Welcome to Desert Pot Springs, the valley’s redheaded stepchild who’s poised to become a real economic beauty.
SHEA JOHNSON OCTOBER 1, 2016 REAL ESTATE, VALLEY
Two years ago, in September 2014, real estate broker Paula Turner was eyeing retirement, having spent 35 years in the business, and having weathered the pre- and post-recession markets. Then a 100-some-acre parcel sold for $620,000 in a Desert Hot Springs tract where Turner also sold a few. Like many industrial developments, it had been far from attractive as a business prospect. It was an old renewable energy facility that had garnered no bids in a tax sale only a few months earlier.
Yet in the year that followed, the same parcel drew offers north of $7 million, were being rejected, and Paula Turner was still a working woman. Thank you, Mary Jane. / Since late 2014, a newly designated zone has been established specifically for the commercial cultivation of medical marijuana. It encompasses all industrial areas on Desert Hot Springs’ general plan land map, signified on a PDF by hues of pink, but city officials and investors see green.
THE PEOPLE’S POT
In the throes of financial crisis, Desert Hot Springs sent two ballot measures to voters in November 2014 seeking approval on taxes for marijuana cultivation and dispensaries, respectively.
Both overwhelmingly passed. Mayor Scott Matas, who initially had been reluctant to get behind the industry, says the roughly 70 percent voter support only reaffirmed the city’s forward thinking, and, like Paula Turner, Matthew Feinstein is grateful.
Formerly in the archaic DVD distribution business, Feinstein’s new venture is Pineapple Express, a publicly traded consulting and investment firm in the cannabis industry, where he is CEO, president and chairman. “Before, you had to hide,” he says, wearing a dress shirt emblazoned with tiny pineapples, “and now we’re, like, showcasing it.”
Building No. 4, a tan facility under construction, lies in the unremarkable southwestern portion of the city, where the uninitiated might assume the most frequent visitors are lost or are parishioners of the United Pentecostal Church next door.
But by the end of this year, building No. 4 will boast the first harvest in Pineapple Park. Ultimately, the 171,410-square-foot marijuana cultivation complex proposes to lease to more than a dozen tenants. The first tenant is former pastor-turned-medical-marijuana-proponent Dan Osborne of Clonenetics Laboratories. Feinstein giddily talks about hosting a ribbon-cutting ceremony, with, he hopes, the mayor and representatives of the chamber of commerce.
Among the players in the city’s commercial marijuana industry are Matthew Feinstein, CEO of Pineapple Express, a publicly traded cannabis investment firm; Mayor Scott Matas, who sees pot as a potential game-changer; and Brad Wilson and Randall Patten, partners in Canndescent, who’ve been involved in the marijuana “gray” market since the mid-1990s.
As the first city in Southern California to greenlight commercial cultivation of marijuana, Desert Hot Springs’ expectations have grown as high as the horde of windmills that usher Interstate 10 motorists into the Coachella Valley. Their vision is shared by the entrepreneurs who have forged an unusual relationship with city leaders that would have been unthinkable only a few years ago. The economic migration has set off a land boom and wave of speculative business proposals that invite comparison to the dot-com boom … and the similar potential to bust. Other cities in the valley have followed; Cathedral City and Coachella are proposing a cultivation tax on the November ballot. Most valley cities are involved in some facet of the industry and the others are watching to see what happens.
In Coachella, pot is viewed no differently from any of the city’s 120 commodities, including citrus and grapes. Unlike Desert Hot Springs, Coachella’s $22 million balanced budget, healthy reserves, and robust capital improvement plan have enabled the city to approach marijuana cultivation less aggressively, says Mayor Steven Hernandez. He declines to project the industry’s potential revenue. One thing, however, is certain: Whatever extra money pot cultivation produces will benefit parks, amenities, streets, and general services, he says.
Hernandez hopes the new industry can boost the city’s efforts to develop an international brand that will drive tourism. “We want to become the Napa Valley of the weed industry,” he says.
“I don’t see any other big opportunities with new industries that are growing as quickly as this one, since maybe the tech boom in the late ‘90s and early 2000s,” Feinstein says.
Matas agrees that commercial marijuana is potentially the game-changer Desert Hot Springs has been looking for. “It’s finally come to a point that this is a breath of fresh air, that if the industry takes off where it’s supposed to go,” he says, “that Desert Hot Springs won’t ever have to worry financially again.”
One challenge the upstart industry faces is a sufficient, reliable supply of power. One cultivation company will require 80 times more air-conditioning than the average three-bedroom home.
ON THE FRINGE OF PROSPERITY
Like other cities in California, Desert Hot Springs had been hammered by the Great Recession nearly a decade ago and the later dissolution of state redevelopment funds, which left unfinished an ambitious renewal of the city’s old town. The city claims one of the lowest income-per-capita rates in the U.S., according to Matas.
After declaring bankruptcy at the turn of the millennium, finding sound footing, then flirting with insolvency again only a few years ago, the city’s modest $15 million budget makes it a struggle to give even $25,000 a year to the city-owned and foundation-operated Cabot’s Pueblo Museum, let alone scrape together $250,000 toward annual operating costs for the Boys and Girls Club, an obligation under the New Market Tax Credits program, the funding source granted to build the center. And then there are roads and public safety facilities to improve.
Outside the Angel View nonprofit care facility that serves children and adults with disabilities, the city’s next biggest employer is the hospitality industry. Yet even with its spas and resorts, Desert Hot Springs hasn’t been able to reproduce the shimmer, let alone solvency, of its southern neighbor, Palm Springs.
“This city has a lot of work to do to get people across the freeway to change how they think about us,” Ted Mayrhofen says at the Starbucks where Two Bunch Palms Trail and Palm Drive intersect.
A middle-aged man with skin reddened by a relentlessly torching sky, Mayrhofen, a medical marijuana proponent, has lived in Desert Hot Springs since the early 1980s. He’s concerned about whether cultivators aren’t here solely to make money. As a horticulture and turf grass management student at College of the Desert in Palm Desert, Mayrhofen, some people might say, lends a strangely consummate perspective to the city of roughly 28,000. He likes it here, and suggests other locals do as well, but the possibility that pot cultivation could somehow exacerbate an outsider’s unflattering perception of his struggling city hangs overhead.
“We need the money, no doubt about it. But what have we done?” he asks rhetorically. “Have we changed the reputation of the city by doing it?”
ONE REALTOR SOMEWHAT RELUCTANTLY STOPPED CONTEMPLATING RETIREMENT
IN THIS SURPRISINGLY ROBUST MARKET. BUT AFTER SELLING A FEW PARCELS,
‘I DIDN’T WANT TO BE KNOWN AS ‘THE CULTIVATION REALTOR.’
In a thrift store off Pierson Boulevard in the heart of old town, Cali Davis, 26, is shopping with her mother. Pot cultivation, she surmises, could draw investment and possibly pique the interest of more outsiders.
“They call [Desert Hot Springs] the devil’s hiding spot,” she says. “People just get sucked in here, there’s nothing for people to do.”
About 8,000 residents work outside the city, and 60 cents of every dollar locals make are spent somewhere other than here, according to Matas.
Plans to produce 6,000 annual pounds of cannabis are underway for a building now cultivating only a tumbleweed. Desert scrub that sold for four figures in the 1980s now goes for 100 times as much.
But after five years of marijuana cultivation, according to conservative estimates, Desert Hot Springs will get a monumental assist to its budget. Due to a 20 percent hiring provision as part of the city ordinance, there will be enough decent-paying jobs for locals. Hypothetically, this significantly could improve an unemployment rate that hovers between 7 and 9 percent.
The 2014 voter-approved cultivation tax stipulated that the city receive as much as $25 per square foot for the first 3,000 square feet of a newly established grower, and as much as $10 per square feet for anything after that. The ordinance was prescient in its 10 percent recreational tax, paralleling the city’s dispensary tax in anticipation of the November statewide ballot measure to legalize recreational marijuana. Cultivators say it’ll only stoke the demand for marijuana and the businesses that support cultivation and dispensing.
By the middle of summer, the city had approved close to 2 million square feet of cultivation with 13 permitted sites in various stages of development. Applying just the $10-per-square-foot tax, that’s $20 million more annually into city coffers when those sites are up and operating within the next five years. The cultivation zone, Matas is quick to emphasize, is ultimately capable of supporting 4 to 5 million square feet of facilities, and there’s no lack of entrepreneurial interest.
“I’m totally game for it, for what it’s done in Colorado and other states,” says Daniel Buelna, local Green Pearl Organics dispensary manager, referring to the city’s lock on cultivation. “Why wouldn’t Desert Hot Springs embrace it?”
The sentiment is shared by Anthony Lee, a principal with SunGrow Collective, a dispensary that also operates in the city. He says that the city’s embrace of the medical marijuana industry could boost its standing within the Coachella Valley, “as long as the city is working with the cultivators.”
“I think it’ll make a big impact on the city,” he says. “Hopefully it’ll make it the central place for medical marijuana.”
Jason Elsasser, formerly in the real estate and construction industry, witnessed his company slide into financial ruin during the recession. He entered into the medical marijuana “gray market” that was created two decades ago by California’s Proposition 215. That statute protected patients and primary caregivers from prosecution.
Downtown Desert Hot Springs is poised for a makeover when the pot crop comes in.
Now, as a principal with CV Pharms, he controls two acres where Allen Fence Co. once operated, and plans eventually to produce 6,000 pounds of cannabis per year in a steel building that by late July was populated only by a tumbleweed the size of a refrigerator.
Besides a few remaining holdouts, such as a Jehovah’s Witness Kingdom Hall, the vast majority of businesses in the cultivation zone have sold for notable profit to marijuana entrepreneurs. The baby-faced Elsasser gestures toward Little Morongo Road, delivering a line that sounds a tad rehearsed: “We’re on the north end of Boardwalk here.”
It’s not hyperbole if it’s true: In the early 1980s the city purchased a 1-acre parcel for $5,000 to be a maintenance and public works facility. No more than a scrubby plot of dirt without infrastructure, it recently sold for $378,000. A 2-acre property east of Elsasser’s sold for $400,000. It was raw land, lacking even power.
“You couldn’t give that property away four years ago,” he says.
Paula Turner, who works for Palm Desert-based Desert Pacific Properties, is in overdrive, and somewhat reluctantly stopped contemplating retirement in this surprisingly robust market. But it almost didn’t play out: After selling a few parcels in late 2014, she recoiled from the market, deciding pot cultivation wasn’t for her.
“I didn’t want to be known as ‘the cultivation realtor,’ so I backed out,” she says.
Then, in November 2015, a client called to say it needed another parcel, prompting her to review what showed itself to be a frenzied market in which bidding wars raged as soon as properties were listed. After her year-long sabbatical, 1-acre properties that had been asking $25,000 were going for $300,000 to $500,000, depending on their location and infrastructure. In this new wild west, she says with bewilderment, a 10-acre property selling for $7,000 per acre had catapulted to $230,000 per acre.
“I think it’s going to be the Silicon Valley of cultivation in California,” she concludes.
Calabasas-based attorney Bob Selan is developing what he calls a “multi-, multimillion-dollar project” of 18 acres solely for marijuana cultivation over several phases. “Nobody’s giving away property thinking it’s desert land anymore,” he says.
“You can imagine what’s going to happen to the surrounding economics,” he says, “just by common sense.”
NO BONES, NO MEAT
Businesses and entrepreneurs are mulling how to revamp existing services to meet pending needs for the nascent industry. A few proposals have asked the city to envision a fusion of the pot and hospitality sectors, the two soon-to-be cornerstones here. Think smoking a joint while soaking in a hot tub.
Heather Coladonato, CEO of the Greater Desert Hot Springs Chamber of Commerce, says it’s fielding more questions about supporting this business’ development. People who engage in a business formerly perceived as fringe, if not illegal, are now members of the chamber. In fact, this year Coladonato founded the California CANNA Coalition, which acts as consultants, advocates, and educators for pot.
She emphasizes sustainability as key in weeding out the booms from the busts, requiring cultivators to polish their business model. Cultivators say startup costs were far less expensive in the gray market, the launch window much shorter, and the hurdles lower. But the scale was smaller and the omnipresent fear of being thrown in jail by federal authorities (marijuana remains federally illegal), was compounded by local jurisdictions that set their own rules in addition to state regulations.
Although Desert Hot Springs has sanctioned commercial marijuana cultivation, the considerable risk has diminished but not disappeared; the promotion from small-timer to commercial grower has drawn more investors because banks won’t extend credit for marijuana cultivation. The move out of “the shadows,” as Elsasser described it, has also underscored a cultural shift.
Thirty-four years ago, Dale Mondary was a young cop in ultra-conservative Kansas, where marijuana use was not tolerated. About a year ago, he accepted the top law enforcement role in DHS, and as the new police chief, has found himself thrust into a culture far different from the one when he walked a beat in the early 1980s.
“You talk about a paradigm shift …,” he says. Today, he reflects on the oddity of meeting with cultivators to review complex security plans, including safes and armed guards, and says the contact with professionals in the industry has helped to overcome his prejudices. But it doesn’t mean there weren’t lingering concerns: Auto thefts and gang activity have plagued DHS, and Mondary isn’t sold that cultivation won’t aggravate things. But so far, the city’s five dispensaries have caused no trouble.
“It is quite different and quite unique and I sit there looking at [cultivators],” Mondary says, “and I’m saying, ‘a few years ago — no, a few months ago — I’d be finding ways to take you to jail.’ ”