The next chapter of desert tourism could see travelers ordering a joint at their hotel as if it were a cocktail in the lobby bar.
Desert Hot Springs officials are moving toward developing “cannatourism” as they take a hard look at the future of the cannabis industry that’s become an anchor in their local economy. That includes considering the allowance of cannabis sales and use in hotels and entertainment facilities like bowling alleys.
They’re also carefully eying their tax rate on cannabis cultivators in an attempt to ensure they remain one of the most competitive cities in the upstart legal industry.
The city was one of the first in California to create a framework for legal operations, and it attracted a host of activity from the start. Cannabis has since become its second-highest revenue stream, bringing in about $3.2 million in the fiscal year that ended last summer.
At a time when 90% of California cities are considering layoffs and cutting services due to the coronavirus pandemic, Desert Hot Springs made some changes to its $23 million budget and ended this fiscal year in June with a deficit of about $350,000, which it covered with reserves, said Mayor Scott Matas.
So officials are proceeding with caution, and planning to collaborate with local cannabis experts as they map out the future of the industry that’s helped right their fiscal ship.
“We have to be able to market ourselves, but we have to balance those revenues coming in without losing too much, especially in this day and age with COVID,” Matas said.
Cannatourism — or the concept of traveling somewhere to consume or participate in cannabis-related activities — is part of Desert Hot Spring’s cannabis strategic plan developed in 2017. Also known as “Spa City” for its mineral-rich hot water that’s an attraction at many hotels, the city was approached early on by hoteliers who wanted the option of providing cannabis to tourism, Matas said.
The concept came to its fullest fruition during a four-hour virtual City Council meeting on Tuesday, a discussion that had been put off since March due to the emergency circumstances surrounding the coronavirus pandemic. City staff had drawn up draft proposals for allowing cannabis sales and use at hotels, and at entertainment facilities.
Under the proposals, hotels would obtain a separate permit and have various restrictions and protocols like designated areas for smoking and vaping. On-duty employees would be forbidden from consuming on the premises.
Council member Russell Betts, who was concerned about taking business away from local dispensaries but saw the appeal of allowing guests to get something onsite, drew the comparison between a bar and a liquor store, where people consume onsite versus buying a product to take home.
“It’s just the same if you’re at a bar and have a $20 dollar drink and only finish half of it,” he said.
Representatives from the Coachella Valley Cannabis Alliance Network called into the meeting to urge officials to allow hotels to partner with already-licensed dispensaries.
“We would like this council to consider strategic partnerships with current retailers, as opposed to allowing new retail licenses to become present in every hotel,” said vice president Jocelyn Kane.
Kane also noted that it will be up to the hotels how to manage regulations with the state’s Department of Alcoholic Beverage Control, which said in a May 2019 guidance that alcohol and cannabis can’t be sold at the same location.
Other possible “cannatourism” rules in the Desert Hot Springs proposals include:
The proposal could also seek to limit sales to what could be consumed onsite by capping inventory and limiting displays.
Matas said that city staff will update the draft proposals and come back with fresh versions in the fall to incorporate new ideas. He said the idea is to “pre-plan,” so the city can ready itself for a time when a coronavirus vaccine is developed and people are traveling in bigger numbers again.
He said he’s wary of becoming “Cannabis City,” and wouldn’t want hotels to be able to put pot leaves on their signage, but is eager to see the plans develop.
“It’s an opportunity,” Matas said. “Taking that concept, and having (hotels) partner with our local dispensaries is only going to bring revenue up in the city.”
In addition to the consumer-friendly changes that the city is contemplating, a far more structural — and financially relevant — issue is playing out due to the city’s tax rate on cultivation businesses.
Industry advocates are pushing for the city to lower the rate, saying that Desert Hot Springs is losing out on cultivation business going to other cities. But officials, while cognizant of stifling growth of the industry, are hesitant to promise any changes.
Joseph Dominguez and Ethan Woods, who co-founded Zenco Capital that has about 75,000 square feet of grow space across cannabis facilities on Little Morongo Road, aren’t sure if they’ll stay in Desert Hot Springs to build a third operation.
“It was commendable what they did out of the gate,” Dominguez said. “The issue is now that everybody’s caught up, we need to be able to stay there and keep thriving.”
Currently, their facilities are among the largest in the city, and they employ about 130 people.
The city’s cultivation tax is $25.50 per square foot for the first 3,000 square feet of space and $10.20 per square foot for the remaining space. Currently, it brings in about $2.7 million a year from 10 facilities.
Dominguez said when they selected Desert Hot Springs to set up shop in 2017, it was “the shining star” of cannabis-permitting cities, not just because it had the rules in place but because it also had the infrastructure.
But he said the city could lose out on future opportunities to other cities that have since instituted lower tax rates.
“Cities like Adelanto and California City have half the tax rate DHS does,” Dominguez said during Tuesday’s meeting. “My board of directors knows it.”
Tuesday’s meeting also included the release of a report from Urban Futures Inc., a consultant hired by the city to examine the state of the cannabis industry and size up whether the city is still competitive.
The report shows that Desert Hot Springs’ cultivation tax rate is within the average and competitive for retail sales when compared to other Riverside County and Coachella Valley cities. But out of about two dozen California cities cited in the report, none have the tiered structure that the Desert Hot Springs does.
In the Coachella Valley, Cathedral City and Coachella charge $15 a square foot, and Palm Springs charges $10 a square foot. Desert Hot Springs has no tax rate on manufacturing, the license category for facilities that make edibles or other products. which is unique among all other commercial cannabis rules in the cities surveyed.
Urban Futures consultant Michael Busch said the coronavirus pandemic is “stress-testing” how cannabis holds up as a revenue stream. Changing the tax rate now, during a recession, means that the city would have less experience on how cultivation business holds up during an economic downtown, he said.
He urged the council to continue analyzing their tax rate, and finding ways to keep attracting and growing the industry.
“Staying ahead will be critical to the city’s ability to continue to thrive in this area, and to be able to recruit and retain cannabis business in the city,” Busch said.
Industry representatives lined up to call in their concerns that taxes are sending cannabis companies elsewhere, with more than 100 people emailing or calling in comments to Tuesday’s meeting. The Coachella Valley Cannabis Alliance Network plans to continue advocating for a lower tax rate in the city, said Paula Turner, who has been in the cannabis real estate industry locally for about five years and is the treasurer of CVCAN.
She said Desert Hot Springs wouldn’t necessarily lose money from the tax rate change, because it would ultimately attract more players. The main issue is the first part of the rate — the $25.50 per square foot for the first 3,000 square feet — that drives up rates and sends cultivators, especially smaller ones, to other jurisdictions, Turner said.
“If the goal of the city council is to be known as business-friendly, you must lower the business tax,” she said.
But council members didn’t immediately jump onto the idea.
Council member Gary Gardner noted how the current rate has yielded enough revenue that the city isn’t making layoffs like other cities as tourism and other tax revenue streams take a beating during the pandemic-induced recession.
Palm Springs, for example, laid off more than two dozen employees.
“It’s crucial we don’t race to the bottom,” Gardner said.
Matas said he wants to examine the issue examined further,and doesn’t anticipate making any changes in the next 12 months.
The plan is to create a task force with business, city and resident representatives that will further consider the issue. Matas said he wants to be sensitive to the industry, but also to constituents who voted overwhelmingly to tax the industry back in 2014.
Still, he acknowledged the city’s tax rate on cultivators — generally the largest and most profitable facilities in the industry — may no longer look competitive now that Desert Hot Springs is no longer the only city looking to play host to the burgeoning industry.
“At the time, the industry was so eager that if we had said, ‘Tax it at $50 a square foot,'” they would’ve said, ‘Yeah, let’s do it,” Matas said. “I understand the difference between them now, because there are multiple players in the industry.”
Melissa Daniels covers local business, hospitality, and economic development in the Coachella Valley. Reach out at (760)-567-8458, [email protected], or on Twitter @melissamdaniels.
Article originally published in The Desert Sun by Melissa Daniels on 7/03/20