The Department of Cannabis Regulation (DCR) has just confirmed that it is now processing requests for ownership changes to existing Phase 2 (non-retail) cannabis licenses in Los Angeles. This long-awaited news is a game-changer for savvy investors and license holders alike, as it opens opportunities to buy or sell shares of the 139 cultivation, manufacturing, and distribution businesses that are licensed under Phase 2 in Los Angeles.
Los Angeles City Council President Herb Wesson has called on the city's Department of Cannabis Regulation (DCR) to suspend all Round 1 applications in light of recent allegations that the online application process was compromised. In his letter to DCR's Executive Director, Wesson urges that the City "1) suspend all Retail Round 1 applications; 2) refund all monies paid by Retail Round 1 applicants and cancel all invoices; and 3) prepare a full audit and report by an independent third party not involved in the process -- unless there are other options like processing every application..."
Don't panic. Although the first application cycle for cannabis retail licensing in the City of Los Angeles closed this morning, the real fun is only beginning. After today, the City’s Department of Cannabis Regulation (DCR) will begin to process and review applications submitted in Round 1. Over 800 applications were submitted in the first round, but only 100 applicants will be issued a license through this electronic process. Applicants who are unable to obtain a license in Round 1 of Phase 3 will be eligible to apply for one of the 150 licenses to be issued in Round 2, although it is anticipated that the final round will yield an even larger applicant turnout. However, applicants can apply for a license in an area of undue concentration, and there is no limit on the number of licenses that can be issued through the undue concentration process. Under Los Angeles Municipal Code (LAMC) SEC. 104.20 (Part a.), the number of Social Equity licenses to non-Social Equity licenses is 2:1, which means that if 190 licenses were issues through Measure M Priority Round 1, 380 should be issued through a combination of Round 1 and Round 2 Phase 3 processing, and the "Public Convenience or Necessity (PCN)" process (for areas of undue concentration) described below. If the city abides by its own ratio, 130 retail storefront licenses will be authorized in addition to the 250 through the electronic process.
WHAT IS "UNDUE CONCENTRATION?"
Phase 3 applicants are subject to the “undue concentration rule” passed into LAMC which restricts business location eligibility based on data from the 2016 American Community Survey, not on any state law requirements. The rule sets a limit on the maximum number of licenses that can be issued in each Los Angeles Community Plan Area. The implementation of undue concentration in Los Angeles further complicates what is already a difficult task for many hopeful cannabis entrepreneurs who have been verified for the City’s Social Equity program, which aims to provide priority licensing and accessibility to individuals who have been disproportionately impacted by the war on drugs. Phase 3 Social Equity applicants must find properties that meet not only the plethora of other local requirements (e.g., correct zoning, 700 feet distance from any other dispensary or “sensitive use” areas) but also within specific communities that has not reached their license cap -- unless the candidate is able to successfully lobby City Council to approve them through the PCN process.
THE PUBLIC CONVENIENCE OR NECESSITY (PCN) PROCESS
The "Public Convenience or Necessity (PCN)" process. process was established by the City Council and passed into LAMC to provide applicants who wish to apply for a license in an area that has already met undue concentration a chance to appeal their ineligibility based on the undue concentration rule. Applicants must submit an online application and pay a $1,499 PCN request fee to be routed to the City Council. Then, applicants must lobby the City Council to receive their approval and become eligible to apply for a license in an area that is undue.
Six of the 36 Community Plan Areas in Los Angeles have already met undue concentration. These areas were deemed unduly concentrated (with zero licenses available) prior to the Round 1 application cycle which began on September 3rd. At that time, several other Community Plan Areas had as few as two or three licenses remaining. These numbers can be viewed for each Community Plan Area on the DCR’s interactive map. The DCR will only issue the number of licenses indicated as “available” on the map in each Community Plan Area during Round 1, and licenses will be distributed on a first-come-first-serve basis. Therefore, even individuals who applied for a Round 1 license in an area outside of the six that have already reached undue concentration are subject to the consequences of the regulation and may be routed to the PCN process. In its review of applications submitted during Round 1, the DCR will issue licenses to eligible applicants on a first-come-first-serve basis (i.e., applicants with an earlier application timestamp will be processed first).Once an area becomes unduly concentrated, Round 1 applicants with later submission timestamps will automatically be routed to the PCN process unless their location is within 700 feet of a sensitive use property or another dispensary. Although the application window for the 100 Round 1 licenses closed this morning, the online PCN application will remain open for applicants that did not apply during Round 1 and wish to apply for a license in an area of undue concentration.
Other cities and municipalities in California who have not enforced additional location requirements like the undue concentration rule -- including Oakland, the very city Los Angeles modeled its Social Equity program after -- attest to the rule’s redundant and excessive nature. The 187 businesses currently holding retail licenses in Los Angeles who applied in Phase 1 as Existing Medical Marijuana Businesses (EMMDs) were also not subject to this rule. In addition, places like the Oaksterdam cannabis dispensary district in downtown Oakland have been havens of community, not crime. Moreover, the unfairness that can result from a system like the PCN process -- which has essentially no guidelines and is subject to the very sticky nature of local politics -- would be eliminated if the City simply allowed everyone who applied to run a dispensary, so long as they respected the sensitive use requirements other than the intradispensary buffer. Our firm will continue to advocate for the eradication of the undue concentration restriction but is helping applicants navigate the requirement and its consequences since the situation does exist presently.
WHY YOU WANT US TO LOBBY FOR YOU
Over 800 applications were submitted in Round 1. It is likely that several more Community Plan Areas in addition to the existing six will become unduly concentrated and applicants in these Areas will be required to undergo the PCN process - regardless of whether or not their Area was one of the original six. Given the high degree of uncertainty regarding who will be subject to the PCN process, our team is proactively preparing to take the first steps of a PCN appeal for each and every one of our clients who applied during Round 1.
Margolin & Lawrence has obtained over 200 state and local cannabis licenses throughout California and one in Massachusetts. Our founding partners, Allison and Raza, have litigated cannabis and other drug cases throughout their careers ( 17 and 16 years, respectively ) across the state and federal courts of our country, and have appeared in Hawaii, Utah, Nebraska, and Nevada, just to name a few. Our years of experience trying marijuana cases in front of juries has trained us for the battleground that is city politics.
Their experience fighting the war on drugs and fighting for drug and marijuana defendants, specifically, gives them the credibility to discuss the Social Equity program and their clients' willingness to re-enfranchise those who have been systematically excluded. Our firm was founded on the same core values as those of the Los Angeles Social Equity program. Allison and Raza have demonstrated a passion for drug legalization and criminal justice reform throughout (and even before) their careers.
Allison began her drug law reform efforts at age 12 when she discovered the insanity of the drug war while writing her sixth grade DARE essay on the Medellín Cartel. Her parents' careers as criminal defense attorneys and advocacy for drug law reform gave her an early and rare insight into the traumas inflicted on people, by the criminal justice system. During her time as a Harvard law student, she published her thesis On the Right to Get High where she argues for the decriminalization of all drugs and states that current state and federal laws are unconstitutional.
Before working with Allison in 2009, Raza worked at the CATO Institute, the ACLU, and the Center for Individual Rights fighting on behalf of individuals who have been disproportionately impacted by the war on drugs. He was also a federal clerk for the 9th Circuit Court of Appeals. Together, Allison and Raza founded their 501c4-registered lobbying firm, Advocates for Healing America, in order to advocate for drug policy reform and provide support to political candidates with a like-minded agenda.
Margolin & Lawrence remains committed to our founding values and will continue to do everything in our power to ensure we help individuals who have been who have been disproportionately impacted by the war on drugs. Our current efforts are aimed towards ensuring that victims of this war have the access they deserve to reparative government programs such as the Los Angeles Phase 3 Social Equity licensing process.
If you have applied for a Round 1 retail license or if you are seeking to apply for a license via PCN or Round 2, we invite you to contact a member of our team immediately to discuss how we may be able to advocate on your behalf. We cannot take clients with retail properties that are within 700 feet of our current clients and are accepting new clients on a first-come-first-serve basis. Therefore, we recommend contacting a member of our team sooner than later to minimize the chances of conflict.
Just yesterday, the Department of Cannabis Regulation (DCR) opened up the application process for Round 1 of Phase 3 retail storefront licenses in the City of Los Angeles. Due to heavy restrictions and high demand, appropriate locations for these storefronts can be difficult to come by. Many applicants have locations which meet all guidelines, yet still fall within a community plan area that has reached “undue concentration.” Here’s the 411 on what is expected to happen after the opening of Phase 3 Round 1 applications:
(Picture of DCR building in Los Angeles)
On August 6, 2019, M&L partner J. Raza Lawrence attended the Phase 3 Round 1 Licensing and Social Equity Workshop hosted by the Department of Cannabis Regulation (DCR). The DCR provided an update on Phase 2 applications, the Social Equity Program, and the application process for Phase 3.
Requirements for Phase 3 Application
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.
On Tuesday, May 28, the Los Angeles City Attorney Michael Feuer filed a draft ordinance regarding retail cannabis licensing.