Undue Concentration and Social Equity Leave Many Angelenos Dazed and Confused
Los Angeles should take steps to promote fairness and reduce the perception of corruption.
The City of LA is moving along with “Phase 3” of its commercial cannabis licensing, the first opportunity for new cannabis businesses to obtain licenses. Verifications from the Department of Cannabis Licensing for Social Equity status, required to apply for one of the upcoming 250 retail storefront licenses, are beginning to roll in. Applicants are seeking to lock down properties in one of the allowed zones and outside 700-foot buffers surrounding schools, parks, existing licensed dispensaries, and other sensitive uses before the September 3 opening of the initial round of 100 dispensary licenses.
While much of the licensing process is straightforward, certain features of LA’s cannabis procedures have left some scratching their heads, and wondering whether the process of awarding the licenses can possibly be fair. One topic causing angst and confusion is the City’s methods for allowing applicants in areas of “undue concentration” to bypass the normal process for obtaining licenses by obtaining special approval from the City Council.
In some parts of LA that have not yet reached “undue concentration,” defined as more than one dispensary per 10,000 people, there is an objective process in place, with clear standards, for applying for and obtaining a cannabis license. But in areas of the City that have already reached undue concentration (including downtown), applicants may obtain a license only by obtaining a finding from the City Council that their existence “would serve public convenience or necessity.” This is done by securing approval from their local councilmember. Without such approval, there is no way to apply for the license. Unfortunately, the City has so far provided no guidance or objective standards as to how anyone is supposed to judge whether a particular proposed dispensary “would serve public convenience or necessity.” It is an inherently vague and ambiguous standard, left totally to the councilmembers’ discretion. Without any transparent regulation in how approvals or denials should be determined, applicants are left out of the process and easily denied the opportunity to a fair and unambiguous chance.
Given the undue concentration rules, some have speculated that councilmembers could threaten to withhold approval of proposed projects unless applicants donated money to funds selected by the councilmember, or could base the approval on any number of any other inappropriate factors. Even if nothing illegal is done, this process will end up favoring large corporations and rich people over small businesses, as the deeper pockets with more capital and access to those in power will take steps to sway City officials in ways that benefit them.
Such a situation could certainly create the appearance of corruption, and is not ideal for a City government already saddled by an FBI investigation. It could also lead to costly litigation from parties who claim to be treated unfairly. In order to address this problem, we would suggest the City drop the entire concept of “undue concentration.” It is difficult to understand why it is inherently bad for dispensaries to be located in areas with other dispensaries. It makes sense that they would be more prevalent downtown, which has many visitors and workers in addition to its residents, or in existing entertainment or shopping districts, or even brand new cannabis-focused districts. The undue concentration laws prevent the most sensible distributions of dispensaries around the City, which would be based on supply and demand, and instead bases the distribution on potentially arbitrary or corrupt decisions of local politicians. Studies have shown that dispensaries increase both safety and property values in a neighborhood. Such new businesses also create jobs and tax revenues. In any event, any concerns regarding over-saturation of licensed dispensaries, to the extent anyone even has such concerns, could be dealt with during the public hearings that are already required for each new dispensary.
Another area that has engendered confusion is the Social Equity program. LA has an ambitious Social Equity program intended to provide special benefits to applicants most likely to have been harmed by the pre-2016 marijuana prohibition. As part of this program, every applicant for one of the next 250 dispensary licenses needs to demonstrate that at least ½ (for Tier 1) or ⅓ (for Tier 2) of it is owned by someone who qualifies as a social equity applicant, based on the right combination of having a prior cannabis arrest or conviction, low-income status, and/or residency for a minimum period in one of certain LA zip codes where the most marijuana arrests have occurred. Beyond this requirement, there is no legal restriction on the relation between investor and social equity applicant,
75 of the first 100 dispensary applications are reserved for applicants owned 51% or more by a Tier 1 social equity applicant, who is required to be both low income (under $45,644 per year) and either (a) have a prior cannabis arrest or conviction, or (b) have lived in specified zip codes with the most cannabis arrests for at least 5 years. Many questions, however, have arisen regarding what it means for the low-income social equity applicant to have the majority equity interest, and how this arrangement will work in practice, given that someone else will have typically invested a lot of money toward startup expenses of the business. The DCR has informed applicants that investors loaning money to a cannabis business for startup expenses may get their loans back with interest before profits are distributed. In addition, dispensaries are allowed to have management agreements whereby the managers of the storefront receive compensation including bonuses based on the performance of the business.
Some have expressed concerns that social equity applicants may end up as mere figureheads, with no substantial financial benefits from the companies, as investors structure contracts so that profits are never distributed to the social equity applicants. This could be done, for example, by entering into a management agreement where the investors are the managers and receive, as performance-based compensation, all of the revenues that exceed the company’s expenses. Under this arrangement, the company would appear to break even every year and never distribute profits, even with large amounts of money distributed to the managers as compensation. Some are also concerned that investors could enter into unpublished “side deals” with social equity applicants, essentially committing a fraud on the City by claiming the social equity applicants are majority owners when in fact they are not. The City’s laws already prevent such arrangements, requiring disclosure of all financial arrangements, but many are concerned regarding whether or how this will be enforced, and whether people trying to follow the law will be able to fairly compete with those who flout the law.
The City could add some minimum standards to the social equity program that would ensure social equity applicants receive tangible benefits, as the program was intended. One workable standard could be a requirement that the social equity applicant either be provided a job at the new business making at least a minimum income (say, $70,000), or if no such job is provided or available, that the social equity applicant is entitled to receive at least a specified portion of revenues before they are distributed to lenders or managers.
We hope the City continues to take steps to ensure everyone is treated fairly, to avoid the appearance of corruption, and to promote the laudable goals of the social equity program. A good start would be to eliminate the ill-advised undue concentration policy, and to publish minimum objective standards for the social equity program so that everyone is playing by the same clear rules.
Individuals interested in Phase 3 Retail and Delivery licensing must submit SEP eligibility verification documents for review by DCR Staff.
Why must I complete the SEP Applicant Eligibility Verification Process?
In order to be eligible to apply in Round 1, Round 2 and the Delivery Pilot in Phase 3, potential social equity applicant must complete this.
When must I do this by?
July 29th, 2019 is the deadline.
Who is eligible to participate in the City’s Social Equity Program?
Individuals who are considered low income ($45,644 or less), have past cannabis arrests and or convictions and those that live in Disproportionately Impacted Areas (districts with the highest cannabis-related arrests) are eligible to participate in the City’s Social Equity Program. (https://cannabis.lacity.org/licensing/social-equity-program). Check to see who qualifies for social equity and priority processing for licensing by taking the quiz linked below.
Please see our quiz on eligibility. (click link)
The City of Los Angeles confirms that there is no maximum number of individuals who can be verified during the SEP Eligibility Verification Process. Therefore, it is not too late to be able to apply for a retail license during Phase 3!
What is the SEP?
The SEP provides applicants assistance in navigating the City’s cannabis licensing process – whether it be technical or business related. This is especially helpful for first-time legal cannabis business owners.
However, if you have additional questions on how to operate a licensed cannabis business, please ask our attorneys at Margolin & Lawrence as the Social Equity deadline is quickly approaching! We are proud to be one of the few jurisdictions in the United States that is persistent on addressing those that are disproportionately impacted by the War on Drugs.
New Jersey Governor Phil Murphy recently signed a bill renewing New Jersey’s medical marijuana program. Murphy signed the Jake Honig Compassionate Use Medical Cannabis Act into law.
Recently, rumors and misinformation have circulated surrounding LA’s “undue concentration” rules for commercial cannabis licensing. The undue concentration rules have not been eliminated, as some have falsely claimed. LA has recently changed details about the policy, in a way that will allow more retail dispensary licenses to be issued sooner. Some have feared, however, that the latest changes may introduce an element of unfairness to the licensing process.
California approves bill to extend provisional permits, curtail illicit cannabis firms
The California Legislature approved – and Gov. Gavin Newsom signed into law – a marijuana regulatory package that includes both an extension for provisional business licenses and a new tool for regulators to crack down on unlicensed growers and retailers.
On June 11, 2019 the California Senate approved an amended version of Assembly Bill AB-97 effectively allowing state agencies to issue provisional licenses to all cannabis operators -- including those who do not currently hold a temporary license. Under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), which regulates the licensure of cannabis in the state of California, only those who held or hold a state temporary license for the same premises and commercial activity applying for were eligible to obtain a provisional license prior to the recent amendment of AB-97. The new legislation will allow new cannabis businesses who have not received temporary licenses from the state to directly apply for a provisional license following approval from their local jurisdiction.
On Tuesday, May 28, the Los Angeles City Attorney Michael Feuer filed a draft ordinance regarding retail cannabis licensing.
While much of California continues to break boundaries on legalizing cannabis, Oakland is poised to follow in Denver’s footsteps in bringing a different substance to the mainstream: natural psychedelics.
Many jurisdictions across California allow cannabis to be sold at brick-and-mortar retail stores and dispensaries, while many either ban or severely restrict storefront sales. But what is the legal status of cannabis delivery businesses – operations that sell medical or adult-use cannabis to customers, but operate only on a delivery basis?
As they present a unique category of cannabis activity, delivery-only businesses are treated differently than storefront retail, which often means they use a separate application process as well. Here's the status of delivery-only cannabis retail in the largest cities in the Bay Area:
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).
Wednesday, April 17 - The City of Los Angeles Rules, Elections, and Intergovernmental Relations Committee discussed and approved an April 12, 2019 report and proposed ordinance from the LA City Attorney regarding cannabis licensing, with recommendations to make some amendments.
All recommendations were approved and will be redrafted for Council consideration and presented on Tuesday, April 30.
Today’s meeting moves the City closer to the opening of the highly anticipated Phase 3, which is the first chance that will allow the general public to receive dispensary licenses. The City Attorney was directed to make requested changes to the proposed new ordinance, to present for City Council consideration on April 30.
Notable Takeaways from Wednesday’s Meeting
The City of Los Angeles and the DCR have been hard at work in recent months, particularly as they sort through the specifics of Phase 3. While Phases 1 and 2 focused on existing cannabis dispensaries, non-retailers (i.e. growers and manufacturers), and social equity applicants, Phase 3 has been the main attraction for many entrepreneurs and would-be business owners looking to break into the industry.
In an earlier April meeting, the fate of Phase 3 was largely unknown due to funding. The DCR claimed that licensing was on hold as they awaited the Fee Deferral Program, which would allow Phase 3 to commence.
While a date has not been announced for the opening of Phase 3 applications, Wednesday’s meeting shed some light as to the direction the City and DCR are taking to solidify the process.
Among the notable new details that are coming out through these recent meetings and reports are:
● Changes to the Los Angeles Municipal Code establishing a first come, first served application process for retailer commercial cannabis activity licenses, with details regarding what is required for an application to be considered complete
● A proposal to allow applications for retail storefront dispensaries beginning January 1, 2020, in neighborhoods that have already exceeded Undue Concentration caps, with City Council approval
● Modifications to the process for issuing non-storefront retail licenses
● Allowing the Department of Cannabis Regulation (DCR) to grant Temporary Approval to Phase 3 storefront retail applicants
● Exempting Phase 2 applicants from the Undue Concentration requirements
● Setting deadlines for Phase 2 applicants to finalize their business location (May 15) and obtain Temporary Approval (substantial progress by July 1)
● Revising various requirements to qualify as a Tier 3 Social Equity Applicant and revising various benefits provided to Tier 1 and Tier 2 Social Equity Applicants
● Adding an additional reason to deny a license application — if the City has taken enforcement action against unlicensed cannabis activity at the same address since January 2018
● Clarifying the definition of license ownership relative to management companies
In addition, one of the recommendations to the draft ordinance that was approved on Wednesday was to instruct the DCR to finalize a timeline for all Phase 3 and Type 9 Pilot activities and post the information on the Department’s website. This indicates that an exact date for Phase 3 licensing could be established by April 30, if not sooner.
The LA City Council held a meeting today to follow up on the April 1 meeting of the Budget Committee and approve the recommendations made on April 1. After a good deal of discussion about the enforcement efforts against unlicensed dispensaries, the City Council approved all the recommendations with only minor revisions. This means the licensing process can now move forward.
The funding approved today by the City Council will allow the Social Equity Program to move forward, which is an integral part of the upcoming Phase 3 licensing process awarding cannabis licenses to new businesses in the City of LA. So far, the licensing has been delayed while the City has worked through issues surrounding the Social Equity Program. We are still waiting for the City to announce details of the timing of the next phase of LA cannabis licensing. This phase will start with the issuance of 200 retail storefront and 40 retail delivery licenses, issued largely to Social Equity applicants.
Now that the City Council has approved the Social Equity funding, we expect the licensing to open up soon, and now is the time for anyone interested in applying to find a property and get all the elements of their applications in order.
Before the ruling on the Social Equity funding, there was an update on enforcement efforts against unlicensed cannabis businesses, including utilities disconnects, cease and desist letters, and search warrants.
So far, the City has been shutting down the illegal businesses bureau by bureau. The City started the crackdown in the Valley, where it has gone to 22 locations, with 10 more scheduled for next week when it will be finished with the Valley. Then, it will move to the South bureau, where it will start with 10 locations in the Harbor area, and then move to the Southeast. The City has also been disconnecting utilities from unlicensed businesses in the past month. $2.3 million has been set aside by the police department for cannabis enforcement.
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.