Changing market conditions in the cannabis industry led the Ceres City Council to modify and extend an existing developer agreement with Kase Manufacturing of Ceres on Monday evening.
Since December 2017 Mike Reynolds, owner of Kase Manufacturing, had been paying the city a flat rate of $100,000 per month for the privilege of manufacturing medicinal cannabis products in a fully-enclosed industrial park building but said he cannot continue doing so. The same agreement was previously amended to include recreational cannabis. The agreement approved on Monday calls for Reynolds paying the city a floor of $25,000 per month or a five percent of gross receipts, whichever is greater.
“As the business grows over time, the dollar amount would increase,” said outgoing City Manager Toby Wells. Based on last year’s financials, Wells said the city should initially expect just $25,000 per month.
Although the original three-year agreement is not set to expire until June, Reynolds owes the city $155,000 as of the end of March. In the transition between agreements, Councilman Bret Durossette motioned to forgive the $155,000, heralding Reynolds for helping to save city coffers.
“Not that we price gouged him, it was a pilot program,” said Durossette. “We didn’t really know where the top would be … in three years it got us out of the hole.”
He said the revenues mostly go to the general fund of which the majority funds police and fire services.
Ceres was the first in the region to approve such a developer agreement. Since then the county has followed suit and the proliferation of cannabis businesses as well as the black market is cutting into Reynolds’ profits.
Wells recommended a 15-year agreement instead of three years, saying a long-term agreement would give Reynolds security about investing in his operation. Vice Mayor Linda Ryno argued against a 15-year agreement, preferring five years. Reynolds said he was “fine” with a five-year contract.
Reynolds said when he entered the agreement it was a “blind stab” at what sales would be.
“We took a blind guess on the amount of money that we would pay per month. Knowing where the cannabis industry was at then to where it is now has drastically changed,” said Reynolds, who called the agreement one of the richest for any city in California.
“In all honesty if we continued at $100K there would be no discussion in talking about future revenue (to the city) because I wouldn’t be able to stay open,” Reynolds told the council Monday. He said in October and November the cannabis market took a crash “because you have a lot of bad actors and you have a lot of people who aren’t playing by the rules.”
He said with a floor of $25,000 or 5 percent, the city was still getting a generous deal given that some cities settle for as low as three percent.
Councilman Channce Condit applauded Kase and the revenues it brings the city. But even though the revenues go into the general fund of which nearly 80 percent go to public safety, once again Condit pressed for earmarks solely for public safety – an idea that gained no traction. He threatened to not support the agreement if earmarks were excluded.
“I am not for earmarking it for the simple reason if we had done it before, then with the shortfall then I would feel obligated to take it out of public safety,” protested Kline.
Durossette expressed concerns that a 2-2 council split would have sent Reynolds packing for another community and a huge loss of revenue.
When Kline and Ryno pressed for Reynolds to make good of $155,000 owed – even over a period of three years – because the money was already budgeted by the city, Reynolds balked.
“If the revenue numbers were there and we weren’t burning cash every month trying to stay afloat and be legal in this huge black market of a state, it would be completely different but it’s all about survival, making sure we could meet payroll and do all the things we need to do to grow.”
He said he guarantees payments of $25,000 per month at a time when Covid-19 will inflict huge sales tax revenue losses for the city.
Wells reminded that the city has benefitted tremendously by Reynolds’ business and been able to pad reserves like not before. He didn’t see Reynolds as owing it when the revised structure was agreed to in February.
“He did right for us and I think it’s time we do right for him,” said Durossette.
Condit’s motion for earmarks and a 15-year agreement died for a lack of a second.
Durossette motioned a five-year agreement at $25,000 per month and to “forgive” the amount due. The council voted 3-1 to support it, Condit voting no.
Mayor Chris Vierra excused himself from the discussion because of a conflict of interest. He said he owns property close to the Kase Manufacturing plant.