NEW PHASE 3 LEGISLATION APPROVED BY CITY COUNCIL
On April 30th, the Los Angeles City Council approved new legislation to begin the third and final Phase of cannabis licensing within the City of Los Angeles no later than the end of next month.
Phase 3 will include two rounds of applications for Storefront Retailer Licenses in addition to one round of applications for Non-Storefront (i.e., Delivery) Retailer Licenses.
Priority will be given to Tier 1 and Tier 2 Social Equity Applicants for all three rounds. Additionally, each round will operate on a first-in-time rule. In other words, the first application submitted will be given priority over succeeding applications with premises within 700 feet of the property. Licenses will be issued on a first-come-first-serve basis.
PHASE 3: ROUND 1, ROUND 2, & DELIVERY PILOT PROGRAM
The upcoming Phase of cannabis licensing will give priority to applicants under the Social Equity Program, a program designed to provide reparations to individuals who have been disproportionally impacted by the war on drugs. Social Equity Applicants will receive expedited application review among other benefits through the program. Eligible applicants in the program will be classified as either Tier 1 or Tier 2 applicants, depending on the criteria they meet. To qualify for Tier 1 or Tier 2 Applicant status, individuals must have lived in a Disproportionately Impacted Area (DIA) for a minimum amount of time and cannot own an Existing Medical Marijuana Business (EMMB). The City of Los Angeles has listed a set of zip codes that currently qualify as DIAs. The City announced that it may add additional zip codes to this list in the future.
ROUND 1 (STOREFRONT RETAIL LICENSING)
After all Tier 1 and Tier 2 Applicants have been verified and notified by the DCR, the DCR will begin accepting applications for Round 1 of Phase 3. Only verified Tier 1 or Tier 2 Social Equity Applicants will be eligible to submit an application during Round 1. Applicants must submit all required documents (see table) within a 14-day period to be announced by the DCR. The dates of the 14-day period have not yet been identified, but the City Council has ordered the DCR to begin this period no later than September 3, 2019. The DCR will distribute 100 licenses during Round 1 to the first 75 eligible Tier 1 Applicants and the first 25 eligible Tier 2 Applicants. Verified Tier 1 or Tier 2 Applicants can only apply for one license during Round 1.
ROUND 2 (STOREFRONT RETAIL LICENSING)
Following the 14-day period of Round 1, the DCR will host a second round of Storefront Retail License application processing. Round 2 will only accept applications from verified Tier 1 and Tier 2 Applicants, just as in Round 1. For the second round of application processing, the DCR will accept applications during a 30-day period that has yet to be determined. Specific documents will be due within the 30-day application period, while all additional documents will be due within 90 days (see table). The first 150 eligible applicants will be issued licenses. The DCR may issue additional licenses until each Community Plan Area (CPA) has reached Undue Concentration. Tier 1 or Tier 2 Applicants who were issued a license during Round 1 may not apply for a license in Round 2.
DELIVERY PILOT PROGRAM (NON-STOREFRONT RETAIL LICENSING)
The DCR has announced that it will launch a Delivery Pilot Program, where it will issue Non-Storefront Retail (i.e., Delivery) Licenses to the first 60 eligible applicants. The Delivery Pilot Program will accept applications from verified Tier 1 and Tier 2 Applicants as well as General Applicants. The DCR announced that delivery will be restricted to addresses within City limits unless special permission is granted by the DCR.
PRE-VETTING PROCESS FOR SOCIAL EQUITY APPLICANTS
Applicants that qualify as Tier 1 or Tier 2 Social Equity Applicants must submit a preliminary application along with supporting documents to the Department of Cannabis Regulation (DCR) in order to have their Tier 1 or 2 status verified. The Ordinance voted into law yesterday identifies an unspecified 60-day period in which these preliminary applications will be received. Although the exact dates of the application window have yet to be determined, the City Council approved a motion ordering that the 60-day period begin no later than May 28, 2019. The DCR will not accept applications or supporting documents after the 60-day period. After the 60-day period ends, the DCR will determine whether or not applicants are verified as Tier 1 or Tier 2 applicants and notify all applicants of their final, non-appealable decision prior to the beginning of the Phase 3 Round 1 application window.
Operational compliance has become paramount to the success of many cannabis businesses following new state regulations that went into effect earlier this year. For others, non-compliance has been a great downfall. Following the legalization of commercial cannabis, the state of California hastily drafted and passed emergency regulations which outlined licensing and operational requirements for cannabis businesses under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). These emergency regulations went into effect in December of 2017 to provide a temporary solution for the lack of cannabis legislation until more thorough regulations could be drafted and adopted by state agencies. Just three months ago, the Office of Administrative Law (OAL) approved new regulations which were immediately adopted by all three state licensing agencies. The new regulations include many significant changes from the previous emergency regulations and introduce more restrictive guidelines for cannabis businesses. Further, the new regulations define serious implications for businesses who violate the new guidelines – from fines up to $250,000 to loss of licensure. In recent months, a rapid number of compliance enforcement agencies have emerged at both the local and state level. Licensed cannabis businesses in California have experienced a peak in random compliance inspection visits, raids from local and state law enforcement, and seizure of cannabis products. With the commercial cannabis industry now in full effect, local and state agencies are beginning to focus less on setting the framework for the industry and more on enforcement of regulations.
A majority of licensed cannabis businesses are in some way in violation of current regulations despite their intentional efforts to comply. This is largely due to the cumbersome location-dependent nature of cannabis regulations. Although cannabis is legal in the state of California, commercial cannabis businesses are still federally illegal, and there is no federal legislation governing the licensing and operational compliance of cannabis businesses. As a result, cannabis regulations vary between states. Further convoluting the concept of cannabis compliance, regulations also vary within-state and are dependent on legislation issued by local authorities. All California cannabis businesses must adhere to statewide regulations enforced by the three state agencies – the Bureau of Cannabis Control (BCC), the California Department of Public Health (CDPH), and the California Department of Food and Agriculture (CDFA) – in addition to guidelines enforced by local agencies. For instance, outdoor cultivation is legal at the state level per the CDFA, but it is prohibited within the City of Los Angeles per the local Department of Cannabis Regulation (DCR). Cannabis businesses must also comply with local Fire Department safety codes which also vary by jurisdiction.
With compliance enforcement on the rise, it is crucial for all cannabis businesses to stay informed about both state and local regulations in order to avoid high penalties or business closure. Our firm offers full-coverage compliance counseling to licensed cannabis businesses. Our team is in regular attendance of local city hall and county government meetings pertaining to commercial cannabis in all areas of California and maintains current knowledge of the ever-changing regulations. We provide counsel in all areas of business compliance for cannabis retailers, distributors, cultivators, and microbusinesses. Our attorneys have a combined 20+ years of experience in the commercial cannabis industry and are active in compliance consulting throughout the state. We are able to provide our clients with expert contractors in building safety code pre-inspection, packaging and labeling compliance, product inventory and storage, advertisement restrictions, etc. We would love to help ensure that your cannabis business is successful and in compliance with all local and state regulations, giving you one less thing to worry about. If you have any questions or would like to speak with our attorneys to further discuss our compliance services, please feel free to reach us via email (firstname.lastname@example.org) or phone (323-253-9700).
An Important Step Forward for Los Angeles Cannabis Licensing – DCR Prepares to Open Phase 3 Applications, Starting with Retail for Social Equity Applicants
Cannabis licensing has been on the lips of hundreds of interested Los Angeles retailers and users for months. Important steps were taken to move the process forward at yesterday’s meeting of the Los Angeles Budget and Finance Committee at City Hall. During the meeting on April 1, City reps discussed delays in the licensing due to the delayed funding for the social equity program. It was also revealed that many people in LA have been holding properties for months waiting for the license application process to open up.
In order to continue with the licensing process, based on the specifics of the LA ordinance, the City of Los Angeles needs to issue a set number of retail dispensary licenses to social equity applicants (defined so that people may qualify based on low-income status, having a prior cannabis arrest, and/or living in specified zip codes within the City for at least 5 or 10 years that have had the most cannabis arrests).
For several months, interested parties have been awaiting the opening of “Phase 3” of Los Angeles’s cannabis licensing program, which is the first opportunity for members the general public to apply for cannabis licenses in the City. The previous two phases awarded licenses to certain qualified “priority” retail and non-retail businesses who had been operating in the City since before 2016.
The City is required to issue retail dispensary licenses to social equity applicants on a 2:1 ratio as compared to non-social equity applicants. To date, the City has issued 178 Phase 1 retail (non-social equity) applications, meaning that it needs to issue 356 social equity licenses in order to catch up with the required ratio. To start reaching these numbers, the City has proposed issuing 200 licenses (in two batches of 100) to social equity applicants.
This process has been delayed because, under the City’s law, social equity applicants are entitled to receive certain business licensing and compliance assistance, but so far there have been no funds allotted to provide this assistance. At yesterday’s meeting, the Budget and Finance Committee finally approved funding for the social equity program, meaning the whole licensing process can now move forward.
DEPARTMENT OF CANNABIS REGULATION’S NEW INTERACTIVE MAP
The Department of Cannabis Regulation (DCR), the governing agency regulating commercial cannabis activities for the City of Los Angeles, released a new interactive map this week which highlights the number of retail licenses available for applications in each of the 35 Community Plan Areas in the City. The map shows the maximum number of retail licenses approved (i.e., “license capacity”) for each Community Plan Area as well as how many of those licenses are available or otherwise occupied by retailers currently in operation.
The interactive map will be particularly useful for prospective applicants who want to pursue a dispensary license during the next and final round of licensing for the City and need to identify eligible properties for a potential retail location. Many retail licenses have already been distributed which has greatly limited the number of remaining licenses available for application in each Community Plan Area. The limited number of vacant licenses has further complicated the property search process for prospective applicants -- a process already restricted by distance and sensitive use requirements defined by the Los Angeles Municipal Code (LAMC). LAMC mandates that all retail locations be at least 700’ away from other licensed cannabis retailers and other “sensitive use” properties (e.g., public parks, public libraries). Further, it restricts the location of potential retail establishments to nine zones as defined by the City’s planning website through Zimas.
Eligible Zones for Cannabis Retail Locations as Defined by The LA Department of City Planning:
C1 Limited Commercial Zone
C1.5 Limited Commercial Zone
C2 Commercial Zone
C4 Commercial Zone
C5 Commercial Zone
CM Commercial Manufacturing Zone
M1 Limited Industrial Zone
M2 Light Industrial Zone
M3 Heavy Industrial Zone
STATE TO ISSUE PROVISIONAL LICENSES BEFORE EXPIRATION OF TEMPORARY LICENSES
Today, the Bureau of Cannabis Control, California Department of Public Health, and California Department of Food and Agriculture announced a plan to prevent lapses in licensure for retailers who have active temporary commercial cannabis licenses that will soon expire. The three licensing agencies are tracking the expiration dates of all active temporary licenses and intend to issue a provisional license to eligible retailers who currently have a temporary license prior to its expiration. To qualify for a provisional license, applicants must:
(1) Hold or have held a temporary license for the same premises and the same commercial cannabis activity for which the provisional license will be issued; and
(2) Have submitted a completed license application to the licensing authority, which must include a document or statement indicating that California Environmental Quality Act (CEQA) compliance is underway.
In today’s announcement, the three licensing agencies urged that any temporary license holders who are contacted by their state licensing authority reply promptly in order to avoid a lapse in licensure.
Know Your Rights: Understanding State Hemp Regulations
February 28th, 2019
These two words were expressed throughout last week’s city council meeting on the current state of cannabis affairs in the city of Los Angeles. Business owners, hopeful entrepreneurs, private citizens and council members reverberated this sentiment from the city’s long delayed licensing process and yet to be fulfilled promise of a social equity program.
The Department of Cannabis Regulation (DCR) held its regular meeting before city council on February 28th to report on the progress the department has made to date and forecast expectations for the future of cannabis licensure in Los Angeles and the long awaited opening of phase 3. Executive Director Cat Packer sat before the council and highlighted the department’s substantial progress since its commencement in 2017, but made clear that “we still have a long way to go.”
A call was made for a more inclusive social equity program to expand the demographic of eligible applicants to other disenfranchised communities impacted by the war on drugs particularly, hispanics. However, strains on resources and available funding have left little for the social equity program to get off the ground.
To date, 55 temporary approvals have been granted to phase 2 applicants and 178 to phase 1 applicants. There are hundreds left to wade through pushing back the opening of phase 3 to sometime in spring or summer. The DCR proposed a bifurcated application process for phase 3 general processing when the time comes that would split the application process in two parts. Part One would establish a lottery or first-come first-serve process and Part Two would be a merit based system. The two part process is suggested to mitigate fairness and allow those who do not have access to resources a fair chance to participate for a license.
Cat also pointed out the large disparity between the number of retail licenses that will be available for phase 3 eligible program applicants. To comply with the city’s regulations for undue concentration, in the city that is home to some 4 million residents, granting one license per 10,000 residents allows for approximately 200 retail licenses available to some 10,000 plus people who are eligible for the social equity program.
An immediate need was called for increased enforcement to shut down illegal and unlicensed cannabis businesses from operating in the city. The black market is not only harming licensed businesses by taking customers from paying high dispensary prices but the city. In order for the city to provide funding generated from tax revenues requires a crack down on the black market.
With all eyes on Cat Packer for answers, she in turn responded to city council asking for direction and guidance on how the department is to proceed. A motion was submitted in support of immediate funding to implement the program and expand the demographic of eligible applicants to participate in the Los Angeles cannabis market and increased enforcement to crack down on the black market.
March 5th, 2019
The Cannabis Regulations Commission met on March 5th and presented their recommendations to the City Attorney that would establish policies for processing of phase 3 applications. Phase 3 would begin with a 60 day pre-vetting process of Social Equity applicants to verify Tier 1 or Tier 2 qualification. Verified Tier 1 or Tier 2 applicants will then be eligible to move forward into the first phase of the licensing process. The DCR will issue 100 licenses in this initial phase allocating 75 to qualified Tier 1 applicants. Qualified Tier 1 applicants would receive priority receiving 75% of the available licenses during this initial phase so long as all basic application requirements are met, including:
A signed lease with proof of payment or deposit, or a property deed
Meet all sensitive use requirements, including undue concentration
Payment of required license fees
Ownership organizational structure
Proposed staffing plan
Complete and detailed diagram
Proposed security plan
Labor peace agreement
Current Certificate of Occupancy
Compliance with the Equity Share Rules
The second phase will allocate an additional 100 licenses establishing no priority between Tier 1 or Tier 2 applicants. The second phase will establish a “first-come, first-serve” process that will allow the first 100 qualified applicants will move forward. Basic qualifications required to be met are payment of the required license fees or deferment approval; ownership organizational structure; financial information; indemnification; and, labor peace agreement. The remaining qualifications mentioned above would be required within 90 days.
The Commission also recommended the implementation of a pilot program for Type 9 Retail Non-Storefront delivery services. A total of 40 licenses would be available allocating 20 licenses to pre-vetted Tier 1 Social Equity applicants. The pilot program will also allow verified applicants who could not obtain a Type 10 retail license due to undue concentration limits will receive priority for a Type 9 delivery license. This will allow licensees to remain in their building and operate as a non-storefront retailer in lieu of having to locate and secure another compliant location. Eligible phase 2 applicants will also have an opportunity to amend their application to include delivery so long as they are compliant with the city’s zoning and regulatory requirements.
Phase 3 Licensing Estimated Timeline
Phase 3 Application Processing
60 day Pre-Vetting Period
Basic Tier 1 or Tier 2 qualification
14 day application window
Qualified Tier 1 or Tier 2 applicants will be processed for 100 retail licenses (75% reserved for Tier 1 applicants). Pre-vetted applicants will receive 15 days notice of when the first phase application window is to open.
Deficient applications will have 5 days from the start of their application to rectify insufficiencies or issues with the basic qualifications.
30 day application window
Pre-vetted Tier 1 or Tier 2 applicants who meet basic qualifications (see above) on a “first-come, first-serve” basis.
Applicants will have an additional 90 days to submit the remaining application requirements
Deficient applications will have 5 days from the start of their application to rectify insufficiencies or issues with the basic qualifications.
Delivery Pilot Program:
Pre-vetted Tier 1 or Tier 2 applicants will receive 15 days notice for when Type 9 delivery licenses will become available
Pre-vetted Tier 1 or Tier 2 applicants subjected to undue concentration limits will have priority
Eligible phase 2 applicants will have opportunity to amend their application to include delivery
Deficient applications will have 5 days from the start of their application to rectify insufficiencies or issues with the basic qualifications.
Contra Costa County
On February 14th, Contra Costa officially issued a Request For Proposal form for new cannabis businesses, including storefront retailers. The number of retailer licenses (with or without delivery operations) will be capped at four.
The county’s deadline for letters of intent is April 4th, while full proposals will be due (by request only) on June 27th. Additionally, the county has released a zoning map showing the proposed areas that will be eligible for cannabis business locations.
City of Fresno
On December 12th, 2018, Fresno voted to allow up to seven medical cannabis retail licenses for the following year, with seven additional retail licenses to follow upon city approval in 2019. The current ordinance limits the number of cannabis retail businesses within the city to fourteen, but seven more may be allowed by a city council resolution.
Fresno limits cannabis retail businesses to locations zones DTN, DTG, CMS, CC, CR, CG, and CH. Additionally, no more than two cannabis retail businesses may be allowed in any one council district.
City of Martinez
On February 26th, the City of Martinez’s Planning Commission met to discuss the city’s newly released draft ordinance for cannabis businesses. The draft regulations would allow for a maximum of two storefront retail licenses, along with a maximum of two delivery licenses (to be associated with a storefront retail business). Retail cannabis businesses would be limited to commercial and light industrial zones. According to the Martinez Gazette, the Planning Commission sent these proposed regulations to the City Council, including a suggestion that the city raise the proposed number of licensed delivery services to three.
City of Pomona
On March 5th, the Pomona City Council met for the first reading of the city’s new cannabis ordinance. The draft regulations provide for licensing of both storefront and delivery-only cannabis businesses. However, the proposed caps on licenses and zoning/location restrictions for cannabis businesses have yet to be released.
City of South Lake Tahoe
On February 5th, the City of South Lake Tahoe released a new cannabis ordinance, allowing up to two retail operations and two microbusiness operations with on-site retail. Cannabis businesses will be restricted to the locations indicated on the city’s buffer map. The city has released its application form and guidelines: the submission period will last from March 11th to April 5th.
City of Ventura
On January 1st, new regulations from the California Bureau of Cannabis Control took effect, allowing delivery of adult-use and medical cannabis anywhere in the state. This overturned Ventura’s past cannabis ordinances, which had restricted retail cannabis activities within the city to deliveries by a maximum of three licensed businesses located outside of city limits. At a City Council meeting on March 4th, the city discussed new policy measures to bring Ventura’s policies in compliance with California law. Among the items on the agenda was the possibility of taxing and permitting cannabis activities within the city, an indication that Ventura is becoming more open to cannabis business.
Are we about to see more enforcement against unlicensed cannabis?
California Governor Gavin Newsom recently announced he is calling for the California National Guard to work with federal officials to target the California illicit market. Given the history of the war on drugs and the current federal laws imposing harsh criminal and civil sanctions for cannabis, the involvement of the National Guard and the federal government in a new crackdown is concerning. Governor Newsom’s announcement of this increased enforcement, however, comes amid growing frustration with perceived dysfunction in the state regulatory system and a persistent illicit market that crowds out regulated cannabis.
California has a thriving illicit market in cannabis, estimated by New Frontier Data to be valued at $3.7 billion last year. This is due to many factors, including California’s unregulated cannabis collectives and cooperatives that operated for years before licensing came, the slow speed at which state and local governments in California have issued licenses, the high taxes and burdensome regulations of the new licensing system, and the demand for California cannabis products throughout the country.
In a sense, the entire cannabis market is an illicit market, as cannabis remains illegal under federal law, which makes any inconsistent California state law allowing cannabis invalid under the Supremacy Clause of the US Constitution. This federal illegality has caused most banks to refuse to do business with cannabis-linked companies, resulting in a largely cash business that is more difficult to track and regulate than it would be if banks were involved. Federal illegality also makes it so the entire interstate market is illegal and unregulated, though lucrative.
The California Bureau of Cannabis Control, tasked with regulating cannabis retail sales, has issued a few enforcement actions against some unlicensed dispensaries, but the efforts have been largely symbolic, against only a tiny fraction of the unlicensed operators. Los Angeles and other cities have also filed misdemeanor cases against unlicensed operators for violations of local licensing laws, but unlicensed dispensaries seem to pop back up faster than they are shut down.
In order for California’s regulatory project to succeed going forward, the state will need to convince more operators to move to the regulated market, through some combination of greater enforcement and lower taxes and regulatory burdens.
The large illicit market and slow roll-out of the licensing process have shaken the confidence of many people who are attempting to comply with California laws. Hopefully, state and local regulators will take advice from frustrated operators, learn from their mis-steps and continue to develop a functioning system. The state and local governments are trying to find the right regulatory balance. Over-regulation makes it so difficult and burdensome to comply that only rich people and companies with lots of resources can operate, and an expensive final product that leads many consumers to buy from the illicit market.
For now, many license holders are playing the long game, hoping the illicit market will shrink over time, and more consumers throughout the state (and eventually the country and world) join the regulated cannabis market. Governor Newsom says that he expects it may take at least five years to develop its complex regulatory system. If the state gets it right, this can be an industry that drives the state economy, creating more resources and jobs for everyone.
One approach that could be successful would be to offer a more simplified and inexpensive process to get new cannabis businesses up and running. More burdensome regulations and higher taxes could kick in only after businesses have gotten through the startup phase and adapted to the regulations. There could be a tiered or graduated system of compliance, taxes, and enforcement that is welcoming to new operators. Startup costs for new businesses are already very expensive, and high licensing expenses and a burdensome application process can dissuade many people from pursuing licenses who might otherwise want to follow the law. Lowering the tax rates in the beginning, while businesses get off the ground, could also encourage new entrants to the regulated market. Once businesses become established and there is a healthy regulated market, taxes could be increased to desired levels. The government has many tools available to help establish a functioning market. We are optimistic that the future is bright for the cannabis economy in California.