries, recreational retailers, specialty product manufacturers, and complementary functions such as technology and transportation. These typically smaller businesses outnumber the vertically integrated ones by an estimated ratio of approximately 10:1, as they are protected in the near-term by the absence of economies of scale (e.g., interstate transportation networks, unrestricted use of complicated transnational financial services) that federal legalization will eventually provide.22 State Trends
California’s illicit marijuana industry has existed for decades and continues to compete with licensed cannabis businesses across the State, in addition to supplying a significant share of the market in states where cannabis remains illegal. As noted previously, while other states that have legalized cannabis have seen illegal activity decline precipitously, the illegal market remains strong in California. The entrenched nature of the industry, combined with the continued demand from states where marijuana remains illegal, contributes to the continued strength of the illegal sector in California. However, both the continued prohibition of sales in many jurisdictions and the impact on product pricing from State taxes help drive the illicit market in the State.

The charts below illustrate the sizable share of unlicensed retailers in various regions of the State and the pricing differentials between licensed and unlicensed purveyors of marijuana flower for storefront and delivery sales.

21 North Bay Business Journal.
22 Marijuana Business Factbook.

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Figure 11. Estimated Licensed and Unlicensed Retailers by Region

Figure 12. Average Price for Cannabis Flower by Retail Type

26 212 132 193 16732
164
194
681 788
0 100
200
300
400
500
600
700
800
900
1000
Northern
California
Greater
Bay Area
Central
California (Incl.

Sacramento)
Los Angeles
County
Other Southern
California
Number Licensed Number Unlicensed
Source: Goldstein et al, Giannini Foundation of Agricultural Economics, University of California. $11.78 $11.49 $10.96
$9.21
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
Delivery (7% Licensing Premium) Storefront (25% Licensing Premium) Licensed Unlicensed
Source: Goldstein et al, Giannini Foundation of Agricultural Economics, University of California.

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In addition to impacting taxable sales by licensed retailers, the illicit industry contributes to the current oversaturation of the market for raw cannabis leaf.

However, the dramatic increase in licensed cultivation over the last few years is also a key factor. The current oversupply of flower is inducing rapidly falling prices for the commodity. According to the Northern California Cannabis Alliance, prices of $1,400 to $1,500 per pound (dry weight) are necessary for a profitable cultivation operation. With prices falling well below these levels, a structural oversupply has emerged.

The State has rolled out a flawed, unpopular regulatory system for cannabis and a tax structure that is fueling the illicit market. A key point of contention among the oldest, most entrenched community of cannabis businesses in Northern California starts at the beginning of the supply chain: cultivation, cannabis concentrate extraction, and manufacturing. Many business owners allege that the State failed to accomplish the goals set out in Proposition 64 by allowing large uncapped grows in the wake of its 2018 emergency regulations. Unlike the widespread appreciation by many long-time business owners for the State’s implementation of medical marijuana use legalization in Proposition 215, the combination of Proposition 64’s lack of specific small business initiatives and the patchwork nature of localities’ ordinances has seemed to favor a certain kind of new entrant:
capital-rich corporations that can successfully absorb the cost of a high compliance burden and market fluctuations in the price of flower. More specifically, many experienced business owners report that potential licensed growers are deciding to go back to the unregulated market in a frustrated reaction to some of the administrative roadblocks, as well as the effective tax rates that result from combined assessments at all levels of government.

The recent commitment by the Governor to reduce the State tax burden to support the industry should benefit the industry, particularly if the flat cultivation tax is eliminated. Legislation proposed in February 2022 would discontinue imposition of the cultivation tax as of July 1, 2022. However, the bill would increase the excise tax by an additional 1 percent starting at some point between July 1, 2025, and July 1, 2026. The Department of Finance estimates will generate half the amount of revenue that would have been collected with the cultivation tax. While the elimination of the cultivation tax would benefit wholesale cultivation businesses or functions, the additional State excise tax will create a further disadvantage for retailers relative to the illicit market. It is unclear how the State will use the excise tax revenues.

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Despite the issues noted above, the State has experienced strong year-over-year tax receipt growth. However, major concerns are emerging regarding the effects of falling commodity prices, and it is expected that growth rates could diminish or potentially turn negative. The chart below illustrates the growth in cannabis- derived taxes collected by the State from 2018 to 2021. While revenue continued to increase from 2020 to 2021, the rate of growth was significantly below that of the previous 2 years.

Figure 13. State of California Cannabis Tax Revenues—2018-2021

$191.4 M
$310.7 M
$571.9 M $675.4 M
$36.8 M
$87.6 M
$144.3 M
$166.4 M
$169.5 M
$240.4 M
$394.3 M
$460.6 M
$0 M
$200 M
$400 M
$600 M
$800 M
$1,000 M
$1,200 M
$1,400 M
2018 2019 2020 2021 [1]
Sales Tax
Cultivation
Tax
Excise Tax
[1] 2021 estimates extrapolated from Q1-Q3 revenues.

Source: CDTFA; EPS.

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State Cannabis Sales Dynamics
The 8 northernmost counties in California with licensed cannabis as a group have the highest per capita cannabis sales in the State. The area is known for high- quality cannabis and is a net exporter. Per capita cannabis sales in Sacramento County have typically been close behind those of the northern counties, in part likely because of sales to residents of Placer and lower El Dorado Counties. Sales in El Dorado County increased dramatically in the second quarter of 2021, possibly because of resumption of tourism to South Lake Tahoe.

Figure 14. Quarterly Licensed Cannabis Sales per Capita by California Region

Sacramento Co.

Yolo Co.

El Dorado Co.

Bay Area
Central Coast
Central Valley
Metro. So. Cal.

North State
Statewide Avg.
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
$100.00
2018 - Q2
2018 - Q3
2018 - Q4
2019 - Q1
2019 - Q2
2019 - Q3
2019 - Q4
2020 - Q1
2020 - Q2
2020 - Q3
2020 - Q4
2021 - Q1
2021 - Q2
Cannabis Sales per Capita
Source: CDTFA; EPS.

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Annual spending per capita in each of the regions from 2018 through 2021 is detailed in the table below.

Table 8. Annual Licensed Cannabis Sales per Capita 2018–2021

State Tax Trends
A comparison of the taxes for all states that have approved legal adult-use cannabis yields a range of potential approaches, both at the State and local level.

Some states like California charge wholesale taxes (which are cumulative and built into the purchase price); many states also charge excise taxes (which are cumulative and are built into the purchase price), and most states have state sales taxes and local sales taxes. Alaska’s tax is based purely on weight.

Based on the comparison by state, California is on the high end of recreational cannabis taxes at the State level, and largely is consistent with other states at the local and county level. The State’s 6 percent sales tax mandates an additional

1.5 percent local sales tax and allows an additional 2.5 percent optional local tax.

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Local Trends
Sacramento’s cannabis industry reveals strong growth in consumer demand and receipts, but local cultivators, retail storefront owners, and delivery operators are struggling with high taxation, the price pressures of an aggressive and successful illicit market, and the financial pressures of lack of access to banking and the current limitations on outside investment.23 Much of this is due to federal restrictions, 280E, and State taxation. But there are areas of local taxation, ownership, and ownership restrictions that are under the control of Sacramento policies. These local trends are explored and compared to the case-study cities of Seattle, Denver, Oakland, and Long Beach.

Industry Metrics
Consumer spending at cannabis dispensaries in the City has grown steadily, with a CAGR of 30 percent between 2013 and 2021. Since 2018, however, spending on cannabis delivery has grown far more dramatically, with a CAGR of 138 percent.

Figure 15. Consumer Spending on Legal Cannabis in Sacramento (2013-2021)

23 Storefront retailers are under a 1-year moratorium that prohibits changes in ownership interest. It will expire in May 2022.
$36 M
$57 M
$84 M
$117 M $130 M $146 M
$186 M
$281 M
$398 M
-
$50 M
$100 M
$150 M
$200 M
$250 M
$300 M
$350 M
$400 M
$450 M
2013 2014 2015 2016 2017 2018 2019 2020 2021
Dispensary Delivery

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Gross receipts have increased dramatically across most IFGs in Sacramento since legalization in 2018, but manufacturing has experienced a much greater degree of variability than other IFGs. Microbusinesses, which include a range of functions including manufacturing, have also experienced greater variability. Much of the decline in manufacturing revenues during 2020, however, likely was due to pandemic-related production interruptions.

Figure 16. City of Sacramento Gross Receipts by Industry Function Group

-
$100 M
$200 M
$300 M
$400 M
$500 M
$600 M
$700 M
$800 M
$900 M
2015 2016 2017 2018 2019 2020 2021
Cultivation
Manufacturing
Microbusiness
Testing
Distribution
Delivery
Dispensary
Source: City of Sacramento Office of Cannabis Management, EPS.

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For some IFGs, a correlation exists between gross receipts and the amount of space occupied in the City. However, the space occupied by cultivation has increased far more dramatically than the gross receipts from cultivation, primarily because of falling prices of marijuana leaf because of both overcultivation and pressure from the illicit market. Conversely, dispensary square footage has been static in recent years as gross revenues have continued to grow. As a result, revenue per square foot of cultivation space has declined, while revenue per square foot of dispensary space has increased, as shown below.

Figure 17. City of Sacramento Occupied Square Footage by IFG

0.0M sq ft

0.5M sq ft

1.0M sq ft

1.5M sq ft

2.0M sq ft

2.5M sq ft
2015
2016
2017
2018
2019
2020
2021
Cultivation
Manufacturing
Microbusiness
Testing
Distribution
Delivery
Dispensary
Source: City of Sacramento Office of Cannabis Management, EPS.

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Figure 18. City of Sacramento Gross Receipts per Square Foot by IFG

The 2018 spikes in revenues per square foot for several IFGs, particularly manufacturing, correspond with spikes in asking lease rates (rents) in industrial zones throughout the City in 2018, as discussed in Chapter 5.

Dispensary
Delivery
Distribution
Testing
Microbusiness
Manufacturing
Cultivation
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
2015
2016
2017
2018
2019
2020
2021
Source: City of Sacramento, EPS.

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The chart below illustrates the increase in cultivation floor area between 2018 and 2021. The dramatic expansion of cultivation area in 2020 coincided with the severe decline in flower prices throughout the State, potentially contributing to the much smaller expansion of cultivation area since.

Figure 19. City of Sacramento Cultivation Floor Area Growth

Sacramento Industry Function Group Characteristics Overview The range of IFGs that make up the seed-to-sale supply chain in Sacramento are consistent with both the national and State trends. These IFGs are considered for their particular regulatory, economic, employment, land use, physical plant, and locational advantages and characteristics, as well as issues of taxation, ownership, and concentration. Table 9 below condenses these characteristics for comparison. As the industry evolves, new IFGs are becoming more clearly defined as R&D becomes increasingly important to the industry and support for consumption lounges potentially generates a new retail IFG. -
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
2018 2019 2020 2021
Square Feet
New Cumulative
Source: City of Sacramento Office of Cannabis Management, CIty of Sacramento Planning Department, EPS.

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Table 9. Industry Function Group Characteristics

IFG Characteristics Taxation
Sacramento - indoor only, substantial range in size Major fiscal benefit High power requirements for indoor operations State excise tax on weight needs to be dynamic, not flat Vertically integrated may have more merit than stand-alone for Sac Required at front end Can buy cheaper elsewhere Compound effect as "tax on tax" Only important to extent needed to control quality State applies 1.8% mark-up Land intensive City could lobby State regarding reduction/change Odor draws neighborhood complaints from certain facilities Combine forces with other cities as appropriate Resource intensive (may be changing - water conservation tech) High infrastructure cost at front end
- relatively high barriers to entry across board
Industrial facility small to medium size Modest fiscal benefit, important economic driver Contribution to City economic structure Possible to control tax exposure by taking possession but not title High start-up costs, significant infrastructure IRS 280E (limiting write-offs) is particularly large issue Requires working knowledge of technical processes Consider reduction of local tax burden to equity participants Can be advanced - R&D and testing: scientist to "executive chef" and higher value added manufacturing operations (economic dev) Mature processes can be automated/limited training requirements Small scale facilities and land requirement compared to cultivation Seamlessly integrated into vertically integrated businesses Warehouse, fleet parking, office Major fiscal benefit
Sales, marketing, marketing, customer care, functions Pass through of State cultivation tax Compliance software designed for cultivators Collect on cultivation side, collect State excise from retailer, Storage, trucking functions paramount provide both to the State (outside of City taxes) High security requirements and costs
Ideally located on central point in freeway system (trucking) Farmer, manufacturing, and sale outlet relationships
Can arrange logistics around testing, packaging, other value adds Can be vertically integrated with emphasis on distribution, but with multiple BOPs
Uses owned or leased vehicle fleet
Truck driver and warehousing jobs
Warehouse plus office Major fiscal benefit
12,000 SF facility can provide Statewide service Collects 15% SET from consumer, State/local sales tax, Sac BOT sales tax Target range similar to grocery delivery radius Incidence of SET payment to distributor presents cash flow hit Unskilled labor with exception of management Also pays taxes on vehicles and fuel 50% drivers, also dispatch and management Sensitive to rising fuel costs Gaining significant market share from dispensaries following e-commerce trends in general
Consumer credit transactions - Ledger Green/MC - viable (also disp) Effectively a retail operation Major fiscal benefit
Performs well in a variety of retail environments Collects 15% SET from consumer, State/local sales tax, Sac BOT sales tax Requires an estimated $4 to $6 million in gross sales Amounts to 28% wholesale price up front 10 additional stores implies capture of $40-60 million in spending Incidence of SET payment to distributor presents cash flow hit Losing market share to delivery companies May need to reduce local sales taxes to compete with illicit market Budtenders make minimum wage plus or slightly more plus tips Price parity with unregulated market required to "move the needle" Declining margins resulting in reduced benefits in urban locations Can possibly avoid local tax reduction if State reduces SET Sophisticated operators unable to pay income taxes and maintain profit Many waiting for investor buy-out
Investor buy-outs are often calibrated to accrued debt levels Debt to net income is becoming unsustainable
Potential for continued retail dispensary cash flow issues Future shaky for operations needing to sell asset to raise cash Unable to obtain loans (banking restrictions)
IRS 280E (write-off restrictions)
Significant start-up costs
Complex staffing, payroll, etc.

Source: EPS.

Non-retail
Dispensaries
(delivery service)
Dispensary (bricks
& mortar)
Taxation, Ownership, and Concentration Characteristics of Sacramento Cannabis Industry Functional Classification (IFG) Cultivation
Manufacturing
Distribution &
Logistics

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(continued)
IFG Ownership Concentration/Land Use
Initially controlled by legacy illicit cannabis farmers in rented facilities Appropriate use of industrial land? Limited control on leasing costs Small vertically integrated firms may prefer control Evolved into element of sophisticated corporate operations Denver issued moratorium in oveer concentrated neighborhoods Consider limiting to: Long Beach, no constraints other than buffers 1) vertically integrated WA has a 2 million square foot limit on cultivation 2) owner occupied Critical to install appropriate security Offsite grows in coastal regions (e.g., Glass House) - key trend Shared facilities avoid duplicating infrastructure Limited concentration issues particular to this use What models most applicable? Market versus subsidized? Volatile extraction - special fire protection considerations Induce through tax incentives and grant funding? Good technical sector with cross-over, retain and encourage Shared manufacturing ordinance could facilitate equity Supports other sectors of economy participation in certain facets, with specialized training Some vertically-integrated firms interested in incubating equity participants Sophisticated multi-disciplinary operations Storage function is of potential concern Executive level skills, knowledge of industry, taxation, packaging, Sacramento viable as distribution location - good fundament als testing, and all other aspects of industry Central point on transportation grid Regional coverage beyond Sacramento Low cost of operating Primary acquisition target for large industry Proximity to major population Mullti-State Operators (MSOs) are prevalent Improving manufacturing prospects would be mutually reinforcing Potentially some opportunities for equity participants Compares favorably to cultivation if there is a need to limit uses High concentration of small operators Significant concentrations in industrial areas Origin with medical cannabis, have scaled up with recreational product High concentrations of establishments/capita Easy to form business and initiate operations, challenge in sustaining Likely to see continual stream of new entrants sans limit Candidate for operational assistance in the form of low interest loans Potential preference accruing to major players - good opportunity for equity participants Amazon? Uber? How long will the current model last?
Major movement among MSOs to control market share (M&A) Major export sector - 60% leaves City Owners transitioned from medicinal to recreational, capped at 30 New entrants in Sacramento County and eslewhere likely CORE members have fees waived (remove barrier to entry) C-1 areas may need to be phased-in as blight is addressed Moratorium to be released - attract business partners Midtown developers and brokers have accepted this use Concern: permit flippers Compares favorably to many other uses Oakland approach: merit-based with 3 year hold Success in integrating with retail/entertainment Eligibility is from police beats - arrest rate stats Positive evidence of investment in area Long Beach: Census Tract with socio-economic criteria Consumption lounges worth exploring New social equity permits: Interview favored over lottery Source: EPS.

Cultivation
Manufacturing
Distribution &
Logistics
Non-retail
Dispensaries
(delivery service)
Dispensary (bricks
& mortar)
Taxation, Ownership, and Concentration Characteristics of Sacramento Cannabis Industry Functional Classification (IFG)

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Ownership Considerations
The nascent legal cannabis industry is evolving so rapidly that it is almost impossible to capture a current profile of the industry before a new significant development alters the landscape. With states legalizing both through ballot measures and legislative actions, new laws and regulations are expanding the national cannabis footprint, and there is significant pressure at the national level in support of full legalization.

States and cities are creating new legislation based on what they perceive as the best legislative efforts of other states and cities. Sacramento and the case-study cities analyzed for this report have ownership structures that are as dynamic as the industry in that they are experiencing the significant financial pressures of volatile wholesale flower prices, dramatic increases in extraction products, State taxation rates well beyond any other industry, and competition from thriving illicit operators. This discussion looks to contrast and compare Sacramento’s ownership limitations, tracking, and transfer.

Local Ownership
Major corporate interests are absorbing small local stakeholders nationwide to gain market share. Because it remains illegal to transport cannabis across state lines, major operators must establish a market footprint in each state to build a national presence. California’s size makes it an extremely valuable part of the national market. Within the State structure of the law, it is useful to consider paths that Sacramento can take to both provide support to local craft entrepreneurs and capture the economic benefits of a nationalized industry.

The California Department of Cannabis Control is the agency that issues and regulates State licensing for all aspects of cultivation, manufacturing, distribution, testing, and sale of cannabis products. While the State also regulates the taxes and other industry specifics (see Appendix D), it is silent on issues of ownership, deferring to each community to craft its own regulations. California was able to look to the early legalization efforts of Washington, Colorado, Alaska, and Oregon to craft the State proposition, but these efforts did not foresee how dynamic the industry has become
.

The City’s OCM is responsible for granting and monitoring BOPs and ownership requirements for all cannabis businesses in the City. Both the State-granted licenses and City-granted BOPs are based on the individual applicant’s/entity’s qualifications and have no value. They cannot be transferred, sold, or assigned.

The State language does allow ownership in a cannabis business to be transferred. Partial ownership transfer is allowed when the new owner is deemed to be qualified by the State. Full transfer requires a new license.

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Sacramento does not limit the number of permits an individual or entity can have, with the exception of retail storefront dispensaries in which no single person or entity is allowed to have ownership interest in more than one dispensary. In the current cap of 30 dispensaries, past practices of ownership entities have compromised the ownership restrictions, resulting in a consolidation of several licenses under multi-corporate ownership. The 10 new CORE dispensary BOPs will also be subject to this restriction. There are other limiting factors on the issuance of BOPs, which are discussed below in the Concentration section of this chapter.

In the seed-to-sale discussion, Sacramento does not prohibit current dispensary owners from vertical integration. These owners have the opportunity to obtain licenses and BOPs throughout the supply chain, including cultivation, and when the moratorium on transfer of non-CORE dispensary licenses ends, they will be allowed to be acquired or partner with larger corporate interests as part of the national consolidation trend.

Tracking Ownership
Sacramento city code requires that every director and any individual/entity who owns more than 20 percent of a cannabis business, regardless of their authority over that business, must submit for a background check and be tracked by the OCM. If the cannabis business is a storefront dispensary, every director and owner, regardless of percentage of ownership, must be tracked. When surveying most of the cannabis businesses licensed in the City, it is clear that an overwhelming majority have opted to structure themselves as corporations.

As has been seen in multiple City documents, many of these corporate entities have the potential themselves to be owned by other corporate entities and even holding companies. This multi-layering of ownership presents considerable challenges in uncovering and tracking a complete ownership structure. The importance of this in all IFGs except retail storefront dispensaries is primarily limited to qualifying owners through the background check. Recently proposed adjustments to Sacramento’s ordinance will simplify this further for background check purposes. But for the retail storefront dispensaries, ownership in more than one dispensary is prohibited, and with a cap on dispensaries, ownership can be extremely valuable. Identifying individual ownership in complex corporate structures and holding companies will require significant resources to ensure that individuals have ownership in only one retail storefront dispensary. And as the City cannot restrict ownership individuals or entities from adopting corporate structures, other solutions will need to be explored.

Transfer of Ownership
The City allows the transfer of part or all of a cannabis business ownership with the exception of retail dispensaries. There is a moratorium on selling dispensary ownership that is set expire May 11, 2022. For businesses other than storefront dispensaries, transfer of ownership must be reported to the OCM on the Cannabis

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Business Information Change Form, which must be completed with both the information of any entity relinquishing ownership, regardless of the percentage owned, and the information of any potential new ownership.

Language from the form reads, “List any new person who has an aggregate ownership interest of 20% or more in the cannabis business. If a holding company has an ownership interest of 20% or more in the business, that holding company and its ownership percentage must be listed as well as the individuals that own the company. The CEO and members of the board of directors of the cannabis business and any holding company must be listed regardless of the percentage of their ownership interests.”
Ownership Case Studies
As the national and State cannabis industry continues to evolve, ownership structures will most likely continue the trend of consolidation. Vertical integration and market share expansion are important trends in the industry. Denver, Oakland, and Long Beach are among the many cities that allow for outside investment and vertical integration. Unlike Seattle, which does not allow cannabis producers to provide retail sales, Sacramento’s allowance of vertical integration from seed to sale is consistent with national and State trends.

It is useful to consider the experiences of other regulators wrestling with the travails of managing the fiscally lucrative cannabis industry.

The following case-study discussions provide a range of tools and techniques being used by various jurisdictions. To capture the maximum range of content and ideas for consideration, creative State policies have been evaluated in addition to those of cities and counties.

Seattle
Seattle Ownership
The Washington State Liquor and Cannabis Board (WSLCB) is the licensing authority for the state’s cannabis program that combines the recreation and medical markets. The WSLCB is not accepting applications for new retail, producer, or processor licenses. There are 3 primary cannabis business license categories in Washington: production/cultivation, processing, and retailing.

Companies can grow and process cannabis, but producers can’t also sell cannabis, and retailers can’t grow and process their own cannabis. In addition to not allowing for full seed-to-sale vertical integration, Washington cannabis businesses cannot accept investment from non-Washington state entities. Individuals must live in Washington state for at least 6 months before applying for a cannabis license. All business entities applying for a cannabis license must be formed in Washington and all individuals listed as “true parties of interest” must meet and

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maintain the Washington state residency requirement. There are more than 100 producer/processer licenses in Seattle and 77 dispensary licenses.24 Until recently, Seattle did not have a social equity program and conducted a Cannabis Equity Survey and Analysis. This has led to the recently appointed Social Equity Task Force that is working to provide recommendations to the WSLCB to establish the social equity program. Recently, the state has directed that all cannabis retail licenses that have been subject to forfeiture, cancellation, or revocation or licenses that were not previously issued by the WSLCB will be filled through the Cannabis Social Equity Program.

The WSLCB is also accepting applications for new Transportation and Research licenses and new Cannabis Cooperative registrations. The practice of home cultivation for adult use is prohibited in Washington state, though limited home grows are permitted for medical marijuana patients. There is a growing effort to change this, although a recently introduced bill to allow it failed.

Seattle has also seen at least one financial institution, a credit union, make a full transition to supporting the cannabis industry, including:
 Cash management checking accounts with designated Account Managers providing one-on-one service.
 Employee accounts.
 Online banking and vendor payments.
 Direct deposit payroll.
 Remote deposit capture via check scanner with same day credit.  Cash pick-up and delivery services.
 ACH transfer processing.

Seattle Ownership Tracking

Washington has multiple levels of ownership, including sole proprietorship partnerships, corporations, multi-level structures, and nonprofits. The tracking of ownership is done both at the initial application process and through their transfer of ownership process. These applications require the listing all true parties of interest. The WSLCB conducts financial and criminal background investigations on all true parties of interest, including:
 Sole proprietorship—the sole proprietor.
 General partnership—all partners.

24 http://magazine.cannabisbusinesstimes.com/article/june-2021/state-of-washington-state- cannabis.aspx

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 Limited partnership, limited liability partnership, or limited liability limited partnership—all general partners and all limited partners.  Limited liability company (LLC)—all LLC members and all LLC managers.  Privately held corporation—all corporate officers and directors (or persons with equivalent title) and all stockholders.
 Multilevel ownership structures—all persons and entities that make up the ownership structure.
 Any entity(ies) or person(s) with a right to receive revenue, gross profit or net profit, or exercising control over a licensed business—any entity(ies) or person(s) with a right to receive some or all of the revenue, gross profit, or net profit from the licensed business during any full or partial calendar or fiscal year, and any entity(ies) or person(s) who exercise(s) control over the licensed business.
 Nonprofit corporations—all individuals and entities having membership rights in accordance with the provisions of the articles of incorporation or bylaws.

In addition, it tracks married couples’ ownership and stipulates that a married couple may not be a true party of interest in more than 5 retail marijuana licenses, more than 3 producer licenses, or more than 3 processor licenses.

A married couple may not be a true party of interest in a marijuana retailer license and a marijuana producer license or a marijuana retailer license and a marijuana processor license.

Seattle Ownership Transfer

Washington allows working with existing licensed businesses to either purchase a licensed business through a new entity, which is called an Assumption, or purchase some or all interest of a licensed business via a Change in Governing People, Percentage Owned, or Stock/Unit Ownership. Applications and qualifications of license ownership are required to be secured through the state before purchasing any interest in the business.

Oakland
Oakland Ownership
The City of Oakland took a very different road to ownership in the industry.

Oakland has been a national leader in creating systems that help cannabis businesses thrive. In 2015, in an attempt to create an institutional culture shift toward placing greater weight on equity and inclusion of historically marginalized communities, the Oakland City Council voted to create the nation’s second Department of Race and Equity (following Portland) and tasked it with analyzing policies and systems through a racial equity lens. The City of Oakland decided on a policy that would award permits to equity applicants and general applicants on a 1:1 ratio. It also put an initial cap on dispensary permits at 4 and included a

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provision for the Oakland City Administrator to allow up to 8 new dispensary licenses per year. It also directs that no individual or entity shall have a direct or indirect interest in more than 2 dispensary permits. The process for general applicants to obtain a dispensary permit is via scoring of the application by city staff. Equity applicants who submit complete applications are selected through a public drawing. There are 14 storefront dispensary permits in the city and an additional 12 that are approved but not yet operational. The City of Oakland did not put the caps on non-storefront retail delivery permits, and there are no other limits on the number or type of permits individuals or entities can hold. The City of Oakland allows for both outside investment and vertical integration.

Oakland Ownership Tracking

The City of Oakland does not expressly define a methodology of tracking ownership other than the information that is required in the initial application. The application requires definition of the type of business structure being used, as well as a list all persons directly or indirectly interested in the permit sought, including all officers, directors, general partners, managing members, stockholders, and partners. Equity applicants are required to file additional qualifying information.

Oakland Ownership Transfer

Oakland does not limit the sale of cannabis ownership for general permit holders.

It does require any new ownership interest to acquire State licensing. In addition, the Oakland zoning code states that permits only “apply to the premises and the entities or individuals originally specified, except upon written permission of the City Administrator’s Office granted upon written application to the City Administrator’s Office made in the same manner as required in the original application process.” Anyone with a direct or indirect interest in the permit that was not listed on the original application must undergo a live scan background check, and inspections of the originally permitted premises by relevant agencies may be required. In other words, a general applicant can transfer their ownership in a cannabis business to anyone, provided the new permittee submit their own application and go through the permit process.

The city’s general business transfer code has language that the city interprets to preclude transfer of their interest to a non-equity business; however, the city is exploring allowing the transfer of equity permits to anyone after a 3-year vesting period. Because of Oakland’s initial requirement of 1:1 equity to general cannabis permits, the pool of equity owners will continue to be replenished.

Long Beach
Long Beach Ownership
When Long Beach set their original ordinance, the city limited dispensary licenses to 32, which were quickly spoken for by the existing medical dispensaries. It did not set caps on other permits, although it did not allow for non-storefront retail

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delivery permits. It also does not allow for processor cultivation permits. The city allows for vertical integration under the State’s microbusiness license designation, and it does not have language in its ordinance limiting the number of cannabis businesses any single individual or entity can own.

In its efforts to provide social equity applicants a path to entry into the industry, Long Beach is introducing 8 new dispensary permits, shared manufacturing uses, and introducing an unlimited number of retail delivery opportunities exclusive to equity applicants. The goal is to provide equity applicants opportunities in the industry with lower initial capital investment requirements than the higher initial investment cultivation and retail dispensary opportunities.

Long Beach Ownership Tracking

The City of Long Beach does not expressly define a methodology of tracking ownership other than the information that is required in the initial application. The application requires definition of the type of business structure being used, as well as a list of all owners and managers in the permit sought, including all officers, directors, general partners, managing members, stockholders, and partners.

Equity applicants are required to file additional qualifying information.

The city does define what constitutes an owner in its ordinance. “Owner” means any of these:
 Any person with an ownership interest of 10 percent or more in the Adult-Use Cannabis Business applying for a permit.
 The chief executive officer of an entity, including nonprofits.  A member of the board of directors of a for-profit or nonprofit entity.  All persons in an entity that have a financial interest of 10 percent or more in the proposed Adult-Use Cannabis Business, including but not limited to:
‒ A general partner of an Adult-Use Cannabis Business that is organized as a partnership.
‒ A non-member manager or managing member of an Adult-Use Cannabis Business that is organized as a LLC.
‒ Any person holding a voting interest in a partnership, association, or LLC. ‒ All officers or directors of an Adult-Use Cannabis Business that is organized as a corporation, and all shareholders who individually own more than 10 percent of the issued and outstanding stock of the corporation.

Long Beach Ownership Transfer

Long Beach allows for the transfer of ownership of cannabis permits through a process with the Office of Financial Management. A Minor Cannabis Transfer of Ownership Application is required when a business is adding owners to their

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license whose ownership percentage totals between 10 percent and 49 percent of the business. The City of Long Beach Office of Financial Management does not stipulate a process for more than 49 percent but does have an application and review process when a business owner is transferring their interest to another party through a business license application. It is an administerial process, and the policy has generated multiple brokers advertising businesses for sale. The new equity-focused shared use is not intended as a salable license but rather an opportunity to provide equity applicants an existing facility in which to operate without significant start-up costs. Long Beach is crafting the ordinances for non- storefront delivery and the 8 new equity applicant retail dispensaries.

In interviews, they are working through how the ordinance will address sales of equity dispensary ownership.

Denver
Denver Ownership
Denver, along with Seattle, approved recreational cannabis on January 1, 2014, but had allowed medical cannabis since 2000. Denver has more than 1,100 cannabis licenses operating out of nearly 500 locations.

Denver’s moratorium on licensing new medical marijuana stores and medical marijuana cultivation facilities continues to be in effect; however, the bill reserves new applications for new medical marijuana products manufacturer, medical marijuana transporter, and retail marijuana business licenses from social equity applicants until July 1, 2027, to provide social equity applicants an opportunity for ownership of cannabis businesses. Denver is only accepting applications from non-social equity applicants for a medical or retail testing facility or R&D license or is applying for a retail marijuana business license that will be co-located with a medical marijuana business of the same type.

In addition, Denver has instituted a consumption lounge pilot program that will provide additional ownership opportunities.

Denver Ownership Tracking

Denver keeps a database for active individual and business licenses, as well as inactive licenses; however, it is for all business license types and is limited to identifying the applicant. It does not address ownership structure. As Denver rolls out its opportunities for social equity applicants and attempts to regulate the transfer of social equity ownership to maintain 51 percent social equity through July 1, 2027, a more advanced tracking system will be imperative.

Denver Ownership Transfer

In general, all cannabis businesses are transferable from one person to another on approval by the Director of Marijuana. There are additional requirements for transfers of marijuana transporter businesses, which are subject to limitations set by Colorado state law. Transfer of ownership of cannabis off-premises storage

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facility permits or cannabis delivery permits have additional requirements. Denver recently adopted language so that before July 1, 2027, equity applicants are allowed to transfer business interests to either other social equity applicants or to non-social equity applicants, as long as 51 percent or more of the business is held by one or more social equity applicants. After July 1, 2027, businesses held by social equity applicants are transferable either to other social equity applicants or non-social equity applicants following an approval process. Non-social equity owners are not limited and can transfer their entire interest to another individual/entity.

Denver also has a common ownership restriction in that if one or more licenses share the same licensed premises, an application to transfer ownership of any one of the licenses shall not be approved if the transfer would result in that license no longer having common ownership with the licenses sharing the same licensed premises.

Ownership Conclusions
The case studies on ownership, ownership tracking, and transfer of ownership provide several important comparisons to be made.

Ownership
There are distinct attributes of how ownership has a direct correlation with how the initial cannabis ordinances were crafted:
 Seattle is, on the one hand, the most restrictive in the sense of requiring a 6-month residency requirement, prohibiting outside investment, and not allowing seed-to-sale vertical integration. Ownership requirements initially did not include an equity component and were among the least restrictive, favoring well-capitalized legacy owners. The state is now focused on a social equity program and is identifying ownership opportunities dedicated to social equity applicants.
 Both Sacramento and Long Beach placed caps on dispensaries in particular and allowed the previous medical permit holders to convert to recreational permits, effectively closing out any new ownership opportunities. Both cities are using similar social equity initiatives to create a more diverse ownership playing field through additional dispensary ownership opportunities. Long Beach is taking this a step further through their shared manufacturing facility program and opening non-storefront retail opportunities for social equity applicants.
 Denver was also without a social equity program and implemented a dynamic and fast-growing cannabis industry that was market driven and allowed to succeed and fail based on consumer preference. While current ownership is rapidly consolidating through major mergers and acquisitions, Denver has

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selectively identified several IFGs for new social equity ownership, including a consumption lounge pilot program.
 Oakland’s approach to requiring a 1:1 social equity to general ownership model for all cannabis permits is widely considered one of the most innovative and fair in the country. In addition, allowing up to 8 additional dispensaries per year provides a growth approach that is measurable and adjustable.

Some interesting opportunities exist for Sacramento to build on the success of previous policy initiatives and interesting new initiatives in the industry:
 The potential to adopt a 1:1 social equity to general ownership model for all IFGs moving forward.
 The potential to identify ownership growth areas in the industry and direct those opportunities to social equity applicants.
 The potential to adopt a more fluid and less reactive approach to ownership by allowing “up to” growth models for the IFGs.
 The potential to open an entirely new IFG and perhaps restaurant niche in the space of consumption lounges, combined with food production and service.

Ownership Tracking
Given the complex ownership structures of both individual IFG owners, as well as vertically integrated corporations already establishing footholds in Sacramento, ownership tracking is one of the more difficult puzzles to solve in the current ownership cap structure, while allowing for vertical integration. There appear to be 3 potential avenues for the City to explore:

1. Hire an outside consultant/firm to manage and implement the tracking through IRS, banking, and other industry methods.

2. Create a position or positions in the OCM, and hire experienced staff to manage and implement the tracking in house.

3. Remove the one permit restriction on retail storefront dispensary ownership and streamline the individual/entity ownership reporting requirements to promote transparency.

Avenues 1 and 2 both would require significant resources to implement but, given the complexity of the corporate structures, may be necessary to uphold the provision of the ordinance. A hybrid approach would be to hire a consulting firm to train staff to manage and implement the tracking internally, but this would still require significant additional resources. The threat of Avenue 3 is that the recent trends of publicly traded companies buying multiple dispensary licenses in locales contribute to a consolidation and monopolization of the market. This is only exacerbated by the allowance of vertical integration. A remarkable example of this

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is the Florida-based and Canadian-traded company Trulieve. Following the recent acquisition of a major competitor, they will now have 149 retail locations in 11 states, including Florida, and more than 3.1 million square feet of cultivation, with 6 of those dispensaries in California.

Ownership Transfer
Each of the case studies have some version of ownership transfer and, with the exception of Seattle, they all offer vertical integration and outside ownership.

Denver, Sacramento, and Long Beach all provide protection for social equity ownership interests to maintain the social equity aspect of the permits. Oakland’s ordinance provides for an ongoing social equity ownership model and is looking to see how to allow social equity businesses to sell to the highest bidder.

If Sacramento looks to make adjustments to the ownership model in line with Oakland’s (1:1 ratio and an “up to” policy), selling a dispensary should not reduce the social equity pool of ownership. Under the current policy, Sacramento will need to look to other ways to allow social equity dispensary owners to maximize their investment.

Taxation Considerations
The cannabis industry is federally illegal, and the product is taxed at the State level at higher rates than other “sin” products, largely out of tax generation aspirations. Early states to legalize have generated high excise taxes that they have directed to the General Fund. California pursued this approach as discussed in the State Taxation Trends, and as a result, Sacramento and other California communities have real dilemmas regarding their relationship to the State taxes, their local concerns, and the health of the industry.

The confusing nature of the opt in/opt out State legalization structure creates different taxation metrics across counties and cities. This decentralized approach pits communities against each other to reduce local tax rates in an effort to capture market share.

The table below provides a comparison of Sacramento to neighboring jurisdictions. It is important to note that while a significant number of these communities do not allow cannabis, the lure of cannabis tax revenue has many of them contemplating entering the market, which will potentially put additional pressure on Sacramento’s local tax rates.

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Table 10. Local Tax Comparison

County/City [1] Local Taxes
Sacramento County Does not allow.

Sacramento 4% gross receipts for all cannabis businesses.

Sutter County Does not allow.
4% gross receipts for cultivation.
5% gross receipts for all other activities.
10% gross receipts for retail, distribution, and cultivation.

For Manufacturing, R&D, and Testing:
5% for receipts between $0 - $50,000/month;
4% for receipts from $50,001 - $100,000/month.

West Sacramento No adopted cannabis business tax; taxes levied via development agreements.

Woodland No cannabis business tax.

Solano County Does not allow.
1% gross receipts for testing and distribution.

Manufacturing:
2% gross receipts Year 1;

2.5% gross receipts Year 2;

3.5% gross receipts Year 3.

Cultivation:
$5 PSF Year 1;
$6 PSF Year 2;
$7 PSF Year 3.

Dixon 15% gross receipts for businesses that do not obtain a Development Agreement or CUP. No cannabis business tax otherwise.

Rio Vista No cannabis business tax.
7% gross receipts for retail.
5% gross receipts for cultivation.
5% gross receipts for manufacturing.
2% gross receipts for distribution.

Yuba Count
y Does not allow.

Cultivation:
$10 PSF for artificial lighting;
$7 PSF for mixed lighting;
$4 PSF for natural lighting;
$2 PSF for nursery.

2.5% gross receipts for testing.
6% gross receipts for retail.
3% gross receipts for distribution.
4% gross receipts for manufacturing.

Vallejo
Marysville
Yolo County
Benecia
Davis

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County/City [1] Local Taxes
Placer County Does not allow.

Colfax $7 PSF for cultivation.
4% gross receipts for retail.
2% gross receipts for distribution.

2.5% for manufacturing and testing.

El Dorado Count
y Cultivation:
$2 PSF for natural light;
$4 PSF for mixed light;
$7 PSF for indoor;
4% gross receipts for nursery.

Manufacturing:

2.5% gross receipts for Level 1 (solvent manufacturing); 0% for Level 2 (non-solvent manufacturing).
4% gross receipts for retail.
2% gross receipts for distribution.

0.5% gross receipts for testing.

South Lake Tahoe No cannabis business tax.

Amador Count
y Does not allow.

Calavaras Cultivation:
$2 PSF for natural and mixed light;
$5 PSF for indoor.
7% gross receipts on retail and manufacturing.

Angels Camp Does not allow.

San Joaquin County No set tax rate. Development agreement required through which County may establish gross receipts impact fees. PA-20000070 sets rates at 3.5 percent gross revenue for all cannabis businesses.

Stockton 5% gross receipts for retail.
1% gross receipts for distribution.
3% gross receipts for manufacturing.
5% gross receipts for cultivation.
0% gross receipts for testing.
5% gross receipts for microbusiness.

Contra Costa Count
y Cultivation:
$7 PSF for indoor;
$3 PSF for mixed-light;
$2 PSF for outdoor;
$1 PSF for nursery.
2% gross receipts for distribution.

2.5% gross receipts for manufacturing.
4% gross receipts for retail.
0% gross receipts for testing.
4% gross receipts for microbusiness (2.5% if not including retail).

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In addition, several nearby cities such as West Sacramento have no specific cannabis business tax but collect cannabis tax revenues through development agreements. Under California law, retail delivery of cannabis cannot be prohibited by local jurisdictions. Therefore, delivery services in communities with lower taxes (and resulting lower sales prices) can deliver into areas with higher taxation, potentially impacting the gross sales and resulting local taxes from Sacramento’s retail dispensaries and delivery companies.

Sacramento Tax Revenues
Overall, Sacramento charges 13.75 percent on retail sales, made up of

8.75 percent State and local sales tax and a 4 percent business operating tax.

Sacramento’s estimated $27.3 million in cannabis industry General Fund revenues comes from a combination of the 4 percent BOP tax, as well as licensing fees and fines, property taxes, utility taxes, and transient occupancy taxes. The General Fund expenditures due to cannabis businesses operating in the City are estimated at $7.5 million, resulting in net revenue of $19.8 million to the City General Fund. (See Chapter 6 for discussion of the fiscal impact analysis.) In addition to the General Fund revenues attributable to cannabis, Sacramento’s neighborhood responsibility plan fee, which seeks to mitigate negative impacts from “novel business activities” like marijuana, has imposed a fee equivalent to 1 percent of gross revenues on cannabis businesses. The neighborhood responsibility plan fee is estimated to generate an additional $5.2 million in revenues for Fiscal Year 2021/2022, not included in the City’s General Fund.

County/City [1] Local Taxes
Richmond 5% gross receipts for all businesses.

Pittsburg 10% gross receipts.

Oakley Does not allow.

Antioch No cannabis business tax.

Concord No cannabis business tax.

El Cerrito No cannabis business tax.

Martinez No cannabis business tax.

Napa County Does not allow.

City of Napa Does not allow.

American Canyon No cannabis business tax.
[1] Tax rates for counties apply to unincorporated portions of that county only. Cities within each county may set their own tax rates for cannabis businesses within their city limits.

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State Grant Programs
Some State tax revenues are returned to the City through State grant programs.

Sacramento was recently awarded a grant of up to $5.78 million, authorized by Senate Bill (SB) 129 Local Jurisdiction Assistance Grant Program, to assist business owners with meeting California Environmental Quality Act (CEQA) requirements, enabling licenses to transition from provisional to permanent. 25 Clearing CEQA requirements has been a major hurdle in transitioning the provisional licenses across the range of IFGs. In addition, in May 2021, the Governor announced a $15 million grant program to support community social equity efforts.

Tax Revenue Case Studies
To provide information for future study, here are approaches that other cities have used in developing their cannabis tax structures. The City of Oakland has structured a policy that is both variable in regard to social equity and size and directs a portion of tax revenues to equity owners.

Each of the case-study cities was considered in terms of how they are allocating cannabis tax revenue. In addition, several new states that allow legal recreational cannabis are developing policies for tax expenditures, and they are found in Appendix B.

The Oakland Case
All cannabis tax proceeds in Oakland are deposited into the General Fund.

In 2017, the Oakland City Council determined that a loan program was needed to assist historically marginalized cannabis operators, given the lack of personal wealth in low-income communities and federal restrictions on bank lending. The Equity Loan Program re-invests cannabis tax revenue into economic opportunities for those most impacted by the War on Drugs.

Oakland’s 2020 tax has yielded $13.7 million for the General Fund, of which $3.4 million is dedicated toward technical assistance and the revolving no-interest loan program for low-income cannabis “equity applicants.” Sacramento also uses a revolving no-interest loan fund. The CORE Capital Loan Program is funded with more than $3 million.

Loan Program Summary
Oakland’s loan program establishes tiers of business development that are awarded specific amounts of funds up to a cumulative maximum of $115,000.00 for 100 percent social equity businesses. The Equity Loan Program consists of

25 Sacramento was earmarked for the fourth highest allocation in the State at $1,813,612.38.

The funding has not yet been received. While the funding cannot be set aside for social equity members only, it is anticipated that social equity members will be a primary beneficiary of the programs launched with the grant.

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public funds, and repayments need to be made to make loans to equity applicants in the future. The program has seen mixed results as several loan participants have not made repayments and have been sent to collections.

Sacramento’s loan program, CORE Capital, is a 6-year interest-free loan program for cannabis businesses made available through grant funds from the Governor’s Office of Business and Economic Development (Go-Biz). The largest amount available for an initial, or first-time, loan is $50,000 if an applicant has a signed business lease for a location/premise or owns a location. Loan applicants may apply for additional loans (“Follow-on Loans”) in increments of up to $50,000, without fully repaying their prior loan(s), as long as they have spent the funds on eligible expenses, are not delinquent, and are compliant with CORE requirements.

In 2019, Oakland lowered the tax rate to 0.12 percent per year for all equity businesses with gross receipts under $1.5 million. It also created a phased-in system that lowered the tax rates for non-equity businesses and larger equity businesses to between 2.5 and 5 percent for non-equity businesses by 2022, depending on the size and sector of the business. In addition, non-equity businesses can receive 0.5 percent rebates for equity activities such as incubating an equity business, local hiring, equity supply chain contractors, and workforce quality of life. However, businesses are limited in the number and frequency of rebates they can receive and still must pay a minimum tax rate of 2.5 percent in 2022. Most business tax classifications in Oakland pay below 2 percent per year.

Cannabis businesses assessed at 2.5 percent will pay the highest business tax rate in Oakland, followed by the classification for “Firearms Dealers” that pay

2.4 percent. So far, the 0.5 percent rebate program has not yielded the intended results as operators see the reporting requirements outweighing the benefit.

While Oakland’s tax reductions for IFGs across the board initially reduce the city’s cannabis tax revenue, it is argued that they further strengthen the local industry’s ability to be profitable, compete with the illicit market, and have the potential to generate higher revenues if demand for regulated product increases.

The Long Beach Case
In 2019, a broad-based coalition of cannabis industry professionals, policy advocates, patients, consumers, and city officials came together to support the city’s legal cannabis industry in reducing taxes. In the face of a significant budget deficit, the Long Beach City Council voted in 2019 to lower the tax rate for cannabis businesses from 6 percent to 1 percent. The city collected $10.3 million in cannabis tax revenue for the fiscal year with the tax revenue flowing into the City’s General Fund. This was a $6.3 million surplus over the $4 million in projected revenue. According to a report, local dispensaries “felt a boom” from the lower tax rates, and a city analysis projects that some levels of increased

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sales will continue.26 Just as Sacramento is, Long Beach was facing increased pressure from the illicit market and sought to reduce taxes to be more competitive, preserve jobs in the legal industry, and reduce public safety concerns.

Sacramento and Long Beach share nearly the same amount of retail storefront dispensaries. However, Sacramento has a significant non-storefront retail delivery IFG that is only recently being proposed in Long Beach. Extrapolating the incremental success of Long Beach’s tax reduction to revenue increase over Sacramento’s retail sales has the potential to increase the viability of the retail IFGs, produce additional revenue, and provide more stiff competition with the illicit market.

The Denver Case
Denver cannabis tax is imposed with a 15 percent state excise tax and a local tax of 9.81 percent. The City of Denver collected more than $70 million in sales tax revenue from $715 million in cannabis sales in 2020, a 17 percent jump from the $60 million collected in 2019, according to the Department of License and Excise.

Denver is projected to earn the same amount of tax revenue in 2021.

In November 2013, Denver voters approved adding a special sales tax on retail marijuana that could vary from 3.5 percent to 15.0 percent. The tax is in addition to standard sales tax and all other applicable state taxes. Since 2017, retail marijuana is exempt from the state standard sales tax but is subject to both state and local special sales taxes:
 Denver standard sales tax: 4.31%.
 Denver special sales tax on retail cannabis: 5.50%. This tax can fluctuate between 3.5% and 15% by Denver City Council authorization.  State special sales tax on retail cannabis: 15.0%.
 Total retail cannabis sales tax: 24.81%. Since 2017, 10% of the state special sales tax has been shared with local jurisdictions.
27 During the 2021 elections, two ballot measures, one state and one local to increase taxes on cannabis were defeated as opponents debated the health of the industry against programs the taxes would fund. Yet in the face of one of the highest major city tax structures in the industry, there appears to be little momentum to lower taxes. Instead, Denver is experiencing continued illicit cannabis production and sales throughout the city.

26 CalliforniaCityNews.org, After Lowering its Cannabis Taxes Long Beach Saw a Windfall, 2/23/2021.
27 The Denver Collaborative Approach, Leading The Way In Municipal Marijuana Management, 2020.

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What is relevant in Denver’s tax model is how the revenues are spent, with 37 percent allocated to homeless housing, 6 percent to education, and 5 percent to public health. This is a significant investment in homeless housing as Denver grapples with many of the same homeless issues confronting communities throughout the state.

The Seattle Case
Washington taxes cannabis with a 37 percent excise tax and an optional 10 percent local tax. As approved by voters in 2012, Initiative Measure No. 502 did not set aside any money for local governments when it legalized recreational cannabis in Washington. City and county officials later asked the legislature for a share of the state’s marijuana tax revenue with the goal of helping to defray some of the costs they might accrue from the new law, such as the cost of enforcing the ban on using marijuana in public places. The legislature reworked the state’s legal cannabis laws significantly in 2015 and, as part of that overhaul, gave local jurisdictions a share of the tax money, provided they did not ban cannabis businesses within their boundaries. Seattle is receiving a reported $30 million per year in revenues.

Like California, Washington has dedicated funds toward social equity programs.

The cannabis revenues must allocate $1,650,000 for Fiscal Year 2022 and the same amount for Fiscal Year 2023 to the Department of Commerce to fund the marijuana social equity technical assistance competitive grant program.

In addition, Washington has established a fund for mentors as part of the cannabis social equity technical assistance grant program.

Nearly half of all cannabis revenues for Fiscal Years 2015 through 2020 went to Washington’s Basic Health Plan Trust Account. That account is described by the Office of Financial Management as providing “necessary basic health care services to working persons and others who lack coverage, at a cost to these persons that does not create a barrier to the utilization of necessary health care services.” Washington, and by extension Seattle, has the highest excise tax in the nation on retail sales; however, there is no wholesale tax, as is the case with California and, by extension Sacramento. The Seattle model places the entire tax burden on the retail transaction and relieves the cultivator from having to pay taxes on raw product with variable pricing. This effectively eliminates the incentive to grow and distribute to the illicit market to avoid wholesale taxation.

Options for Sacramento
As noted previously, the State levies a flat cultivation tax based on product weight, not value. This flawed approach places a tremendous burden on small cultivators when the sales price of raw product declines and pressures local jurisdictions to lower tax rates to sustain the viability of local cannabis businesses.

It has also incentivized the sale of raw product into the illicit market through what

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is known as burner permits28 and “track-and-trace” manipulation.29 However, the Governor of California’s recent commitment to make adjustments to State regulations and taxes could allow Sacramento greater leeway in adjusting the local tax to support local programs. A proposed bill being circulated would eliminate the wholesale cultivation tax entirely and increase the retail excise tax initially to 50 percent of the anticipated revenue of the cultivation tax and then raise to capture 100 percent of the cultivation revenue.

It is uncertain how the bill will look once passed through the State legislature, and what impact it will have on retail pricing; however, it will certainly benefit the viability of cultivators. This significant tax adjustment makes it difficult to predict what, if any, adjustments to the Sacramento tax model should be made.

As seen in Table 10, several Northern California communities add an additional tax on cultivation, primarily by square footage. While this method, or a tax on sales price, are more predictable than the State’s tax by weight, they create additional pressure for cultivators to sell to the illicit market.

Sacramento’s 4 percent local tax does not appear to be out of line with other nearby communities, although it will bear watching how neighboring communities contemplating allowing cannabis businesses set their local taxes, as this development could have a direct impact on local sales and tax revenue.

Taxation Conclusions
 Sacramento could look to a modified Oakland model and reduce the 4 percent local tax for all social equity businesses while maintaining the current tax for non-equity.
 Sacramento could look to the success of Long Beach and reduce the local tax across the board as a means to stimulate sales revenue in the regulated market.
 If the cultivation tax is eliminated and the excise tax is increased by half of the projected cultivation tax revenues, Sacramento could increase the local sales tax by an increment that would fall within 50 percent of the cultivation tax. This approach would need to be re-evaluated once the excise tax reverts to 100 percent of the cultivation tax revenues.

28 Burner permits are associated with distributors who purchase raw product from a cultivator, pay the cultivation tax to the states, and sell the product to the illicit market. 29 Track-and-trace manipulation is when cultivators track only a fraction of the actual flower produced by a plant and then sell the rest to the illicit market.

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Concentration
Land use regulations, sensitive receptor buffers, and facility availability are the primary drivers of cannabis business concentration. Many cities have used zoning in industrial areas to create what are known as “green zones,” where the cities allow all cannabis IFGs to locate. Cultivation, distribution, manufacturing, and testing businesses are industrial in nature and are better located in industrial districts. Delivery is dependent on proximity to its regional market business size, but it is also primarily a small warehouse-type use. Dispensaries are essentially retail stores and are generally located in neighborhood retail areas or along commercial corridors. Sacramento’s ordinance also directs the industrial aspects of the cannabis community to specific land use zones, and these are primarily in Council Districts 2 and 6.

Chapter 5 of this Study details the concentration of the various IFGs and the real estate and neighborhood impacts. Sacramento is similar to other cities in that older industrial and residential districts are often adjacent and even comingled, as can be seen in both Districts 2 and 6. The land use tables in Appendix C identify the allowed zoning classifications for the range of IFGs. Sacramento has 2 additional concentration restrictions in District 6. In 2018, the City Council passed a limit on cannabis cultivation, capping it at 10 percent of the industrial real estate or approximately 2.5 million square feet. In addition, the City limits retail non-storefront delivery permits in the southeast industrial area to 50 permits. As shown in Table 11 (Chapter 5), there are 34 active delivery BOPs in the district. One additional restriction in Sacramento limits retail storefront dispensaries to the C-2 General Commercial Zone and C-4 Heavy Commercial Zone and restricts it from the C-1 Limited Commercial Zone and the C-3 Central Business District Zone.

Looking to Other Cities
Denver has not limited its number of dispensaries. However, like Sacramento, some surrounding cities in the area didn’t allow recreational cannabis, allowing Denver to capitalize as the regional epicenter for the cannabis industry. Denver has effectively let the market decide what dispensaries survive. As the Denver cannabis industry has matured, the city has concerned itself with dispensary and cultivation oversaturation in neighborhoods, despite their generally positive reception. Now, Denver does not allow either of these licenses in the 5 most impacted neighborhoods, recalibrated each year. The impact is measured in the number of cannabis business permits per capita. In one of the most impacted neighborhoods, there is 1 business permit for every 91 inhabitants.

Oakland was about initial quantity limits, beginning with 4 dispensaries, and allowing up to 8 new dispensaries per year, with their social equity requirements in all other licenses requiring a 1:1 ratio of equity licenses to non-equity licenses and did not limit other licenses. Oakland used its zoning ordinance to create a

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defined green zone and uses buffers from sensitive receptors as a second limiting factor. Growth has continued since legalization, but there does not appear to be any organized concern about oversaturation.

In Long Beach, available land with the correct zoning is their concern, and they are also introducing reduced buffers in some cases to expand their green zone.

Long Beach doesn’t limit concentration or location other than dispensaries must be a minimum of 1,000 feet apart. The City of Long Beach relies on consumer demand and available property to limit concentration. They have even recently allowed a dispensary in a residential mixed-use building. Previously, non- storefront retail delivery was not allowed in the city, but along with 8 new dispensaries for social equity applicants, they are opening the delivery business permit to social equity applicants as well. In discussion with their cannabis department, there was not a concern for overconcentration. This may be due in part to the overwhelming industrial footprint in the south Los Angeles area, including Wilmington.

Cultivation
With the exception of Seattle, the case-study cities have a range of approaches to concentration of cultivation licenses.

Initially, Denver’s rush to the market saw cultivators swarm Denver’s older industrial districts, with older Class B and Class C space. As their market has matured, Denver introduced a moratorium on the licenses and only recently opened new cultivation licenses to equity applicants. As discussed previously, Denver is maintaining moratoriums on those communities (top 5 each year) most impacted by concentration.

Long Beach does not limit the number of cannabis cultivation licenses, but according to the city’s zoning restrictions, it is allowed in light, medium and heavy industrial zones and in general industrial areas but not in residential, institutional, park, commercial, and port zones, and the lack of available facilities limit the concentration.

Oakland limits cultivation licenses by zoning not by number, and facilities that meet the zoning are prolific as Oakland has an extensive industrial green zone with facilities appropriate to indoor cultivation. Cultivation is allowed by right in all industrial zones. The tables in Appendix C provide a summary of land use regulations for Sacramento and the case-study cities for comparison.

Sacramento has 93 cultivation BOPs producing far more product that is consumed in the City. Based on the consumption per capita data shown previously in Table 8, there appears to be far more product being cultivated than is locally consumed. However, cultivators are free to move their product throughout the State, and as such, it is not possible to say with certainty how saturated the Sacramento market is. In addition, the burner permits and the track-and-trace

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manipulations discussed earlier make it even more difficult to assess. But with the number of cities and counties adjacent to Sacramento and the high number of non-dispensary delivery services, regional consumption will capture a percentage of the cultivation.

Manufacturing and Distribution
Manufacturing and distribution are both growth opportunities in Sacramento.

These are complex industries on which the supply chain relies and are evolving daily. They are scientific, technological, logistical, fabricating, packaging, and marketing. Larger, well capitalized entities are well positioned to gain ownership in these components of the industry.

Would Sacramento be better served to welcome these large corporate companies and incorporate specific jobs training and local hiring practices into their licensing requirements? Colorado and Washington represent 2 different approaches.

Washington makes a concerted effort to limit consolidation and support small local businesses, but that may change soon as many fear that without outside capital investment, Washington will not be able to thrive in a national legal industry.

Colorado invites the industry to “come on in” for investment, which appears to have resulted in significant consolidation.

What is clear is that these 2 IFGs are the center of vertical integration and will dominate this young industry through their relationships with cultivators and dispensaries, their abilities to continually advance product quality, and their brand control.

Retail
Retail dispensaries are simply retail stores, and there is little if any evidence of negative impacts on their surroundings in the case-study cities. In fact, these outlets tend to meld into their respective communities, as illustrated in Midtown Sacramento, and are good neighbors. However, there is clear and direct evidence from the interview process and recent press that many are struggling. When the moratorium on outside investment ends in May, outside investment will be important in stabilizing this aspect of the industry. With 10 new dispensaries coming online in the future, could the concentration concerns around these stores be lessened by opening up additional zoning and districts to them? Non-storefront retail or delivery is being looked to by several cities as a means of increasing local ownership, particularly for social equity applicants. Long Beach is at the forefront of this as delivery has not been allowed in the city but will now open up to social equity applicants. According to one of the interviewees for this Study, larger examples of this business can make about 600 deliveries a day, with capital facilities including a warehouse to store product, a fleet of vehicles, an office, and dispatchers.

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In contrast to the cost of cultivation and dispensaries, retail delivery businesses have a relatively low cost to entry but may face challenges in terms of high ongoing operational costs. While authorized to deliver to other markets in the State approved for sales, limits on carried inventory and practical considerations result in a high number of establishments serving local and even regional consumers.

With the growing use of online purchases and rapid delivery times, these delivery companies should continue to see growth. The threat to them in the near term appears to be a combination of rising costs, particularly fuel and insurance, the tax structure, and the volatility of the retail prices. In the long term, competition from large fleet, multi-platform companies such as UBER may prove to be a much larger threat. And with Amazon now backing federal legalization, it may be inevitable that these mega players will dominate the procurement and delivery sectors of the industry.

While there is concern, particularly in District 6, of an overconcentration of the delivery businesses, the City has already introduced policy to limit the number of these permits to 50, with 34 current BOPs.

Concentration Conclusions
 Concern with oversaturation in particular neighborhoods or districts of cultivation could be regulated in the same manner that the City is regulating the concentration of cultivation in District 6.
 With 10 new social equity dispensary permits approved, the City may need to open additional Council Districts and potentially the C-1 and C-3 zones to avoid overconcentration in Midtown and District 6.

Youth Impacts
Dispensary and Delivery Advertising and Packaging
There is general consensus among public health experts that abuse of cannabis among youth is associated with a range of negative consequences such as reduced high school graduation rates and certain mental and physical health outcomes.
30 In Sacramento, groups such as California Youth Forward and others have noted a tendency for billboards and other advertising that may be “suspect” in terms of messaging and imagery that could be construed as appealing to youthful sentiments. In addition, packaging and wrapping has come under fire for

30 Fischer, Benedikt, et. al. 2022. Lower-Risk Cannabis Use Guidelines (LRCUG) for reducing health harms from non-medical cannabis use: A comprehensive evidence and recommendations update. International Journal of Drug Policy.

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mimicking various candies (e.g., gummies), often appealing to youth in non- cannabis settings.

While these concerns are substantial, this issue is largely outside the purview of this Study. The State’s Department of Cannabis Control is tasked with enforcing the advertising restrictions that were enacted by Proposition 64, which include bans on cannabis advertising within 1,000 feet of schools, daycare centers, or playgrounds. Local efforts to monitor product packaging targeted to children are likely to be ineffective, given that products are manufactured and sold throughout the State, although the City should lobby the Department of Cannabis Control to more strongly enforce Proposition 64’s restrictions on youth-oriented packaging.

Clearly the City should evaluate its ability to influence advertising and packaging in its jurisdiction. These efforts could include allowing residents to report cannabis advertising that violates restrictions on youth-oriented advertising via the City’s 311 service, or even explore adding an additional level of City review for cannabis billboards, as is being considered in the City of San Diego. 31 Lastly, the City could
enact a local ordinance restricting the location of cannabis advertising, similar to the City of Oakland’s sign ordinance,
32 which restricts outdoor tobacco and alcohol
advertisements within 1,000 feet of schools, youth centers, and churches.

However, enforcement of this measure would require a significant dedication of City resources. To the extent possible, the local industry could potentially be expected to follow certain guidelines in return for receiving City services.

However, it is less clear that the mere existence of dispensaries and delivery services has an influence on youth participation. While some research has indicated a possible relationship between knowledge of nearby cannabis resources and propensity to use cannabis,
33 one advantage of regulated cannabis is the
ability to verify age. As discussed throughout this report, dispensary customers tend to skew toward older age groups, generally in their mid-30’s and older, reflecting economic ability to shoulder the tax structure. The balance of consumer demand, including among youth, continues to be met through illicit supply, based both on price and availability.

Overall, there is limited evidence that legalization has influenced youth participation. As stated by the International City/County Management Association, “evidence that legalization of cannabis significantly changes patterns of youth use/abuse is lacking.”

31 Garrick, David. 2018. San Diego plans to crack down on marijuana ads, especially billboards.

Los Angeles Times. October 20, 2018.
32 City of Oakland Municipal Code Section 14.04.280.
33 International City/County Management Association. 2018. Local Impacts of Commercial Cannabis. Available at
https://icma.org/sites/default/files/Local%20Impacts%20of%20Commercial%20Cannabis%20Fin al%20Report_0.pdf

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Many municipalities are applying substantial sums of both earmarked and General Fund resources to address a range of societal objectives related to childhood well- being. For example, the City of Santa Cruz recently asked its voters to approve a charter amendment, allowing for the creation of a Children’s Fund for early childhood development programs, funded by a permanent allocation of 20 percent of all cannabis tax revenue. Further examples of cities using cannabis tax revenues to fund youth well-being are the City of Santa Ana, Monterey County, and Humboldt County, as detailed in the California Cannabis Tax Revenues report.34

34 Youth Forward. 2020. California Cannabis Tax Revenues: A Windfall For Law Enforcement or an Opportunity for Healing Communities?

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Real Estate and Neighborhood Impacts
Overview
Of the original 30 medical cannabis dispensaries, 13 were located in or immediately adjacent to Midtown. Following legalization of adult-use cannabis, these locations transitioned into the first recreational cannabis retail options, cementing Midtown’s role as a primary location for retail dispensaries. Other locations throughout the City are generally located along major commercial corridors. Other non-retail cannabis operations have largely been defined as industrial uses and have therefore located in the City’s existing industrial zones in those Council Districts where they are allowed. As start-ups with cash flow limitations, the operations generally sought out less-expensive spaces in the smaller, older Class B and Class C industrial buildings common in several of the City’s industrial areas.

The map shown below illustrates the geographic dispersion of the different IFGs in each of the Council Districts. For detailed descriptions of each of the IFGs, see Chapter 3.

As shown in Figure 20 and Table 11, the majority of cannabis businesses are in Council Districts 2 and 6.
35 Only 8 of Sacramento’s 93 licensed cultivation
businesses are located outside of these 2 Council Districts, and 80 percent of the licensed production businesses are located in these 2 districts. In addition, half of the City’s 30 storefront dispensaries are located in these 2 Council Districts as well.

35 There are 264 licensed cannabis businesses in the City. The analysis in this section relies on data provided by the OCM in July 2021 when there were 252 licensed cannabis businesses in the City.

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Figure 20. City of Sacramento Distribution of Cannabis IFGs

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Table 11. Licensed Cannabis Businesses by Council District

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The existing Class B and Class C industrial buildings in Districts 2 and 6 are appealing for start-up operations, as the lower rents of these spaces puts less strain on low cash flows during the early stages of the business. As shown in Figure 21, these 2 Council Districts contain the vast majority of buildings and floor area classified as “Industrial” by the Sacramento County Assessor’s Office.

Figure 21. Industrial Floor Area by Council District

The City’s zoning policy contributes to the concentrations of uses in Districts 2 and 6, as shown in Figure 22, with cannabis production uses allowed in the C-2 General Commercial, C-4 Heavy Commercial, A-Agriculture, or Manufacturing and Industrial zoning districts. Within the C-2 zoning district, manufacturing and distribution uses are limited to 6,400 square feet of floor area, and distribution cannot be a stand-alone use. In addition, all cannabis uses must be at least 600 feet away from any K-12 school, and businesses within ½-mile from any existing or future light rail station face additional permitting conditions. 36 In Figure 22, which shows the zoning districts where cannabis uses are permitted and where there are restrictions, the restriction on areas around schools is increased to 1,000 square feet to account for the distance from the center of the school to the edge of school grounds, from where the 600-foot regulatory buffer is measured.

36 Per Sacramento Municipal Code Section 17.228.127, if within a ½-mile of an existing or future light rail station, the project must include “pedestrian features” such as lighting, benches, tree shading, and landscaping. If the project involves new construction, the City has several other requirements related to facade design and parking that the project must implement. 0 M
5 M
10 M
15 M
20 M
25 M
30 M
12345678
Floor Area (Millions of Square Feet)
City Council District
Industrial Floor Area by Council District
Source: City of Sacramento, Sacramento County Assessor's Office, EPS.

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Figure 22. City of Sacramento Cannabis Buffers and Available Land

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As seen in Figure 22, there are large areas with no restrictions on cannabis uses in the industrial zone at the eastern boundary of District 6, as well as at the northeastern edge of District 2. However, the northern half of the large industrial zone in the northeastern corner of District 2 is composed of vacant, undeveloped land with several development constraints, such as existing wetlands and the ownership of a large portion of the area by the federal government. Overall, 78 percent of cannabis businesses in the City are located in industrial zoning classifications, as shown in Table 12.

Table 12. Sacramento Cannabis Businesses by Zoning Classification

As seen in Table 13, the total floor area occupied by cannabis businesses reflects the concentration of cannabis businesses in Districts 2 and 6 and a lesser degree of concentration in District 3. As a result of cannabis businesses being largely concentrated in Districts 2 and 6, these districts have a much larger portion of their commercial floor area occupied by cannabis businesses. Approximately

3.6 percent of all commercial floor area in District 6 is occupied by licensed cannabis businesses.

The concentration of cannabis floor area in Districts 2 and 6 is the result of both the overall concentration of cannabis businesses in these districts, and specifically, the concentration of cultivation businesses in these districts, which require much more floor area than other business types. As noted in the August 17, 2021, staff report to the Law and Legislation Committee of the City Council, the amount of square footage that has received land use approval is much greater than the square footage currently occupied by licensed cannabis businesses.

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Table 13. Cannabis Business Floor Area Concentration by Council District

Potential Negative Concerns
Potential concerns with retail cannabis operations (dispensaries) cited by citizens, officials, and a study completed shortly after legalization (Matrix Consulting Group37), range from blighting effects brought about by undesirable clientele in non-Midtown locations to gentrifying effects from increased retail activity and resulting higher retail rents because of Midtown retail cannabis facilities. Potential concerns with industrial cannabis uses vary depending on the function and Council District. A key concern in Council District 2, which includes older and comingled industrial and residential uses north of the Center City, is the impact cannabis production and distribution facilities have on the nearby residential uses. A key concern in Council District 6, which includes the Power Inn area, is the impact on industrial rents and the potential for displacing long-term tenants and their associated jobs and services.

To assess the potential negative impacts of cannabis businesses on the surrounding commercial uses, EPS analyzed commercial occupancy and leasing rate (rent) trends in the areas surrounding cannabis business operations relative to trends in their respective Council Districts and the City overall. Potential negative effects on residential property values were assessed through a comparison of home sales value trends in areas proximate to cannabis businesses relative to trends in the wider surrounding geographies.

37 Completed in January 2019 by the Matrix Consulting Group, the Analysis of Cannabis Impacts study has a dedicated section reporting neighborhood impact concerns voiced by commercial and residential stakeholders at that point in time.

Industry
Function
Group
Cannabis
Commercial
Space [1]
% of
Total
[2]
Cannabis
Commercial
Space [1]
% of
Total
[2]
Cannabis
Commercial
Space [1]
% of
Total
[2]
Cannabis
Commercial
Space [1]
% of
Total
[2]
Cannabis
Commercial
Space [1]
% of
Total
[2]
Cannabis
Commercial
Space [1]
% of
Total
[2]
Cannabis
Commercial
Space [1]
% of
Total
[2]
Cultivation 26,565 398,105 - 8,577 51,325 971,018 - Manufacturing - 25,652 6,081 1,443 14,060 100,937 - Distribution - 25,071 - 9,305 13,725 126,219 - Transport - - - - - 12,413 - Micro - 46,051 - - 3,085 73,111 - Delivery - 32,989 - 11,642 6,307 53,815 - Production
Subtotal 26,565 527,868 6,081 30,967 88,502 1,337,514 - Stor
efront - 27,305 4,000 34,394 9,811 29,265 3,232 Lab - 18,313 - - - 7,942 - Total 26,565 0.2% 573,486 2.5% 10,081 0.1% 65,361 0.1% 98,314 0.9% 1,374,721 3.7% 3,232 0.0% Source: City of Sacramento Office of Cannabis Management, Sacramento County Assessor's Office, EPS. [1] Includes only the square footage of businesses with an active Cannabis Business Operating Permit [2] Includes properties categorized by the Sacramento County Assessor's office as Industrial, Retail/Commercial, Office.

Council District 1 Council District 7Council District 6Council District 5Council District 4Council District 3Council District 2

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Details of the commercial leasing market analysis and the residential sales pricing analysis are discussed in their respective sections below.

Figure 23. Detail of Cannabis Businesses in Council District 2

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Figure 24. Detail of Cannabis Businesses in Council District 3

Figure 25. Detail of Cannabis Businesses in Council District 4

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Figure 26. Detail of Cannabis Businesses in Council District 5

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Figure 27. Detail of Cannabis Businesses in Council District 6

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Contrasting Geograph ies: Long Beach,
Seattle, Denver, and Oakland
Comparative Mapping Exhibits
Sacramento’s approach is consistent with most other cities reviewed in that there are significant concentrations of industrial cannabis IFGs in the District 2 and 6 locations that have a large concentration of industrial zoning, although Sacramento is distinct in that the retail storefront dispensaries and in fact all cannabis activity is not allowed in some Council Districts.

Long Beach on the other hand does not limit the location of retail storefront dispensaries and allows them in any retail zone in the city. The core of the industrial footprint in Long Beach is concentrated in its southwest corner adjacent to the Port of Long Beach and the industrial community of Wilmington.

Oakland similarly focuses the industrial uses in the long industrial stretch along the Oakland Estuary and in the industrial areas of West Oakland, while allowing retail uses in any retail district in the city.

These patterns also hold true for Denver. However, because of concentration concerns, Denver now has a moratorium on licenses in the five most impacted communities for both dispensaries and cultivation.

Seattle also allows dispensaries in retail districts but identifies specific historic and cultural areas that prohibit all cannabis businesses.

Lessons Learned
 Sacramento is consistent with most other cities in terms of concentration and restrictions on industrial cannabis operations and, as a result, pushes these uses into existing industrial zones, causing potential overconcentration issues.  Sacramento excludes retail dispensaries from the downtown district through zoning, when other cities allow them in any commercial zone, subject to buffers and other cultural restrictions.
 Denver, like Sacramento, is showing concern for over-impacted neighborhoods and is limiting concentrations of retail dispensaries and cultivation in 5 most impacted communities for each IFG.

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Figure 28. Distribution of Cannabis Businesses in the City of Long Beach

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Figure 29. Distribution of Cannabis Dispensaries in the City of Seattle

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Real Estate and Neighborhood Impact
Indicators and Findings
The Analysis of Cannabis Impacts report, prepared for the City in January 2019 (Matrix Report), identified several potential impacts to neighborhoods that could result from the legalization of cannabis businesses in the City. The Matrix Report identified the following potential impacts:
 Increase in nonresidential rental and lease rates because of increased demand from cannabis businesses.
 Downsizing of employment opportunities because of a lower number of employees per square foot for cannabis production compared to other industrial businesses.
 Influence on neighborhood reputation because of stigma and stereotypes about cannabis businesses.
 Decreased residential property values for properties located near cannabis businesses.

At the time the Matrix Report was published, adult-use marijuana had been legal for only 1 year, an insufficient amount of time to analyze the impacts that cannabis businesses have had on these neighborhoods.

The Real Estate and Neighborhood Analysis is divided into 2 main sections below, with the first section focusing on potential effects of cannabis business clusters on commercial real estate, and the second section evaluating the potential effects on residential neighborhoods.

Real Estate Indicators and Findings
Commercial Real Estate
Cannabis Retail Analysis
Citywide retail zones overall and those with cannabis businesses differ considerably because most retail nodes in the City do not include any cannabis business and generally have different market characteristics than those retail areas that do include cannabis businesses. Retail areas without cannabis businesses include significant square footage in areas ranging from Arden Fair Mall to various big box retailers to numerous grocery store-anchored shopping centers. Cannabis retail, however, tends to be located in areas with smaller, free- standing retail in more urban settings such as Midtown, in smaller parcel/non- shopping center sections of commercial corridors, and several are in light industrial areas.

Citywide, retail rents declined as square footage was added between 2015 and 2018, followed by increasing retail lease rates since.

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Retail areas near cannabis businesses have had consistently high occupancy levels and steady space inventories, with the exception of additional square footage in District 4 in 2018. However, retail asking rents in the areas analyzed near cannabis businesses (referred to herein as cannabis analysis zones) have increased much more than citywide, with a dramatic rise from 2016 to 2020.

Figure 30. Retail Occupancy & Rent: Citywide and Cannabis Analysis Zones

District 4
As noted previously, cannabis dispensaries in District 4 predate the legalization of recreational-use sales. However, the legalization of recreational-use marijuana has likely increased the foot traffic in those blocks where cannabis dispensaries are located. Furthermore, retail space near District 4 cannabis businesses has seen significant increases in asking rents in recent years. However, cannabis businesses in District 4 also tend to be located in areas that were existing neighborhood commercial nodes or have evolved into commercial nodes as significant new mixed-use developments have responded to the increasing demand for dense urban housing with nearby walkable amenities.

The rise in retail rents in Midtown is likely driven by the upscale restaurants and retailers responding to the increasing share of higher educated, higher earning persons and households present in the area and the “retail synergy” created by co-locating with other retailers catering to the same populations. It is unlikely cannabis dispensaries induce higher spin-off customer traffic to trendy local restaurants or national retail chains such as upmarket apparel or home goods stores than any other successful retail establishments that may exist in Midtown.

The District 4 retail market trends show steady additions of new square footage and rising rents since 2016. The District 4 cannabis analysis zones saw the addition of retail space in 2018 following a spike in asking rents in 2017, potentially resulting from the marketing of the new Ice Blocks spaces coming online.
94%
94%
95%
95%
95%
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$-
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15.0 M SF

20.0 M SF

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2015 2016 2017 2018 2019 2020 2021
Citywide Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
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$-
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2015 2016 2017 2018 2019 2020 2021
All Cannabis Zones Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.

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Figure 31. Retail Occupancy & Rent: D4 Overall and D4 Cannabis Analysis Zones

District 4 Area Highlights
The following charts illustrate the retail occupancy and rent trends in some of the cannabis retail zones in District 4. Given the relatively tight 500-foot zones analyzed around the Midtown cannabis locations, the specific spaces and buildings marketed during a calendar year can significantly affect asking rate trends.

Figure 32. Retail Occupancy & Rent: Representative D4 Cannabis Analysis Zones

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2015 2016 2017 2018 2019 2020 2021
Council District 4 Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
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99%
100%
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98%
$-
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$30.00
$35.00
$40.00
$45.00

0.0 M SF

0.2 M SF

0.4 M SF

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2015 2016 2017 2018 2019 2020 2021
D4 Cannabis Zones Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
98%
99%
99%
97%
95%
96%
96%
$50.00
$51.00
$52.00
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$57.00
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$60.00
60,000 SF
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150,000 SF
2015 2016 2017 2018 2019 2020 2021
1900 19th St Vicinity Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
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96%
100%
100%
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92%
96%
$-
$5.00
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$40.00
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2015 2016 2017 2018 2019 2020 2021
1404 28th St Vicinity Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
94%
96%
100%
97%
95%
97%
97%
$-
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2015 2016 2017 2018 2019 2020 2021
1918 16th St Vicinity Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
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100%
100%
100%
100%
100%
100%
$-
$0.20
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2015 2016 2017 2018 2019 2020 2021
1716 J St Vicinity Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.

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Other Council Districts with Cannabis
Retail rent and occupancy trends near cannabis businesses in the non-Midtown districts vary widely but generally follow similar patterns to the rest of their respective Council District, with some key differences noted below:

1. High occupancy rates in District 2, both districtwide and in the cannabis analysis zones, appear to have been the driver for a rise in retail rents in 2018, with the district average asking rates declining recently in response to lower occupancy, while the cannabis analysis zones have remained fully occupied.

2. The cannabis analysis zones in District 3 have historically had lower rents and occupancy levels than the district overall; however, asking rents in the cannabis analysis zones now exceed the district average, though occupancy rates remain moderately lower.

3. The District 5 cannabis zone rent surge in 2018 appears to be related to the addition of approximately 25,000 square feet of new retail space that was added to the inventory and likely commanded a lease-rate premium.

4. The District 6 cannabis zone retail rents spiked in 2019 with full occupancy.

Retail rents in the areas near cannabis facilities have since moderated; however, occupancy remains stronger than the district overall.

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Figure 33. Retail Occupancy & Rent: Districts Overall and Cannabis Analysis Zones

95%
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$-
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2015 2016 2017 2018 2019 2020 2021
Council District 2 Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
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$-
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0.20 M SF

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2015 2016 2017 2018 2019 2020 2021
D2 Cannabis Zones Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
94%
94%
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96%
97%
$-
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$15.00
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$25.00

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1.5 M SF

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3.0 M SF
2015 2016 2017 2018 2019 2020 2021
Council District 3 Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
91%
91%
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$-
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2015 2016 2017 2018 2019 2020 2021
Council District 5 Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
96%
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$-
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2015 2016 2017 2018 2019 2020 2021
D5 Cannabis Zones Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
88%
90%
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93%
$12.00
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2015 2016 2017 2018 2019 2020 2021D3 Cannabis Zones Retail Occupancy & Rent Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.

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$-
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2015 2016 2017 2018 2019 2020 2021
Council District 6 Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
92%
96%
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95%
100%
96%
99%
$-
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$20.00

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0.22 M SF
2015 2016 2017 2018 2019 2020 2021D6 Cannabis Zones Retail Occupancy & Rent Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
93%
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91%
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$-
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0.80 M SF

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2015 2016 2017 2018 2019 2020 2021
Council District 7 Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
100%
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85%
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$-
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2015 2016 2017 2018 2019 2020 2021
D7 Cannabis Zones Retail Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.

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Cannabis Impacts on Industrial Real
Estate
Sacramento Industrial Real Estate Market Overview
For several years following the Great Recession, the Sacramento Region’s industrial market continued to experience lackluster performance, characterized by high vacancy rates and average lease rates generally below the levels required for new development to be feasible without a major signed tenant preceding construction. Much of the drag on the region’s industrial market was due to older, smaller spaces considered functionally obsolete for most larger users of industrial space, in addition to some significant vacated purpose-built spaces. Larger industrial spaces constructed since the 1990s generally include significantly higher unobstructed spaces below the roof supports, known as Clear Height, of at least 30 to 36 feet and ultra-flat floors to accommodate modern equipment.

Over the last several years, the market for industrial real estate in the Sacramento Region has strengthened considerably. The advent of cannabis legalization coincided with the industrial market’s first significant signs of recovery since the recessionary period. However, the continued growth and evolution of the distribution sector, combined with the region’s location at the nexus Interstate 80 (I-80) and Interstate 5 (I-5) transportation corridors, and tightening of the Tracy-Lathrop logistics hub, have supported the region’s emergence as a logistics center. The COVID-19 pandemic has provided further acceleration of these trends.

Commercial brokerages report the Sacramento Region has absorbed more than

10.0 million square feet over the last 4 years, driving vacancy rates low and contributing to increasing lease rates. The charts below summarize industrial real estate market activity in the Sacramento market (defined by Costar as Sacramento, Yolo, Placer, and El Dorado Counties).

While absorption of Class A spaces in larger buildings has dominated market activity throughout the Sacramento Market
38 recently (largely because of the
development of Metro Air Park), a significant share of absorption occurred in smaller Class B and Class C buildings in the years leading up to 2018, driving up occupancy levels and asking rents in these spaces, as shown in the figures below.

38 The Sacramento Market is defined by Costar as Sacramento, Yolo, Placer, and El Dorado Counties.

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Figure 34. Industrial Real Estate Metrics by Building Size and Class

Cannabis Industrial Analysis
As noted previously, non-dispensary cannabis businesses are generally limited to the City’s industrial areas because of zoning restrictions. Therefore, a fair amount of clustering in these zones is inevitable. The areas analyzed for each individual business or cluster of businesses vary depending on the number of clustered cannabis businesses and density of surrounding uses. For clusters of a few neighboring cannabis manufacturing and distribution establishments, such as found in several District 2 locations, a 1,000-foot radius from the center of the cluster was analyzed, with some adjustments to avoid areas separated by freeways. In the Power Inn area, where numerous cannabis businesses are scattered throughout industrial zones, larger geographies were analyzed (e.g., for the area around Power Inn Road and 14th Avenue, the area of analysis included the area between the railroad tracks and Granite Regional Park).

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For individual retail dispensary locations in densely developed Midtown, the area analyzed was limited to a 500-foot radius from the establishment, while areas within a 700-foot radius were analyzed for retail establishments along major corridors and other less densely developed areas, such as Stockton Boulevard or Fruitridge Road.

Maps of the analysis zones are located in Appendix E.

Industrial Findings
In the City, industrial occupancy levels peaked at 98 percent in 2018, with an accompanying spike in average asking rents, which softened to 2020, followed by a further increase in 2021.

Figure 35. Industrial Occupancy & Rent: Citywide and Cannabis Analysis Zones

The City’s industrial zones surrounding cannabis uses, which tend to include a higher share of older, smaller spaces (Class B and Class C), generally mirrored those in the City overall but saw a higher spike in rents in 2018 than found citywide. Conversely, the recent uptick in industrial rents in the City overall, largely driven by warehouse and fulfillment demand, is less pronounced in the cannabis analysis zones because these areas tend to have fewer of the large, high-ceiling spaces sought by larger distribution operators.

Council District Cannabis Analysis Zones Industrial Analysis The following sections provide comparisons of industrial occupancy and lease rate trends for the areas surrounding cannabis businesses (cannabis analysis zones) in each of the Council Districts with the overall trends found in the districts. The districtwide trends are presented first, followed by the cannabis analysis zones.

In addition, market data for several specific analysis zones are provided for illustrative purposes.
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2015 2016 2017 2018 2019 2020 2021
Citywide Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
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2015 2016 2017 2018 2019 2020 2021
All Cannabis Zones Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.

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While several locations lacked sufficient commercial real estate leasing activity to provide sufficient data for analysis, either because of small inventories or high occupancy levels with little turnover, many of the cannabis analysis zones with adequate data for analysis showed similar patterns, as discussed below. (Note that years with insufficient reported lease rate data show as breaks in the asking rent trend lines in the charts below.)
District 1 Industrial
The District 1 cannabis zone industrial is confined to the vicinity of 135 Main Avenue, where a spike in asking rent was noted in 2018 when the area was at full occupancy. After some movement returned to the market the following year, asking rents declined moderately.

Figure 36. Industrial Occupancy & Rent: D1 Overall and D1 Cannabis Analysis Zones

90%
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2015 2016 2017 2018 2019 2020 2021
Council District 1 Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
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2015 2016 2017 2018 2019 2020 2021
D1 Cannabis Zones Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.

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District 2 Industrial
The District 2 cannabis analysis zones exhibited similar industrial market trends as the district overall. However, asking rents near cannabis businesses dropped somewhat more rapidly from their 2018 peak and have seen a smaller spike in 2021.

Figure 37. Industrial Occupancy & Rent: D2 Overall and D2 Cannabis Analysis Zones

92%
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2015 2016 2017 2018 2019 2020 2021
Council District 2 Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
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2015 2016 2017 2018 2019 2020 2021
D2 Cannabis Zones Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.

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District 2 Area Highlights
In each of the District 2 industrial-oriented cannabis analysis zones, the findings vary because of the specific mix of buildings, tenants, and leasing activity. For example, the area near Blumenfeld Drive and Joellis Way roughly aligns with trends found citywide, while the area in the vicinity of 1500 El Camino Avenue experienced a much less dramatic spike in industrial lease rates in 2018 but a much more pronounced increase in average asking rates in the last 2 years. The area around Lathrop Way has experienced continued softening in rates. The Railroad Drive area has seen a dramatic increase in industrial asking rates following the lease up of a significant amount of previously unoccupied space in 2018 that followed a period of low rental rates.

Figure 38. Industrial Occupancy & Rent: Representative D2 Cannabis Analysis Zones

87%
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$-
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500,000 SF
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1,000,000 SF
1,100,000 SF
2015 2016 2017 2018 2019 2020 2021
Blumenfeld & Joellis Vicinity Industrial Occupancy & Rent Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
98%
100%
96%
100%
93%
100%
96%
$-
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
140,000 SF
160,000 SF
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320,000 SF
2015 2016 2017 2018 2019 2020 2021
1500 El Camino Ave Vicinity Industrial Occupancy & Rent Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
97%
99%
94%
99%
100%
83%
100%
$-
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
150,000 SF
200,000 SF
250,000 SF
300,000 SF
350,000 SF
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450,000 SF
2015 2016 2017 2018 2019 2020 2021
241 Lathrop Way Vicinity Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
73%
73%
90%
100%
100%
74%
79%
$-
$2.00
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0 SF
50,000 SF
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2015 2016 2017 2018 2019 2020 2021
1955 Railroad Dr Vicinity Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.

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District 4 Industrial
The industrial square footage in District 4 is scattered over several areas but mostly located along the northern fringe of Midtown, or adjacent to railroad lines or freeways. The industrial square footage located in the District 4 cannabis analysis zones is generally fairly small compared to some of the other more industrially focused areas of the City. The small inventory combined with relatively convenient location (depending on use) results in very little available vacant space and therefore little to no data on asking lease rates, particularly in the cannabis analysis zones.

Figure 39. Industrial Occupancy & Rent: D4 Overall and D4 Cannabis Analysis Zones

District 4 Area Highlights
The area near 1900 19th Street illustrates the low inventory combined with high occupancy levels and resulting lack of industrial asking lease rate data, typical of District 4 cannabis analysis zones.

Figure 40. Industrial Occupancy & Rent: Representative D4 Cannabis Analysis Zones

Note: The area near 12th and C Streets includes periods with sizeable vacancy (15 percent), but no available asking lease rate data, suggesting the vacant space may not be on the market.
94%
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$-
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2015 2016 2017 2018 2019 2020 2021
Council District 4 Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
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$-
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2015 2016 2017 2018 2019 2020 2021
D4 Cannabis Zones Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
100%
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2015 2016 2017 2018 2019 2020 2021
1900 19th St Vicinity Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
93%
95%
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2015 2016 2017 2018 2019 2020 2021
241 N 10th St Vicinity Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.

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District 5
Industrial areas around cannabis businesses in District 5 exhibited similar lease rate patterns as the district overall. However, the cannabis analysis zones peaked at a lower average asking rate in 2018 and have remained lower than the district overall.

Figure 41. Industrial Occupancy & Rent: D5 Overall and D5 Cannabis Analysis Zones

District 5 Area Highlights
The Otto Circle analysis area has exhibited very high occupancy levels for the past several years. Following a period of 100 percent occupancy, vacant inventory that was added to the market in 2018 appears to have initially followed the same asking rate spike found elsewhere, with rates falling in subsequent years.

However, the area does not appear to have experienced the recent uptick in industrial rents.

Figure 42. Industrial Occupancy & Rent: Representative D5 Cannabis Analysis Zones

The 47th Avenue cannabis analysis zone closely mirrors citywide asking rate trends, with a moderate peak in 2018, followed by a tapering and recent increase.

The area has had high occupancy levels since 2016.
97%
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2015 2016 2017 2018 2019 2020 2021
Council District 5 Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
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2015 2016 2017 2018 2019 2020 2021
D5 Cannabis Zones Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
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2015 2016 2017 2018 2019 2020 2021
108 Otto Cir Vicinity Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
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2015 2016 2017 2018 2019 2020 2021
1421 47th Ave Vicinity Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.

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District 6
The areas identified as cannabis analysis zones for this analysis comprise a significant share of the total District 6 industrial square footage. As such, the similar lease rate trends from 2015 to the 2018 spike illustrated in the charts are understandable. However, the cannabis analysis zones have seen asking rates drop since the 2018 spike, while asking rates for the district overall have largely remained near the level reached in 2018. This suggests that some of the more desirable industrial space in the district is outside the cannabis analysis zones.

Figure 43. Industrial Occupancy & Rent: D6 Overall and D6 Cannabis Analysis Zones

District 6 Area Highlights
The Florin Perkins analysis zone epitomizes the cannabis industrial zone lease rate trend, with a dramatic peak in 2018, followed by a decline and slight rebound.

Moreover, with approximately 13 million square feet, the area was a key driver of the citywide spike in 2018. The following drop in occupancy in part may be attributable to cases of rent speculation cited by individuals close to the local submarket, where landlords declined to renew existing leases in a quest for higher paying cannabis tenants. While such a strategy may have rewarded some property owners, it does not appear to have been sustainable, given the increased vacancy and decreased rents.

The growth in industrial asking lease rates throughout the district has spread to the traditionally economically depressed Lemon Hill area, with rates approaching levels found elsewhere in the district. However, given the higher sustained lease levels since 2018 in the district overall than found in the cannabis analysis zones, it does not appear that cannabis has been the driver of the recent run-up in asking rents in Lemon Hill.
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Rent (annual)
Source: Costar; EPS.
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Council District 6 Industrial Occupancy & Rent
Occupied Vacant Asking Rent
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Rent (annual)
Source: Costar; EPS.

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Figure 44. Industrial Occupancy & Rent: Representative D6 Cannabis Analysis Zones

District 7
District 7 has limited industrial area, with full occupancy in the cannabis zone and districtwide.

Figure 45. Industrial Occupancy & Rent: D7 Overall and D7 Cannabis Analysis Zones

Residential Re al Estate
EPS analyzed the impact of cannabis businesses on residential property values.

The Matrix Report found that community members were concerned that proximity to cannabis businesses could lower residential property values. To assess the impact of cannabis businesses on residential property values, this section provides an overview of the housing market in Sacramento, summarizes available literature on this issue, and presents the findings of a quantitative analysis of property values near cannabis businesses.

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2015 2016 2017 2018 2019 2020 2021
Lemon Hill Vicinity Industrial Occupancy & Rent
Occupied Vacant Asking Rent
Inventory
Rent (annual)
Source: Costar; EPS.
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2015 2016 2017 2018 2019 2020 2021
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Occupied Vacant Asking Rent
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Rent (annual)
Source: Costar; EPS.
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2015 2016 2017 2018 2019 2020 2021
Council District 7 Industrial Occupancy & Rent
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Inventory
Rent (annual)
Source: Costar; EPS.
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D7 Cannabis Zones Industrial Occupancy & Rent
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Inventory
Rent (annual)
Source: Costar; EPS.

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Although the Matrix Report does not identify the exact characteristics of cannabis businesses that could drive down home values, EPS’s research has identified the following issues:
 Unpleasant odor of cannabis plants from cultivation or manufacturing processes.
 Blight and urban decay from poorly maintained structures used by cannabis businesses.
 Increased crime around cannabis businesses.

Overview of Sacramento Housing Market
The City is the central city of the Sacramento-Roseville-Arden Arcade Metropolitan Statistical Area (Sacramento MSA). As of November 2021, the Sacramento MSA has the 14th highest home prices of the 34 MSAs in California for which Zillow tracks data. In the Sacramento MSA, where Zillow tracks home values for 77 cities, the City has the 69th highest home prices. As shown in Figure 46, the typical home value in Sacramento is slightly lower than in neighboring jurisdictions.

Figure 46. Home Values in the Sacramento Region

Over the past 20 years, home values in the City and the broader region increased sharply from 2000 to 2007 before the Great Recession. Home values reached their Recession-induced nadir in 2012 and have been increasing steadily ever since. Over the past 2 years, home values in the region have begun to increase more rapidly because of restricted supply and in-migration to the region from the more expensive San Francisco Bay Area.
$100,000
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2000 2005 2010 2015 2020
Davis
Folsom
Roseville
Elk Grove
Woodland
Rancho
Cordova
West
Sacramento
Sacramento
Source: Zillow, EPS.

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In the City, home values are generally highest in the legacy neighborhoods immediately to the south and east of the central business district and in the Pocket neighborhood (ZIP code 95831) in southwest Sacramento, as shown in Figure 47. The lowest home values are found in the northeast and southeast portions of the City, which also contain the majority of the land available for industrial and heavy commercial uses.

Figure 47. Home Values in Sacramento Neighborhoods

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Drivers of Home Prices
Studying the impact of nearby cannabis businesses on home values is somewhat difficult, as most cannabis businesses are located in industrial zones. Because of the impact of industrial activity, which can include air pollution, noise and odor from industrial processes, neglected properties, and heavy truck traffic, residential values near industrial zones are typically lower than in other areas of cities.
39 This impact on prices is strongest on homes within a short distance of industrial uses, about one-half to two-thirds of a mile.40 While cannabis production uses presumably share many of the disamenity characteristics of general industrial uses, cannabis retail does not. Although the Matrix Report did not identify specific neighborhood concerns regarding cannabis dispensaries, public comments show that residents are concerned about the potential for illegal activity, blight, and impacts to neighborhood reputation arising from dispensary locations. Because of the difference in how dispensaries and production uses are presumed to impact property values, this Study analyzes home value impacts from dispensaries separately from production uses.

Because legalized cannabis is a relatively new industry, there are few studies on the impact of cannabis businesses on residential property values. The available studies show conflicting results. A study in Seattle showed that homes located within 0.36 mile of a dispensary had negative price impacts of 3 to 4 percent compared to homes located outside of this distance.
41 However, a study from
Denver, Colorado, showed that homes within 0.1 mile of a dispensary were worth approximately 8 percent more than their neighbors outside of this distance. 42 At a larger scale, a study of 12 states and Washington, D.C., found that legalization of adult-use cannabis was associated with increases in home values statewide, and that neighborhoods in Washington, D.C., and Colorado experienced increased prices after nearby cannabis dispensaries opened. 43 Cannabis Businesses and Home Prices in Sacramento
Using data on home sales from the Sacramento County Assessor’s office, the per- square-foot (PSF) sales prices of single-family homes within one-quarter mile of cannabis businesses are compared to those within one-quarter to one-half mile from a cannabis business. Homes within the quarter-mile to half-mile distance were chosen to control for the general price effects of the neighborhood, including access to jobs, transportation, and amenities. In Figures 50 through 52, later in

39 Wiley, Jonathan. 2015. The Impact of Commercial Development on Surrounding Residential Property Values. Georgia Multiple Listing Service. Available at https://www.gamls.com/images/jonwiley.pdf [Accessed November 2021]. 40 De Vor, Friso & De Groot, Henri. 2009. The Impact of Industrial Sites on Residential Property Values: A Hedonic Pricing Analysis from the Netherlands. Tinbergen Institute Discussion Papers.

Available at https://papers.tinbergen.nl/09035.pdf [Accessed December 2021]. 41 Thomas, Danna & Tian, Lin. 2021. "Hits from the Bong: The impact of recreational marijuana dispensaries on property values." Regional Science and Urban Economics. Elsevier. Vol. 87(C). 42 Conklin, J., Diop, M., & Li, H. 2021. Contact High: The External Effects of Retail Marijuana Establishments on House Prices. Real Estate Economics.
43 Kim,D., O’Connor, S., Norwood, B. 2020. Retail Marijuana Deregulation and Housing Prices.

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this chapter, these sales are labeled “control.” In addition, the impact of proximity to production uses (cultivation, manufacturing, or microbusiness) and retail dispensaries are also analyzed separately in the manner described above.

Home prices in candidate neighborhoods are evaluated over the time period extending from 2015 through 2021 to allow comparison of values both before and after the establishment of legalized commercial cannabis businesses in 2018. The analysis did not include any home sales under $20,000 as these are assumed to be non-arms-length transactions.

Home Values Near Production Uses
Overall, the analysis found that homes within one-quarter mile did not suffer any decrease in home value relative to their neighbors slightly farther away, as shown in Figure 48. Based on an average of 92 sales per year for homes within a quarter-mile of a cannabis production business, and 309 sales per year for homes within a quarter-mile to a half-mile, both groups of homes experienced sales price appreciation between 2015 and 2021 as Sacramento continued its recovery from the Great Recession, but as shown in Table 14, homes within a quarter-mile of a cannabis production business are sold for approximately $40 more PSF than homes within a quarter-mile to a half-mile away from these businesses.

In addition, sales price growth for those homes nearer to these cannabis businesses has been greater than homes slightly further away in each of the last 3 years.

Figure 48. Home Prices within ¼-Mile of Cannabis Production Uses

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Table 14. Home Prices Near of Cannabis Production Uses (Citywide)

As noted previously, Council District 2 and Council District 6 contain the majority of cannabis production businesses. As such, this Study examines impacts on home values for homes in those districts that are near cannabis businesses.

Council District 2
As of July 2021, Council District 2 had 55 of the 264 actively licensed cannabis businesses, as shown in Table 5 (Chapter 3). These 55 businesses are largely concentrated along Business Interstate 80/Capitol City Freeway and Del Paso Boulevard, as shown in Figure 22 (Chapter 3). Data from the Sacramento County Assessor’s office identified an average of 134 sales per year of homes within one-quarter to one-half mile from cannabis production uses and 66 sales per year of homes within one-quarter mile of cannabis production uses. These data show similar results to the citywide analysis in that both groups of homes experienced price appreciation during the Study period. However, in District 2, homes sold in 2021 near cannabis businesses sold for approximately $20 less PSF than homes slightly further away, as shown in Table 15.

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Figure 49. Home Prices Near Cannabis Production Uses in Council District 2

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Table 15. Home Prices Near Cannabis Production Uses in Council District 2

Council District 6
As of July 2021, Council District 6 had the highest concentration of cannabis businesses. The district contained 65 percent of the 160 licensed cannabis production businesses in the City, and 58 percent of all cannabis businesses.

However, as shown in Figure 29, cannabis uses in District 6 are largely located in the industrial areas east of Power Inn Road, segregated from the residential areas. Because of this separation of residential and industrial uses in District 6, EPS’s analysis of home sales includes fewer sales than the analysis of District 2.

In District 6, there were approximately 47 single-family home sales per year in the control group and 13 sales per year of homes within one-quarter mile of a cannabis production use.

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As seen in Figure 50 and Table 16, sales prices of homes in District 6 were between $20 and $40 PSF lower for homes within one-quarter mile of cannabis uses between 2018 and 2020. However, in 2021, homes within one-quarter mile of cannabis uses were selling for approximately $30 more PSF than homes within one-quarter to one-half miles of cannabis production businesses.

Figure 50. Home Prices Near Cannabis Production Uses in Council District 6

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Table 16. Home Sales Near Cannabis Production Uses in Council District 6

Home Values Near Dispensaries
The City’s land use policies are more permissive for storefront dispensaries than other cannabis uses because they are essentially retail businesses and therefore are more readily able to locate in General Commercial (C-2) zones. As seen in Table 12 earlier in this chapter, storefront dispensaries make up nearly half of the 27 cannabis businesses located in General Commercial zones. General Commercial zones are generally either interspersed within residential neighborhoods, such as in Midtown, or along commercial corridors.

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Based on an average of 338 sales per year for the control group and 86 sales per year for homes within one-quarter mile of dispensaries, the analysis finds that proximity to dispensaries does not reduce home values relative to other homes in the same general area. As seen in Figure 51, homes within one-quarter mile of dispensaries had higher sales prices PSF from 2015 to 2020. Only in 2021 did the PSF price for homes within one-quarter mile of dispensaries fall below the PSF price for homes within one-quarter to one-half mile away.

Figure 51. Single-Family Home Sales within One-Quarter Mile of Dispensaries (Citywide)

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As shown in Table 17, in 2021, homes within one-quarter mile of a dispensary were sold for approximately $13 less PSF than homes between one-quarter and one-half mile away from a dispensary. While this is a reversal of the 2015 to 2020 trends, more years of data and observation will be needed to see if the current trend continues.

Table 17. Home Sales Near Cannabis Dispensaries (Citywide)

Year
Price Per Square
Foot
Change
from
Previous
Year
Price Per Square
Foot
Change
from
Previous
Year
2015 $218.34 N/A $251.72 N/A
2016 $232.20 6% $257.03 2%
2017 $268.15 15% $287.96 12%
2018 $307.00 14% $316.35 10%
2019 $299.21 -3% $395.65 25%
2020 $330.16 10% $349.59 -12%
2021 $364.41 10% $351.22 0%
Total Change
(2015 - 2021) $146.07 67% $99.50 40%
Source: City of Sacramento, Sacramento County Assessor, EPS. [1] Includes properties between 1/4-mile and 1/2-mile away from a dispensary. [2] Includes properties within 1/4-mile of a dispensary. [3] Includes all single-family residential sales above $20,000. Sales below $20,000 are presumed to be non arms-length transactions.

Control [1] Test [2]

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Crime and Cannabis Businesses
Although the Matrix Report did not specifically identify crime as a concern, it did describe the concern that cannabis businesses could have a negative impact on “neighborhood reputation,” of which the local crime rate is presumably a major component. In addition, public testimony on the District 2 Land Use Study, heard before the City’s Law and Legislation Committee on August 17, 2021, specifically identified crime at cannabis businesses as a major concern.

Before legalization of recreational cannabis in 2016, trade in recreational cannabis was, by definition, a criminal activity. Cultivation, distribution, and retail sale of marijuana had strong links to organized crime.
44 Even post legalization, there
remains a strong black market for illicit cannabis, and the stigma linking cannabis businesses to criminal activity also remains. Public concern about criminal actors operating cannabis businesses is compounded by concern about criminal actors targeting legitimate cannabis businesses. With a large market for illicit cannabis and cannabis products, as well as the tendency of cannabis businesses to hold large amounts of cash, cannabis businesses may present attractive targets for robberies and theft. In recent months, cannabis businesses have made high- profile news stories as both perpetrators and victims of crimes. In Alameda County, sheriffs targeting an illegal grow operation seized more than $10 million in cash and 100,000 cannabis plants.
45 In addition, in November 2021, news
organizations reported on a series of more than 2 dozen robberies of licensed cannabis delivery businesses in Oakland in less than a week, with business owners claiming losses of up to $5 million.46
At the state level, cannabis legalization is generally associated with a decrease in crime, likely because of the disruption of illicit markets by legal ones.47 Previous studies of the relationship between the location of cannabis businesses and crime

44 National Drug Intelligence Center, 2008. National Drug Threat Assessment 2009. Available at https://www.justice.gov/archive/ndic/pubs31/31379/dtos.htm [Accessed December 2021]. 45 Cordova, Gilbert. 2021. Upwards of $10M in cash alone seized in illegal marijuana grow operation in Alameda County. ABC10.Com. Available at
https://www.abc10.com/article/news/crime/alameda-county-sheriffs-office-seize-large-amounts- of-marijuana-in-bust/103-80dcef91-2d69-42bd-ab36-fee4553672d8 [Accessed December 2021]. 46 Anthony, Laura. 2021. 'I fear for my business': Oakland cannabis dispensaries say they've lost $5M in recent thefts. ABC7News.Com. Available at https://abc7news.com/oakland-thefts- cannabis-dispensaries-police/11282132/ [Accessed December 2021]. 47 Huber, Arthur; Newman, Rebecca; & La Fave, Daniel. 2016. Cannabis Control and Crime:

Medicinal Use, Depenalization and the War on Drugs. The B.E. Journal of Economic Analysis & Policy. Available at
https://www.researchgate.net/publication/335379896_Not_in_my_backyard_Not_so_fast_The_ef fect_of_marijuana_legalization_on_neighborhood_crime [Accessed December 2021].

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at smaller spatial scales have produced mixed results. A 2009 study48 of the distribution of medical cannabis dispensaries in Sacramento found that census tracts with a higher density of medical marijuana dispensaries did not have higher property and violent crime than other census tracts and posited that the additional security measures that dispensaries typically use—security guards, video cameras—may serve to deter criminals seeking to target the dispensary.

At a slightly larger scale, a study in Los Angeles found that census block groups with medical cannabis dispensaries had higher crime rates than nearby block groups without dispensaries.
49 A 2016 study in Long Beach found that higher numbers of medical marijuana dispensaries were associated with higher crime rates in surrounding areas, leading the authors to suggest that the additional security measures deployed by dispensaries may push crime to surrounding areas. In Denver, researchers found that recreational cannabis dispensaries were associated with lower violent crime but slightly higher property crime rates on the block-long street segments on which the dispensaries were located.
50 However, a second study in Denver
occurring at the same time examined the impact of dispensaries and found that the opening of a dispensary in a census tract led to a 19 percent decrease in crime rates compared to other census tracts, attributing this effect to both the disruption of organized criminal cannabis trade and the additional security measures employed by dispensaries.

While criminal activity around the production and distribution of illicit cannabis remains a concern, this report focuses on the latter portion of crime—that of criminal opportunists targeting cannabis businesses, as this is the more relevant concern when examining the neighborhood impact of licensed cannabis businesses. Since licensed cannabis operations began in 2018, the Sacramento Police Department (SPD) has tracked burglaries and robberies at cannabis businesses. As shown in Table 18, there were between 30 and 84 robberies and burglaries per year targeting cannabis businesses. Over these 4 years, robberies and burglaries at cannabis businesses accounted for less than 1 percent of all robberies and burglaries reported to the SPD.

48 Kepple, Nancy and Freisthler, Bridget. 2012. Exploring the ecological association between crime and medical marijuana dispensaries. Journal of Studies on Alcohol and Drugs. Available at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3364319/ [Accessed December 2021]. 49 Contreras, Christopher. 2017. A block-level analysis of medical marijuana dispensaries and crime in the City of Los Angeles. Justice Quarterly. Available at https://www.tandfonline.com/doi/full/10.1080/07418825.2016.1270346 [Accessed January 2022].
50 Connealy, Nathan; Piza, Eric; & Hatten, Dave. 2019. The Criminogenic Effect of Marijuana Dispensaries in Denver, Colorado: A Microsynthetic Control Quasi-Experiment and Cost Benefit Analysis. City University of New York Academic Works. Available at https://academicworks.cuny.edu/cgi/viewcontent.cgi?article=1349&context=jj_pubs [Accessed December 2021].

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Table 18. Robberies and Burglaries at Cannabis Businesses in Sacramento (2018–2021)

While overall robberies and burglaries have trended downward since 2019, the number of crimes targeting cannabis businesses has been much more volatile, with no discernable trend. Although crimes targeting cannabis businesses have not shown any sign of trending downward, crimes involving illicit cannabis have declined significantly since commercial cannabis businesses were legalized.

Crimes involving possession (of more than 28.5 grams of cannabis), unlicensed cultivation, or transportation and sale of illicit cannabis declined from a high of 213 in 2019 to just 94 in 2021, as seen in Table 18.

Year 2018 2019 2020 2021
All Crime
Robberies Total 1,053 1,053 894 984
Change from Previous Year - 0% (15%) 10%
Burgalries Total 6,207 7,138 5,853 5,124 Change from Previous Year - 15% (18%) (12%)
Crimes at Cannabis Businesses
Robberies Total 3 17 4 9 Change from Previous Year - 467% (76%) 125%
Burgalries Total 28 67 26 77 Change from Previous Year - 139% (61%) 196%
Total Total 31 84 30 86 Change from Previous Year - 171% (64%) 187%
Marijuana Related Crime [1]
Total 197 213 116 94
Change from Previous Year - 8% (46%) (19%)
Source: City of Sacramento Police Department, EPS.
[1] Marijuana-related crimes include posession (of greater than 28.5 grams), unlicensed cultivation, posession of marijuana for sale, transportation of marijuana, and posession of marijuana in a vehicle.

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While the total number of crimes targeting cannabis businesses has not declined significantly since 2018, as general property crime has, the number of cannabis businesses has increased significantly in that time frame. As seen in Table 19, the number of crimes per cannabis business has declined significantly since 2018.

Throughout the Study period, cultivation, delivery, and storefront dispensaries are the most commonly targeted types of businesses, both in terms of overall numbers of crimes and the number of crimes per licensed business.

Table 19. Robberies and Burglaries by Cannabis Business Type (2018–2021)

Overall, this analysis of crime at cannabis businesses, as well as review of the available literature, shows mixed results. On a regional level, the legalization of cannabis and the expansion and maturation of a legitimate cannabis industry will likely reduce crime, as licensed cultivators, distributors, and retailers continue to displace the criminal organizations that ran this industry before legalization.

At the neighborhood level, cannabis businesses will likely remain an attractive target for thieves, although their attractiveness will decrease if federal legalization proceeds and allows these businesses to join traditional financial institutions and decrease the amount of cash they process and store on site. Despite this attractiveness, the proliferation of cannabis businesses in Sacramento has not generated a proportional increase in crimes targeting these businesses, suggesting that the enhanced security measures employed by these businesses are a strong deterrent to crime.

Year
Total
Per
Licensed
Business Total
Per
Licensed
Business Total
Per
Licensed
Business Total
Per
Licensed
Business
Total
Crimes
(2018 -
2021)
Average
Annual
Crimes per
Licensed
Business
Industry
Function Group
Cultivation 9 1.00 23 1.05 13 0.19 47 0.53 92 0.69
Delivery 6 [1] 30 1.67 5 0.10 17 0.29 58 0.69
Distribution 3 3.00 3 0.38 2 0.07 1 0.03 9 0.87
Manufacturer 2 0.67 4 0.36 0 0.00 11 0.41 17 0.36
Microbusiness 0 0.00 0 0.00 0 0.00 5 1.25 5 0.31
Lab 1 0.25 2 0.50 0 0.00 0 0.00 3 0.19
Storefront 9 0.30 22 0.73 10 0.33 5 0.17 46 0.38
Total 30 0.64 84 0.89 30 0.15 86 0.34 230 0.50
Source: City of Sacramento Office of Cannabis Management, City of Sacramento Police Department, EPS. 2018 2019 2020 2021
[1] The Sacramento Police Department reported 6 crimes at cannabis delivery businesses in 2018, although no delivery businesses were licensed until 2019.

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Key Chapter Findings
 Many of the industrial areas that are well-suited for cannabis production facilities experienced dramatic spikes in asking lease rates in 2018 on the heels of legalization. The rent spikes, which were likely due to a combination of real demand and speculation, appear to have moderated, though pricing pressure resulting from the growth of e-commerce and distribution remains.  An analysis of lease rates for retail and industrial uses in the areas surrounding cannabis businesses found no pattern of negative impact on the marketability of surrounding areas, as demonstrated by asking lease rate trends for available spaces.
 A comparison of home sale values within one-quarter mile of dispensaries and those within larger control groups for the same areas found that proximity to dispensaries does not reduce home values relative to other homes in the same general area.
 The proliferation of cannabis businesses in Sacramento has not generated a proportional increase in crimes targeting these businesses, suggesting that the enhanced security measures employed by these businesses is a strong deterrent to crime.

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Cannabis Economic and Fiscal
Impacts in Sacramento
Economic Impact Analysis
Employment Overview and Trends
While the cannabis industry is comparable to other industries in several ways, there are also significant additional benefits and industry synergies beyond those seen by other similar operations. Cannabis cultivation and manufacturing are prime examples of this dynamic. Based on guidance provided by IMPLAN, the economic impacts of cultivation operations were estimated to be consistent with the impacts associated with indoor greenhouse industry operations.

Cannabis cultivation has similar needs to indoor greenhouses in terms of employment and output potential but serves as a significant catalyst for R&D beyond a standard greenhouse operation. Sacramento cannabis operations encourage significant agricultural research in the region, including the genetic innovations resulting in new strains of cannabis and development of new innovative growing technologies.

Proximity to the University of California at Davis, a university with significant agriculture research facilities, creates the opportunity for the Sacramento Region to become a hub for cannabis growing technology and research. Major agricultural companies, such as Scott’s Miracle Grow, have begun to enter the cannabis R&D sphere, creating a catalytic effect and infusing the cannabis industry with much- needed research funding.

Similarly, the cannabis manufacturing industry is most closely akin to food manufacturing operations with some key distinctions. Where the cannabis industry diverts from the typical food production manufacturing industry related to the more scientific nature of cannabis operations as dosage in goods and specific manufacturing techniques require more intensive laboratory research and development. Maintaining proper dosage throughout the manufacturing requires very specific technology and, at times, a more intensive manufacturing operation.

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These are some tie-ins to other prominent sectors in Sacramento:
 Cannabis manufacturing is commonly compared to craft brewery operations, which often undertake similar stages of testing and development of new brewing methods.
 Seed variety innovations relate strongly to life science and seed science research activity, including genetics research and tie-in to wider innovation in the ag industry.
 Delivery companies resemble (and may someday be directly influenced by) e-commerce-oriented companies.
 Distribution operations of the cannabis industry are similar to many non- cannabis operations choosing Sacramento as a central hub for transportation and distribution infrastructure, serving growing markets throughout the western United States.
 Value-added packaging and manufacturing of consumer-oriented packaged goods in the cannabis industry are reflective of other small- to medium-sized manufacturing in the region.

Cannabis Industry Multiplier Effects
This Study includes an Economic Impact Analysis of cannabis-related operations in the City. The purpose of this Economic Impact Analysis is to estimate the quantifiable economic impacts of ongoing cannabis operations on the City and the regional economy with respect to jobs, income, and total economic output. The economic stimulus generated by cannabis operations has a multiplying effect throughout the local economy as businesses, consumers, and the households of employees associated with cannabis operations make local expenditures.

The Economic Impact Analysis quantifies these impacts using an input/output (I/O) economic modeling system, which measures the change in regional economic activity resulting from an economic stimulus. The purpose of this analysis is to estimate the existing ripple effect of economic activity generated by cannabis operations.

This estimate of the economic impacts of cannabis operations relies on the I/O modeling system called IMPLAN, which encompasses fixed relationships and linkages between households, businesses, and government entities within a regional economy. In this Economic Impact Analysis, the regional economy is defined as the County of Sacramento and is based on the 2019 IMPLAN dataset, which represent the latest available data from IMPLAN, although all economic impacts are presented in current 2021$.

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IMPLAN models are most useful in examining small, incremental changes in an economy and are most often used to reflect the growth in economic activity in a region as new economic stimuli develop. As this Study is assessing the economic activity of existing, ongoing operations, adjustments to the standard IMPLAN modeling have been made. Specifically, this analysis uses an industry contribution analysis methodology, which estimates the economic activity generated by existing business in an economy and limits the ripple effect to existing business in the economy.

The economic impacts measured in this Economic Impact Analysis include the direct contributions of the cannabis operations, as well as indirect and induced impacts of cannabis operations, including those impacts related to employment and associated households, and local contract expenditures. Figure 52 illustrates the components described in this Economic Impact Analysis.

Figure 52. Economic Impact Analysis Components

DIRECT IMPACTS

INDIRECT IMPACTS

INDUCED IMPACTS
Operating revenues and
employment
Example: Operational
spending and onsite
employment of
cannabis operations.

Business-to-business
transactions
Example: Cannabis
businesses purchases
goods, such as office
supplies and
equipment from
businesses in the
County.

Spending of employee
income
Example: An office
employee spends their
salary on groceries and
household expenses,
generating sales for
other local businesses.

Total Economic Impacts
Source: EPS.

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Key Findings
This Study includes an estimate of the economic impacts generated by cannabis operations by broad business group categories, including cultivation, manufacturing, distribution, and retail. A summary of economic impacts by business group is shown in Table 20.

Table 20. Summary of Economic Impacts

1. Cannabis operations in the City are estimated to result in $2.2 billion in total economic output in the local economy, annually, inclusive of direct, indirect, and induced impacts.

Of the $2.2 billion in activity, $606.3 million will be retained by employees of local businesses in the form of income. Cannabis operations generate $1.5 billion in direct economic activity, $357.1 million of which is income. The remaining $746.2 million of economic activity reflects the estimated indirect and induced impacts supported by cannabis operations as spending ripples through the local economy. This level of economic activity generates support for approximately 12,500 full- and part-time jobs in the region, including 8,000 direct, 2,600 indirect, and 1,800 induced jobs.

2. The majority of economic activity created by cannabis operations are estimated to be captured by the City.

All $1.5 billion in direct economy activity generated annually is captured in the City, and a significant portion (65 percent) of indirect and induced impacts are estimated to be retained by the City, for a total City impact of $2.0 billion, annually, supporting 11,000 jobs.
51 51 City capture or Sacramento County economic activity is based on the percentage of total annual economic activity occurring in the City, based on total economic impact estimates provided by IMPLAN.

Activity/Impact Categories Cultivation Manufacturing Distribution Retail Delivery Total Source Table A-14 Table A-15 Table A-16 Table A-17 Table A-18 Table A-13 Annual Ongoing Economic Impacts
Annual Ongoing Operational Impacts [1] $1,550.3 M $238.3 M $229.8 M $79.2 M $135.8 M $2,233.4 M Annual Ongoing Operational Jobs (Annual Average) [2] 7,005 889 2,047 912 1,565 12,418 Source: IMPLAN, 2019 Dataset; City of Sacramento; EPS.
[1] Includes direct, indirect, and induced impacts of cannabis activity. [2] Employment includes both full-time and part-time workers.

Annual Economic Impacts of Cannabis Activity by Business Group

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3. Cultivation activities generate the most significant economic impacts of all cannabis operations, followed by manufacturing and distribution.

Cannabis cultivation activities are estimated to generate $1.6 billion in economic activity annually, supporting 7,000 jobs, the greatest level of impact generated out of all cannabis business groups analyzed. Manufacturing and distribution reflect the next largest economic drivers in the local economy, generating $238.3 million and $229.8 million in economic output, respectively.

4. Economic activity attributable to cannabis operations accounts for approximately 2 percent of the local economy.

Based on regional data provided by IMPLAN, $151.4 million in economic output is generated in Sacramento County, of which cannabis operations account for approximately 2 percent.

Fiscal Effects of the Cannabis Industry
on the City General Fund
A City Fiscal Impact Analysis (Fiscal) has been prepared for its cannabis industry, which estimates the annual fiscal revenues, expenditures, and resulting fiscal surplus or deficit to the City General Fund attributable to cannabis operations.

This Fiscal examines the estimated annual net fiscal impact on the City’s General Fund budget resulting from cannabis operations, based on the approved Fiscal Year (FY) 2021/22 City budget.

Specifically, the Fiscal estimates whether estimated General Fund revenues from cannabis operations adequately cover the cost of delivering General Fund municipal services (e.g., police and fire protection) to the cannabis businesses, as well as provide ongoing funding for the OCM. The fiscal impacts of cannabis operations were estimated for each major cannabis business group, cultivation, manufacturing, distribution, and retail.

Key Findings
Table 21 shows the annual fiscal surplus resulting from each cannabis business group. A detailed accounting of all fiscal revenues and expenditures included in this analysis is included on Table 22.

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Table 21. Summary of Fiscal Impacts

Table 22. Detailed Summary of Fiscal Impacts

Item Cultivation Manufacturing Distribution Retail Delivery Total City General Fund Net Fiscal Impacts
Annual General Fund Revenues $6.5 M $1.2 M $5.8 M $13.8 M $4.8 M $27.3 M Annual General Fund Expenditures $2.2 M $0.4 M $1.7 M $2.5 M $1.1 M $7.5 M Annual Net General Fund Surplus/(Deficit) $4.3 M $0.9 M $4.1 M $11.3 M $3.7 M $19.8 M Additional Cannabis Fiscal Revenues
Local Neighborhood Responsibility Fee $0.9 M $0.2 M $1.2 M $2.2 M $0.7 M $5.2 M Source: EPS.

Annual Fiscal Impact Summary by Business Group (Millions) Item Cultivation Manufacturing Distribution Retail Delivery Total City General Fund
Annual Revenues
Property Tax $716,000 $93,000 $69,000 $60,000 $69,000 $938,000 Property Tax in lieu of VLF $333,000 $43,000 $32,000 $28,000 $32,000 $436,000 Real Property Transfer Tax $44,000 $6,000 $4,000 $4,000 $4,000 $58,000 Sales Tax $76,000 $8,000 $25,000 $2,082,000 $663,000 $2,191,000 Sales Tax - Measure U $76,000 $8,000 $25,000 $2,082,000 $663,000 $2,191,000 Sales Tax - Prop. 172 (Public Safety) $4,000 $0 $1,000 $122,000 $39,000 $127,000 Transient Occupancy Tax (TOT) $6,000 $1,000 $2,000 $1,000 $2,000 $10,000 Utility Taxes $93,000 $10,000 $30,000 $16,000 $27,000 $149,000 Business Operations Tax - Cannabis $3,617,000 $814,000 $4,846,000 $8,703,000 $2,671,000 $17,980,000 Business Operations Tax - Other $43,000 $5,000 $14,000 $7,000 $12,000 $69,000 Franchise Fees $7,000 $1,000 $2,000 $1,000 $2,000 $11,000 Cannabis Business Permit Fees $1,434,000 $251,000 $724,000 $714,000 $590,000 $3,123,000 Fines and Forfetitures $21,000 $2,000 $7,000 $4,000 $6,000 $40,000 Total Annual GF Revenues $6,470,000 $1,242,000 $5,781,000 $13,824,000 $4,780,000 $27,323,000 Annual Expenditures
General City Operations $1,252,136 $135,564 $404,020 $210,258 $360,484 $2,001,978 Cannabis Operations
Cannabis Management $247,889 $55,774 $332,089 $596,429 $183,019 $1,415,200 City Attorney $184,621 $41,539 $247,330 $444,203 $136,307 $1,054,000 Community Development $117,201 $26,370 $157,010 $281,989 $86,530 $669,100 Finance $17,674 $3,977 $23,677 $42,524 $13,049 $100,900 Fire $13,925 $3,133 $18,655 $33,505 $10,281 $79,500
Police $220,755 $49,669 $295,738 $531,144 $162,986 $1,260,292 Auditor $29,094 $6,546 $38,977 $70,002 $21,481 $166,100 Community Outreach and Education $131,372 $29,558 $175,994 $316,084 $96,993 $750,000 Total Cannabis Operations Expenditures $962,532 $216,564 $1,289,470 $2,315,881 $710,645 $5,495,092 Total Annual GF Expenditures $2,214,668 $352,128 $1,693,490 $2,526,139 $1,071,130 $7,497,070 Annual General Fund Surplus/(Deficit) $4,255,332 $889,872 $4,087,510 $11,297,861 $3,708,870 $19,825,930 Additional Cannabis Fiscal Revenues
Local Neighborhood Responsibility Fee $904,318 $203,466 $1,211,483 $2,175,817 $667,666 $5,162,750 detsum
Source: EPS.

Note: All values are rounded to the nearest $1,000.

Annual Fiscal Impacts by Business Group

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1. Cannabis operations generate a significant fiscal surplus of $19.8 million to the City’s General Fund annually.

Cannabis operations are estimated to generate $27.3 million in General Fund revenues annually, well above the estimated $7.5 million in General Fund expenditures required to fund municipal services for cannabis-related businesses. Cannabis-related revenues are estimated to account for approximately 5 percent of all General Fund revenues budgeted for FY 2021/22. Retail operations are the largest driver of fiscal surpluses, with an estimated surplus of $11.3 million attributable to retail cannabis operations.

2. Business operations taxes are the largest revenue source for cannabis operation in the City.

Based on the FY 2021/22 City budget, it is anticipated that cannabis uses will generate $20.7 million in business operations taxes. Cannabis uses are anticipated to contribute approximately 73 percent of all business operations taxes generated in the City.

3. Cannabis operations are anticipated to generate approximately $4.5 million in sales tax revenue in FY 2021/22, including all City sales tax revenues.

At the time of retail sales, non-medical adult-use cannabis products are assessed multiple sales taxes, including the general 1 percent sales tax, the City Supplemental General Fund Measure U transaction and use tax, and Proposition 172 public safety sales tax, all of which provide revenues to the City General Fund. Cannabis sales in the City are anticipated to generate approximately 5 percent of all budgeted City sales tax revenues for FY 2021/22.

4. Revenues generated are significantly greater than the cost of operating the OCM.

The approved City budgeted expenditures for the OCM are estimated at $3.2 million for FY 2021/22, accounting for less than 1 percent of all budgeted General Fund expenditures.

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5. Based on conversations with the City Police and Fire Departments, cannabis uses have not been shown to be overly taxing on the respective departments beyond a typical commercial or industrial user.

Using a per-persons-served multiplier effect, it is estimated that cannabis operations will require $1.0 million in police services and $760,000 in fire services for a total public safety expenditure budget of $1.8 million for FY 2021/22.

6. In addition to the estimated General Fund revenues, cannabis operations are estimated to generate an additional $5.2 million in non-General Fund revenues through the neighborhood responsibility plan fee.

Estimated as 1 percent of all activity related to cannabis operations, the neighborhood responsibility plan fee is anticipated to generate an additional $5.2 million in revenues beyond those captured by the City’s General Fund.

The above-referenced fiscal surplus indicates the possibility of introducing several industry-supportive measures, as discussed in Chapter 4 of this report.

Key Chapter Findings
 Cannabis operations in the City are estimated to result in $2.2 billion in total economic output in the local economy, annually, inclusive of direct, indirect, and induced impacts, supporting nearly 12,500 jobs. Cannabis operations generate $1.5 billion in direct economic activity, $357.1 million of which is income. The remaining $746.2 million of economic activity reflects the estimated indirect and induced impacts supported by cannabis operations as spending ripples through the local economy. The City is anticipated to capture the majority of economic activity attributable to cannabis, with $2.0 billion of the estimated economic activity anticipated to be captured in the City, annually, supporting 11,000 jobs.
 Cannabis operations generate a significant fiscal surplus of $19.8 million to the City’s General Fund, annually. Cannabis operations are estimated to generate $27.3 million in General Fund revenues annually, well above the estimated $7.5 million in General Fund expenditures required to fund municipal services for cannabis-related businesses. Cannabis-related revenues are estimated to account for approximately 5 percent of all General Fund revenues budgeted for FY 2021/22. The neighborhood responsibility plan fee is anticipated to generate an additional $5.2 million in revenues beyond those captured by the City’s General Fund.

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