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There's a new gold rush in California as investors prep for pot legalization vote

A cannabis farmer applies fertilizer to a crop of plants in Humboldt County, California.
Robert Gauthier | Los Angeles Times | Getty Images
A cannabis farmer applies fertilizer to a crop of plants in Humboldt County, California.

Pot speculators are hoping to capitalize on a new gold rush in California.

This week the state approved a measure for the November ballot that lets voters decide on whether to legalize recreational marijuana use.

"The rush is on for sure," said Troy Dayton, CEO of ArcView Group, a cannabis investment and research firm based in Oakland, California.

Industry experts said there's been increased investor interest and activity to fund indoor and outdoor cultivation, testing laboratories, infused product manufacturers, as well as licensed marijuana shops. Moreover, they are seeing more out-of-state interest given the huge size of the Golden State's market and the likelihood that voters will pass legalized recreational weed use.

Weed taxed 15 percent

"There's been a lot of marijuana-related investments into California," Dayton said. Those include buying options on properties and things like that in order to take advantage of this (legalization effort)."

California's legalization initiative qualified for the Nov. 8 general election ballot after backers received the required number of signatures. The measure designates state agencies to license and regulate the industry and imposes a 15 percent excise tax on retail marijuana sales. There's also a cultivation tax, although it exempts medical pot from some taxation.

Several desert communities in Southern California have opened their arms to large-scale marijuana cultivation businesses as a way to create local jobs and more tax revenue. They include cities such as Desert Hot Springs and Adelanto, where officials have created a marijuana cultivation ordinance and application process.

"Southern California has been seeing a tremendous amount of activity, particularly in the Coachella Valley area," said Leslie Bocskor, president of Electrum Partners, a cannabis-based advisory firm based in Las Vegas. He said there's also more money flowing into the cannabis industry in Nevada, where voters there will decide this fall whether to legalize recreational use in the Silver State.

"If California legalizes marijuana, the retail sales will surpass the entire medical and recreational sales market that now exists" -Chris Walsh, Marijuana Business Daily

Four states — Colorado, Washington, Oregon and Alaska — previously decriminalized recreational cannabis. Nationwide, about half of the states and Washington, D.C., have legalized medical marijuana use — although there's still a federal prohibition on marijuana.

"If California legalizes marijuana, the retail sales will surpass the entire medical and recreational sales market that now exists," said Chris Walsh, managing editor of Marijuana Business Daily.

This year, retail sales of marijuana in the U.S. are forecast to reach about $4.5 billion, according to Walsh. The industry has been experiencing strong sales growth in recent years, with sales doubling in the U.S. from 2013 to 2015.

"Marijuana is one of the most profitable industries in the United States," said Electrum's Bocskor, a former investment banker.

Woman tending to her commercial cannabis crop in an indoor grow facility in Denver, Colorado.
Jon Paciaroni | Getty Images
Woman tending to her commercial cannabis crop in an indoor grow facility in Denver, Colorado.

Indeed, pot retailers can be more lucrative in terms of average annual sales per square foot than some of America's best known storefronts. Sales per share foot is a common metric in the retail industry and used sometimes to show productivity of the selling space.

Cannabis storefronts make on average $974 in annual sales per square foot, according to MBD data. That is considerably higher than the average revenue per square foot at Whole Foods ($930) and well above department stores ($180), the publication said.

To be clear, the cannabis store data is self-reported by about 1,000 marijuana retailers.

"Marijuana in general doesn't take up much shelf space," said Walsh. "You can have a reasonably small space dispensary or store and fit a lot of product into it."

CA pot sales: $6.4 billion by 2020

As for California, the revenue potential of more pot shops in the state is significant.

ArcView estimates California's legal market for cannabis is a $2.7 billion industry in 2016, and it forecasts it will grow to a $6.4 billion market by 2020, when including both medical and adult use markets.

A report issued last month by California's Legislative Analyst's Office forecasts state and local governments could eventually collect additional revenues that could surpass $1 billion annually from new excise taxes on marijuana under the proposed legalization measure.

That said, there's an expectation by some analysts that if pot legalization passes the state won't see the first recreational stores licensed and selling until closer to 2018.

"The fall election will be very important in terms of the trajectory of where the industry goes and how quickly legalization happens in this country." -Jessica Rabe, Analyst, Convergex

More than $2.5 million has been raised since January by the marijuana legalization campaign, including about $1 million from billionaire Sean Parker, the former president of Facebook and founder of Napster. Other major pro-legalization contributors include Drug Policy Action ($500,000) and WeedMaps ($500,000), a marijuana dispensary finder.

Overall, at least nine states have marijuana-related ballot measures expected to be on the ballot this fall.

"This is a huge year for the industry," said Jessica Rabe, an analyst at Convergex in New York. "The fall election will be very important in terms of the trajectory of where the industry goes and how quickly legalization happens in this country."

Yet, analysts point out the marijuana businesses face added risks due to federal banking laws and other challenges unique to the industry. For example, Section 280E of the U.S. tax code dings businesses engaged in "trafficking in controlled substances" by barring them from getting the deductions or credits available to other businesses.

Support growing for pot legalization

Californians approved medical marijuana back in 1996, making it legal under state law to cultivate as well as possess and use pot for medicinal purposes. A recreational use initiative on the statewide ballot lost in 2010 but supporters of the new campaign appear to have more support this time around, including from top state officials such as Lieutenant Governor Gavin Newsom, a Democratic candidate for governor in 2018.

Approximately 60 percent of the college graduates polled this past spring were in favor of recreational use, while around 55 percent of those with some college favored the decriminalization, according to the Public Policy Institute of California. Support in the most populated areas such as San Francisco Bay and Los Angeles also favors legalization, although there's been some slippage in support since 2010 in the state's more rural Central Valley region.

"This is an issue whose time has come," said ArcView's Dayton. "Pioneering elected officials are going to be coming out in favor of it because it makes sense."

Among the groups opposing marijuana legalization in the state are the California Hospital Association and the California Correctional Supervisor's Association. The state's report on the measure's fiscal impact on state and local government shows it could save "tens of millions of dollars to potentially exceeding $100 million annually" due to savings in the courts, police and corrections.