Cannabis boomtown: In Palm Springs, revenues and dispensary numbers keep going up, up, up, but for how long?
PSA Organica on Sunny Dunes Road was one of the first licensed cannabis dispensaries in Palm Springs. It started out selling only medical marijuana before adding recreational marijuana once it was allowed to in 2018.
But last April, owner Julie Montante made the decision to close the business and put it up for sale. The reason? High competition, along with a desire to focus on her new dispensary and lounge downtown, Four Twenty Bank Dispensary and Lounge.
"There is so many in the town now, you can walk down the main street, Palm Canyon [Drive], and visit 12 or 13 of them," she said of the level of competition. "So why does somebody want to go to a residential area and purchase there when they can go to Palm Canyon and every street has a dispensary on it?"
But while downtown is undoubtedly a source of major competition, it wasn't the only one. Several other dispensaries are now operating close by on either Sunny Dunes Road or South Palm Canyon Drive.
That competition has created something of a race to the bottom with dispensaries slashing prices to draw customers.
"When you're lowering the prices to the 'enth degree, you're not making any money," she said. "So you're paying tax, you're paying for the product and maybe you're making 10% profit over that, which doesn't pay your payroll insurance and everything else that's thrown at us."
It was that circumstance that led Montante to join what she says is a growing number of dispensary license holders who are putting their businesses and their licenses up for sale.
"Everybody is worrying, everybody is selling," Montante said. "There's too many dispensaries."
Montante thinks it would've made more sense to limit the number of licenses issued as was done in Palm Desert, where the city can issue a maximum of six licenses. Palm Springs once also capped licenses at six but lifted that cap in 2017, ahead of the start of recreational sales. However, it still maintains limits on how close dispensaries can be to one another, residential areas and certain facilities such as schools that collectively have a limiting effect.
"Basically, they thought one will weed out the other in competition, but the problem is it takes a lot of money to open these businesses," Montante said of Palm Springs. "So as far as I'm concerned, they should put a moratorium on, they should revoke licenses that people haven't used and are just holding on to them to see if they can sell them or whatever. Things need to change, the city should take a look at the high taxes and work with the dispensaries to try to lower them a bit, especially our renewal fees. I don't mind that the city is making money because it is helping to better the city but that is happening because our taxes are very high."
But while PSA Organica is shuttered for now while Montante seeks a buyer, the Four Twenty Bank Dispensary & Lounge, which is located inside a historic bank building on South Palm Canyon Drive, remains more competitive because of its downtown location and lounge, which also hosts live entertainment.
Montante said her situation is emblematic of a local cannabis industry that has become "oversaturated" and is no longer the surefire moneymaker it once seemed, even as the number of dispensary licenses issued by the city keeps increasing and Palm Springs is once again on track to set another record for marijuana tax revenue.
Plus, even as some dispensaries are closing or being sold, walk or drive through the city and it's hard to miss the cannabis businesses that continue to open up all over the city.
During one week in April, the Palm Springs Chamber of Commerce held a ribbon-cutting for a Palm Springs location of the Pineapple Express dispensary at 695 Williams Road and the new Row House Lounge, Eatery and Dispensary on North Palm Canyon Drive, a combined dispensary and lounge that also serves food, a first in the city.
The city's official numbers, too, show that while new dispensaries haven't always been opening as rapidly as they did during that single week, the past year has seen no shortage of openings with 10 new dispensaries coming online since the start of May 2021.
That number was up from six during the previous 12 months, which coincided with the first year of the COVID-19 pandemic. Under California law, dispensaries were able to remain open as essential businesses.
Tax revenue keeps rising
The revenue the city has generated from cannabis taxes also continues to sharply increase, as has been the general trend since the city's first cannabis businesses opened in 2016.
During the 2020-21 fiscal year (Palm Spring's fiscal year begins at the start of July and culminates at the end of the following June), Palm Springs collected $4.7 million in cannabis tax revenue. That was up 80% from the $2.6 million collected during the 2019-20 fiscal year and more than double the $2.2 million collected in the 2018-19 fiscal year.
Palm Springs is on track to again exceed its 2020-21 collections in the current fiscal year, though tax receipts have only been tallied through February. Through the first eight months of the current fiscal year, Palm Springs collected $3.1 million in marijuana tax revenue compared to $2.9 million over the first eight months of the prior fiscal year, a slower rate of growth than the fiscal year before but still growth nonetheless.
During the 2016-17 fiscal year, the first year the city began tracking cannabis tax revenue through the city attorney's office, the city collected $1.5 million. Collections have grown every year since.
Palm Springs currently collects a 10% tax on gross marijuana sales from dispensaries. There is also a $10-per-square-foot fee for facilities where marijuana is grown ($5 for facilities located in a specific area off Interstate 10) and a 2% tax on gross receipts charged to facilities that manufacture cannabis products, such as dabs and edibles.
City leaders have extolled cannabis taxes as one of several city sources of revenue that grew tremendously during the COVID-19 pandemic. That growth was further evidenced when City Manager Justin Clifton told the council in April that Palm Springs currently has the money to make significant new investments in city services.
"I didn't hear from any public health official that cannabis would be increasing during COVID," Palm Springs Mayor Lisa Middleton said during her State of the City speech on May 3. "But COVID appears to have been really good for cannabis."
Palm Springs has a disproportionate number of dispensaries
The growth in Palm Springs' cannabis tax collections has also far outpaced growth across the state. For the last six months of 2021, the state collected about 1.9% more in state cannabis taxes than it had in the last six months of 2020. Palm Springs' collections, in contrast, increased by just under 8.5%.
According to a list of active permits provided by the city, Palm Springs currently has 32 permitted cannabis dispensaries. That number includes PSA Organica, which is closed but still has a valid permit, and Beyond Hello, which is currently closed for remodeling.
However, the director of the city's department of special program compliance that is in charge of managing cannabis licensing said the city asks for written notice from dispensaries if they are closed for renovations or sale and the rest are currently open. She said a total of 10 permits have ever been sold or transferred in the city.
Desert Hot Springs has eight licensed dispensaries, according to data from last March, and Cathedral City has 14. Further east, Palm Desert has seven dispensary locations while Coachella has four, with its dispensaries limited to two sections of the city. Marijuana dispensaries are banned in several Coachella Valley cities, including Indio, La Quinta and Rancho Mirage.
Palm Desert laws limit the number of dispensary licenses that can be issued there to six but has a provision allowing that cap to be exceeded for sites where cannabis is both grown and sold, as is the case with the West Coast Cannabis operation on Melanie Place.
When calculated on a per-capita basis using 2020 Census data, the number of dispensaries in Palm Springs over-indexes when compared to its closest neighbors. The city currently has one current licensed dispensary for every 1,392 residents (including PSA Organica and Beyond Hello), while Desert Hot Springs has one for every 4,064 residents and Cathedral City has one for every 3,273 residents.
Census numbers give a limited view of the potential market of cannabis consumers in Coachella Valley resort cities that have large populations of seasonal residents and high tourist traffic. Still, the numbers suggest there has been a shift in the configuration of dispensaries since The Desert Sun found that Desert Hot Springs was the leader in a 2018 analysis of the number of dispensaries per capita in Coachella Valley cities. At that time, Desert Hot Springs, Cathedral City and Palm Springs ranked first, second and third respectively statewide in cannabis licenses per capita.
In April, local cannabis business owners asked Cathedral City officials during a special meeting to consider changes to the city’s cannabis regulations and taxes or risk losing the industry to surrounding cities.
In Cathedral City, cannabis businesses must pay a 10% tax on their revenues, just as they do in Palm Springs. Cathedral City also has a cultivation tax of $15 per square foot, which is greater than Palm Springs' $10 per square foot, and a cannabis manufacturing tax of $0.05, $0.10 or $0.40 per gram based on the type of cannabis concentrate.
Cannabis businesses in Cathedral City collectively paid a total of $4.9 million in taxes in the calendar year of 2021, while businesses in Palm Desert collected $3.4 million in the 2020-21 fiscal year. Palm Springs collected $4.8 million in the 2021 calendar year and $4.7 million in the 2020-21 fiscal year.
Palm Desert taxes retail sales at 10% of gross receipts and manufacturers at 2% of gross receipts. The cultivation tax is $13 per square foot.
On May 12, the Cathedral City City Council said it would not support lowering the taxes because of the negative impact doing so would have on city revenues.
Desert Hot Springs and Coachella had not provided cannabis tax revenue figures as of the publication of this story.
Those dispensary numbers also suggest that both Palm Springs and its neighbors account for an outsized number of the dispensaries in the state. California has 1,383 licensed cannabis retail and delivery operations, plus 219 active microbusinesses (a special license for businesses that grow cannabis on an area of less than $10,000 and distribute the cannabis themselves), according to California Department of Cannabis Control data. There are currently 363 California cities that prohibit retail cannabis dispensaries.
Based on those numbers, Palm Springs accounts for 1.89% of the state's licensed cannabis dispensaries (that number includes microbusinesses) and just 0.11% of its population.
That number could also grow more in the future: two applications submitted in 2022 for dispensary permits are listed as pending, meaning they are still getting approvals from the city.
There are seven permits for dispensaries that are listed as "permitted but not operational." That means that the city has issued the permit, but permits from the state are still pending, said Veronica E. Goedhart, the director of the city's department of special program compliance.
The permit for Joy Meredith's Joy of Wellness dispensary has been suspended since January after the city investigated the operation and determined that Meredith had participated in unregulated growing and selling of cannabis.
While several license applications have been withdrawn or surrendered before a planned dispensary ever came online, there has not been a case of a dispensary surrendering its permit once it was open.
"Most people attempt to sell [their permit]," Goedhart said.
New entrant embracing competition
The increasing crowdedness of the dispensary markets in Palm Springs and the broader valley did not escape the notice of The Row House's owner, Ryan Mierau, as he made plans to open his operation.
"I would've never come into Palm Springs and opened up just a dispensary," he said. "There's a tremendous amount of dispensaries here so we needed to come into the market with something that is totally different and new."
Mierau said the biggest differentiator for The Row House is the lounge, which he says is the first in the only one in the county and possibly the state to serve food that can be consumed alongside cannabis products. That lounge is also doubling as a live events space that will host events ranging from comedy shows to concerts.
Palm Springs, Cathedral City and Coachella are among the few cities in the state to currently permit cannabis lounges.
Lounges are not currently legal in Desert Hot Springs. However, earlier this month, the Desert Hot Springs voted to allow cannabis "entertainment facilities" which can host concerts and other entertainment events and sell cannabis products in its downtown district. Such businesses were already permitted outside of downtown.
But the lounge isn't the only differentiator; Mierau said he also invested more than a million dollars into the business in hopes of making it a one-of-a-kind destination.
"There's no lounge that is low lit and private like this," he said. "These lighting fixtures, I can't even tell you how expensive they are and this room is hundreds and hundreds of thousands of dollars. We weren't going to do it half-assed and it couldn't just be a dispensary, it needed to be something much bigger and better so we could blow our competition out of the water."
Mierau also said he sees Palm Springs willingness to allow large numbers of dispensaries, rather than limit licenses as Palm Desert has done, as a positive.
"I think Palm Springs did a phenomenal job with their city council, the mayor, all of the politicals in office, they went and they saw a huge opportunity to bring in large amounts of tax revenue to the city and they didn't get involved with like the negative politics, they saw it as it actually is and they realized that the city could benefit greatly from it," he said.
He also added that he doesn't necessarily think it is a bad thing that the dispensary market seems increasingly oversaturated.
"Is it oversaturated? Yes, but so is restaurants, so is coffeeshops, so is every other space," he said. "But on every single other business, you leave it open to the free market because it's a private sector and if they're gonna fail, they're gonna fail on their own. They've got to compete and may the best one win, that's kind of how it's done in every single other industry. They don't limit the amount of shoe producers are. It's just go for it and I wish you the best of luck."
Paul Albani-Burgio covers breaking news and the City of Palm Springs. Follow him on Twitter at @albaniburgiop and via email at firstname.lastname@example.org.