California cannabis leaseCalifornia is in the middle of building a massive regulatory structure for licensing medical cannabis businesses. Though we already knew that the state will be giving priority review to existing collectives “in operation and in good standing with the local jurisdiction by January 1, 2016,” last week, we learned from the state’s chief cannabis regulator that California will be issuing temporary licenses this fall to applicants with prior local approval. This is ahead of the state’s January 1, 2018 deadline to generally begin accepting license applications, and it highlights the importance of gearing up as soon as possible. The first steps for that involve securing property to lease.

We have written about some nuances in lease provisions for commercial cannabis tenants in California, but the state’s rapid timeline for licensing creates some unique problems. Here then are a few things you should consider including in your California commercial cannabis lease to address uncertainty in licensing and to help streamline the licensure process:

  1. Clearly and narrowly define the permitted use and the controlling law. It’s important to restrict the use of the property and to establish boundaries for indemnification purposes, and particularly important for laying out the basis for complying with applicable local law as a precursor to applying for a state license. The proposed regulations under the Medical Cannabis Regulation and Safety Act (“MCRSA”) require tenant applicants to demonstrate they have the right to conduct their specific proposed business activity on the premises, as demonstrated by a lease agreement. MCRSA also requires proof of approval from the local government. Lease language should include obligations to use the premises only in conformance with the specific regulations applicable to the tenant’s proposed use and in accordance with the terms of the local permit or other approval, as well as with all local laws.
  2. Mandate local approval from the get-go. Though a state-issued cannabis license is more of a forward-looking proposition at this point, local approval can and should be sought before the parties put pen to paper on their lease agreement. A common mistake is for a tenant to invest in a cannabis facility build-out or start buying equipment and supplies before getting all necessary local inspections and permits, or before confirming compliance with zoning and land use laws. The lack of building permits is a classic basis for a municipality’s after-the-fact decision to label a tenant’s cannabis business a nonconforming use (for more on recent California land use disputes, see here). The bottom line is that the parties need to know ahead of time whether the locality will allow the use, and if so, exactly which existing and proposed local laws the tenant will be expected to follow. The lease should prohibit the tenant from engaging in any cannabis activity without express written approval from the locality, preferably through a permit.
  3. Lay out a state license application timeline. California has said that it will begin accepting license applications as of January 1, 2018, but it has also confirmed that it will accept applications for temporary licenses as early as this coming fall. The lease should therefore contain an obligation for the tenant to begin the state application process for the specific type of license sought, upon its execution. Proposed regulations for some types of licenses allow the applicant to continue operating if it was operating in compliance with local law prior to January 1, 2018 and has submitted its application to the state before July 2, 2018. The parties may carve out an allowance for such a scenario, but they should also include an obligation to secure a state license by a certain date or the lease may be null and voice.
  4. Assign responsibility for application costs. Tenant applicants can expect to incur standard license application fees and costs, but under the proposed regulations, certain applicants will need to demonstrate compliance with California environmental laws, either through certification by the local permitting entity, or if no local permitting system exists, then through an environmental impact report (EIR) commissioned by the tenant. The lease should set out a timeline for an anticipated EIR, if one is necessary, and should clarify that all such costs shall be borne by the tenant.
  5. Include an out for failure to obtain a license. In line with number 4 above, if the tenant ultimately fails to acquire a state license under the timeline in the lease, then, regardless of the reason for the failure, both parties will want to be relieved of their lease obligations. The tenant will be unable to collect revenue for rent, and the landlord will not want to be stuck with a non-paying tenant. The lease should include failure to obtain a license within a certain period of time as an event of default.

California is still in unchartered territory as it seeks to create and implement a complex regulatory structure over the country’s oldest and largest cannabis business ecosystem, and it remains to be seen what the final rules for medical will look like, and how they will reconcile with the yet-to-be-released rules for adult use cannabis. But in the meantime, cannabis entities seeking to be the first participants in the regulated marketplace (and their landlords) need to carefully consider how their lease relationship is going to be affected by the licensing process.

Bye Bye
     “GOODBYE TO ALL THAT”

On Tuesday, Enrolled Senate Bill 1057 was signed by the President of the Oregon Senate and the Speaker of its House. The bill now sits on Governor Kate Brown’s desk, where it awaits signature. Anyone who has followed the Oregon cannabis story for the past few years knows Governor Kate Brown has never not signed a cannabis bill that made it to her desk — and, to be very clear, even if an Oregon bill goes unsigned and unvetoed for 30 days, it still becomes law. As to SB 1057, we fully expect its approval in the next 30 days, which is a big deal. That is because SB 1057 makes some sweeping changes, especially to Oregon’s medical marijuana program.

Below is a bullet point list of the bill’s key provisions, cribbed from one of the Staff Measure Summaries for the Joint Committee on Marijuana Regulation. I have highlighted provisions of emphasis in bold, and points of superior emphasis in bold + italics.

  • Allows Oregon Liquor Control Commission (OLCC) authority to prevent the illegal transfer or diversion of marijuana from OLCC licensees.
  • Allows an OLCC marijuana licensee to be designated by the OLCC as an exclusively medical licensee.
  • Increases the number of commissioners on the Oregon Liquor Control Commission from five to seven.
  • Specifies one of the additional commissioners must be from western Oregon and the other new commissioner from eastern Oregon.
  • Limits the number of commissioners from one political party to four.
  • Allows specified OLCC licensed marijuana producers an additional 10 percent of their existing canopy square footage to produce marijuana for medical use.
  • Requires marijuana producers who do utilize this additional canopy square footage to donate for free 75 percent of the marijuana produced, and allows the remaining 25 percent to be sold to OLCC licensed marijuana businesses.
  • Prohibits an OLCC regulatory specialist from carrying a gun, conducting inspections of primary residences not licensed by OLCC, or ensuring compliance with Oregon Medical Marijuana Program (OMMP) registrants.
  • Allows OLCC to issue a letter of reprimand or to proceed with an investigation of a former OLCC marijuana licensee.
  • Allows an OLCC marijuana licensee to transport marijuana items to, and exhibit at, trade shows or the 2017 Oregon State Fair under certain conditions.
  • Allows OLCC to require persons with a financial interest in a business with an OLCC marijuana license to submit specified information to the OLCC.
  • Adds an identification card from a federally recognized Indian tribe to the list of allowable documents verifying age when purchasing marijuana.
  • Requires marijuana produced and transferred within the OMMP system be tracked by the OLCC tracking system.
  • Specifies funding for the tracking system to be paid from the Oregon Marijuana Account prior to any other distribution.
  • Requires Oregon Health Authority (OHA) to impose an additional fee on marijuana grow sites, processing sites, and dispensaries to pay costs incurred by the tracking system.
  • Specifies timelines for tracking system phase in.
  • Directs OHA to create a database sharing OMMP registrant information with OLCC and the Department of Revenue.
  • Specifies information in the database is not eligible for public disclosure.
  • Moves marijuana labeling authority from the OHA to OLCC.
  • Clarifies that an OMMP cardholder may jointly possess six medical marijuana plants under OMMP in addition to four marijuana plants allowed under Measure 91.
  • Limits the allowable number of immature marijuana plants in possession of an OMMP cardholder to 12 unless their address is a registered medical marijuana grow site.
  • Limits the allowed number of immature medical marijuana plants at registered medical marijuana grow site to twice the number of allowed mature marijuana plants.
  • Allows the Oregon State Department of Agriculture to possess, test, and dispose of marijuana.

The fundamental current running through this bill is the continued transfer of Oregon medical marijuana to OLCC purview, something we have been writing about and predicting for quite a long time. (See our articles here, here, here, here and here.) In this legislative session, Oregon is making a conscious choice to regulate marijuana less like a public health issue (medicine) and more like a revenue commodity (alcohol). In speaking with OLCC and reviewing a few of the other bills in committee, we only expect this trend to continue. I note that this trend is happening not just in Oregon, but in Washington State too, and — like it or not — we expect most other states will follow this trend as well.

Because Oregon’s medical marijuana program continues to be a major source of grey and black market activity, the state is also making a concerted effort at controlling diversion through SB 1057. By requiring medical growers and processors to track their output in the OLCC system or forfeit their registrations, the state is attempting to put an end to 20 years of growers stacking patient cards for profit. As with moonshine stills in the 1930s, these growers will have to decide whether to: (1) meander into the bona fide regulatory fold; (2) continue making medicine for patients at a very small scale; or (3) recede to the illegal market and attempt to evade ramped-up enforcement.

As for compliance dates, each medical grow site, processing site and dispensary (if any OHA dispensaries still exist) must notify OHA prior to December 1, 2017 whether it has elected to remain in the medical program—subject to increased costs and OLCC tracking—or whether it will apply for an OLCC license outright. If the person or entity stays in the OHA program, seed-to-sale tracking must begin on or before July 1, 2018, or OHA will revoke the registration. There is some nuance to all of that (see bill Section 44) but that is the general concept.

Like the notion of taxing medical marijuana sales, eradicating the Oregon Medical Marijuana Program seems to be a third rail down in Salem. So expect the legislature to continue to chip away at the program with bills like SB 1057. At this point, entrepreneurs should be thinking about, and engaging in, the OLCC program exclusively. As we said in October, the OHA regime will soon recede to strictly limited, patient-caregiver relationships. The money there is gone.

california-webinar (1)

In exactly one week, on June 1, starting at noon Pacific time, three of our Los Angeles and San Francisco attorneys, Hilary Bricken, Alison Malsbury, and Habib Bentaleb, will be putting on a FREE webinar on California’s MCRSA rules. These rules came out less than a month ago and they now make up the bulk of the regulatory standards for California cannabis licensing.

Our speakers will extensively discuss these new rules and give you the information you need to secure a California medical cannabis business license.

This webinar will cover cannabis licensing issues for California Retailers, Distributors, Transporters, Manufacturers and Cultivators

The presenters will take audience questions both during and at the end of the webinar.

To register for this free event please go here.

We’ll see you there.

Marin County Cannabis
Marin County Cannabis: fog with a bit of sun

We’ve written recently about Marin County in our Cannabis Countdown series. We started with a history and update of Marin County’s medical cannabis ordinance. We then followed up with an update when the County Administrator rejected all ten applicants for medical cannabis dispensary licenses in Marin County (unincorporated Marin that is). Of the ten applicants that were denied, eight filed appeals to the rejections by the County Administrator and seven presented oral arguments before the Marin County Board of Supervisors and the public on May 23rd (one applicant withdrew its appeal before the hearing).

Before hearing the appeals, the County Administrator and Marin County Board of Supervisors released their reasoning behind their rejection of the applicant’s request for medical cannabis dispensary licenses. Although they varied from applicant to applicant there were a couple of common threads our readers will find useful:

  1. Applicants that did not have prior experience running cannabis dispensaries were facing an uphill battle. Sure, people can learn on the job, but a lack of experience is not going to be viewed favorably. If an applicant did not have a substantial background running cannabis dispensaries it was one of the first things the Board of Supervisors pointed out.
  2. The tiniest details do matter, especially if you’re hoping to open up a cannabis business in a jurisdiction that’s apprehensive about allowing in cannabis businesses. The Marin County ordinance listed 17 criteria for review in determining whether to grant or deny a medical cannabis dispensary license (See Section 6.85.061 of Ordinance 3639). Make sure your application clearly and forcefully addresses every single one of these areas for review because if you don’t, your minor oversight(s) could very well be the cause for denying your application. This is something we know well from the hundreds of cannabis applications we have done in multiple states (mostly California, Washington and Oregon).
  3. Not every locality is ready to open up to for-profit cannabis businesses. Mind you, I’m not talking about recreational cannabis use under the Adult Use of Marijuana Act (AUMA) but for-profit medical cannabis businesses allowed under California’s Medical Cannabis Regulation and Safety Act (MCRSA). The Marin County Board of Supervisors was quick to point out if an applicant was well-positioned to convert from a non-profit entity to a for-profit one. They were concerned that a for-profit entity would be more concerned about sales than the health concerns of their patient members and being a good community partner. Such a concern may have been unfounded but it didn’t diminish the weight the board placed on the distinction between non-profit and for-profit cannabis businesses.
  4. This is California so don’t ever forget about traffic and parking. The Board considered either a likely increase in traffic or insufficient parking spots as an issue with every single applicant. America is a pretty divided country on many issues right now, but I’ve yet to see a pro-traffic party so be prepared to address this issue as everyone is concerned with it.
  5. Public support is important. What was clear from the start was that most of the applicants had learned their lessons from the public hearings previously held during the application process – which were overwhelmingly attended by those against cannabis businesses. There were many people in the audience there to support of the applicants, as demonstrated by stickers favoring certain dispensary applicants and more encouraging comments when the floor was open to the public. Practice, practice, practice. Although not a stated reason for their rejection, it was clear some of the applicants did not spend enough time properly preparing their oral arguments to the Board of Supervisors. Your attorney represents your business so select them wisely. It’s also important to highlight that tone matters. One applicant seemed to treat the Board with outright contempt. You may find yourself before that board again or word of your behavior will travel across the state and imperil your future endeavors; so take a deep breath before you tell a Board of Supervisors at a public hearing how you really feel. Not a good strategy.

Professionalism, tone, and demeanor are especially important because although the Marin County Board of Supervisors dished out heavy doses of stick, they also dangled a carrot at the end of the hearing by requesting the County Administrator’s office and its working group report back to the Board with suggestions for a medical delivery business licensing plan. There’s no denying that these hearings were a momentary setback for the medical cannabis movement in Marin County but there were some positives to take away. First and foremost, the Board of Supervisors reiterated its desire to provide Marin County residents with safe access to medical cannabis and to structure a licensing program to meet that need. Second, Marin County and its municipalities will want to address this issue or they will continue to lose significant tax revenue to neighboring counties. Yesterday was not a good day for cannabis in Marin County, but there are more days ahead.

Cannabis trade associationsLast week, we wrote about a new cannabis industry group in Oregon, the Craft Cannabis Alliance. In addition to national groups like the National Cannabis Industry Association, more and more regional, state, and local cannabis trade associations have been forming. Generally, they begin with political goals in mind. The national groups work toward marijuana legalization at the state level and on lifting restrictions at the federal level. State and local cannabis groups typically work for specific regulatory fixes or lobby local governments to resolve land use challenges. When cannabis trade associations go beyond run of the mill lobbying work, however, they can present legal risks to their members with potentially harsh consequences. Specifically, if trade association members take steps to limit their competition with one another, they can face massive civil penalties.

Competition law, referred to in the United States as antitrust law, has both federal and state components. Federally, antitrust law stems from the Sherman Act of 1890, the Federal Trade Commission Act of 1914, and the Clayton Act of 1914. The Sherman Act prohibits every “contract, combination, or conspiracy in restraint of trade.” The Sherman Act has been interpreted by courts over the years not to outlaw every restraint of trade — it specifically targets “unreasonable” restraints such as price fixing, dividing markets, and rigging bids. Most states also regulate unfair competition. In Washington State, we have the Consumer Protection Act, which largely mirrors the Sherman Act’s prohibitions in restraint of trade.

In most international jurisdictions, actions for violation of competition law are limited to governments. In the United States, however, both state and federal statutes provide for private rights of action. This means private parties that are damaged or potentially damaged by unreasonable restraints of trade may be able to collect treble damages, attorney’s fees, and injunctions against any company that is a party to the unreasonable restraint of trade.

Trade associations, then, provide an easy pathway to violations of state and federal competition law. Many of the smaller regional trade associations are focused on a specific sector of the industry. Retailer groups as well as cultivation groups have formed across the legal cannabis states in the western United States. Imagine this situation: a trade group made up of farmers meets to discuss lobbying on state pesticide rules. As the meeting winds down, conversation turns to talking about the glut of supply in the market, driving down prices. One producer says she has no plans whatsoever to sell below a certain price. Another producer says the same thing, and others nod in assent – agreeing it would be unprofitable for any of them to sell below that price.

That conversation can create huge liability problems for all its participants and for the trade group as a whole. Even if there isn’t a formal written agreement, an aggrieved party could still show an unreasonable restraint of trade. Actions of an association or actions of its members consistent with an unreasonable restraint of trade can be evidence of an agreement of the association’s members. Certain agreements, including price-fixing and market allocation agreements, can actually be crimes that include jail time. And though federally criminal conduct is nothing new for participants in the cannabis industry, those that violate competition law are not even granted the minimal protections of the Cole Memo.

Trade associations are particularly susceptible to certain types of anti-competitive behavior. Associations with codes of conduct, standard setting, and certification can unwittingly create anti-competitive behaviors. If a provision of the code of conduct is unreasonable and deemed to act as a restraint of trade — as opposed to a reasonable attempt to pursue a legitimate goal –could make association members that act pursuant to that code section liable for antitrust violations. Judges and juries have large amounts of discretion in determining whether a restraint on trade is unreasonable or not, so a legitimate safety standard to one person may be an illegal attempt to force a boycott of a competitor to another person.

Trade associations need to take steps to ensure their group does not create antitrust liability for its members. Anti-competitive agreements can be inferred if two or more market actors are taking parallel action and it can be shown that the competitors have engaged in illicit communications. So it makes sense for a trade association’s leadership to run tight meetings. All business should be formally proposed to an executive committee, which then limits discussion at broad group meetings to the specific business on the table. Agendas and presentations can be distributed in advance, and participants should be informed to stick to the specific issues at hand. Leadership can further inform the members that certain topics are completely off limits: pricing, whether to do business with certain market participants, decisions regarding company product output, and complaints about the business practices of other companies.

By taking these steps, an association can help prevent its meeting minutes from being used as proof of anticompetitive conduct. And if individual members engage in such conduct with one another, it is easier for other members to claim they were not involved in the anticompetitive acts.

There are many areas of law that the young cannabis industry hasn’t had major problems with yet. Products liability laws, antitrust laws, and others have seemed like distant problems, given that simple banking and taxation has been such a problem. But it is vital for industry members to remain proactive. Otherwise, public and private actors can upend the industry with a well-timed lawsuit.

Cannabis Production

So you’ve set your sights on joining the next generation of Oregon cannabis producers. Congratulations! You’ve identified talented growers, you’ve resolved the intractable indoor vs. outdoor cannabis growing dilemma, you’ve saved up some money, and now you are eager to get your cannabis operation up and running.

But what’s next? Your first question is a classic: Where will I grow?

When you apply for an Oregon Liquor Control Commission license, you will need to prove you have a deed or lease to an eligible property. A letter of intent to lease or to purchase will also suffice, but the OLCC will not actually issue the license until you close the lease or sale. You should work with a realtor with experience in the cannabis industry to identify a few possible locations. As you begin your search, remember the following:

Not all counties and cities are alikeOn the most basic level, you need to be aware of the various cities or counties that have banned recreational producers outright. The OLCC maintains a list of these hostile local governments and you may be sad to hear that Grass Valley, Oregon is still off-limits!

Even the cannabis friendly local governments vary significantly in their local requirements, with some counties going to great efforts to be cannabis friendly, and others putting up an unfortunate amount of red tape. An exhaustive county-by-county or city-by-city analysis is beyond the scope of this post and we recommend you speak with cannabis entrepreneurs and professionals who have worked with your top choices for county or city to get a sense of potential local government roadblocks.

Distribution Channels. Though rural land is likely cheaper, your best markets will likely be in the cities. It is never too early to begin cultivating relationships with wholesalers, processors and even retailers to help bridge this gap. Proximity to testing labs is also a plus.

Perform Your Due DiligenceOnce you find a location in a friendly area with room for your operation, you need to ensure that the property complies with all state, county, and municipal requirements and regulations. This can be done by thoroughly reviewing county codes, city comprehensive plans, land use regulations, relevant zoning ordinances, and CC&Rs and, in some cases, talking with the appropriate government officials. You also need to be sure your property has access to adequate water as you will be required to show proof of “water rights,” and adequate power.

Failing to do due diligence on a property can have disastrous consequences. We recently had a cannabis client come to my law firm ready to close on a perfect piece of real estate in a location with a cannabis-friendly local government. This company had even paid for certain improvements to the property, and it was just days away from closing on the property transaction. Fortunately, as soon as we were provided the counties’ records on the property, we noted a provision from the 1980s that prohibited their business. We identified this issue just in time to prevent the purchase and free up our client to move on to greener pastures.

Once you’ve acquired rights to your perfect cannabis property, you are ready to apply for a Land Use Compatibility Statement (LUCS) from the local jurisdiction and to begin preparing the property for the OLCC licensing/inspection process. Check back soon for part 2 of this series.

How to choose your cannabis business lawyerThis blog and our Facebook page (which is nearing 175,000 likes) have given our law firm a national and even a global reach. On top of this, our cannabis attorneys have spoken on cutting edge cannabis legal issues in around half of our states. But we do not have a national cannabis practice. No firm does. To practice law in any given state, the lawyer should be licensed in that state. And though our lawyers are frequently retained by lawyers in states in which we are not licensed, the bulk of our cannabis work is in California, Oregon and Washington, where we have our offices and multiple lawyers with a host of specialized cannabis law expertise.

Yet cannabis businesses constantly contact us for legal help in states where we do not usually practice. We are not the right law firm for a cannabis dispensary in Maryland that needs a lawyer to tell it what must do to operate legally there. We are not the right law firm for a marijuana grower in Alaska that wants to make sure it is complying with local zoning laws. We are not the right law firm for a group that wants legal help in structuring a cannabis investment fund for Nevada. And yet we constantly get calls like these due to the dearth of established cannabis business law firms in most newly legalized states.

When one of our existing clients is seeking the right law firm to represent them in states we don’t cover we help them track down the best firm for them. But when a non-client asks us what law firm they should use in one of those states, we are reluctant to provide names. So we instead usually ask them a few questions about their situation and then we suggest a few things they should consider in choosing the best law firm for their company. This post is intended to answer the question of how to choose the right cannabis law firm for your cannabis business. How should you go about choosing a cannabis business lawyer who is both a good business lawyer and the right lawyer for you?

1. Unless you are a really big company for whom money is almost no object, we recommend you avoid “nationwide” legal behemoths with 100+ attorneys. These firms typically have all sorts of minimum fee requirements and all sorts of hourly billing requirements for their attorneys and these things conspire to drive their legal bills into the stratosphere. Why pay for nationwide legal coverage if you have no plans to operate in Massachusetts, Michigan, Texas and Alaska? But if you know that you will be taking your business into both Michigan and Ohio, it might be a good idea to retain a law firm that covers both states.

2. We recommend you avoid solo practitioners and micro-firms (5 or fewer attorneys) as your only source for all your legal advice because they cannot sufficiently cover and address all of the things required to represent a cannabis business, including the following:

  • Corporate law
  • Contract law
  • Intellectual property law
  • State licensing
  • Local zoning issues
  • Real estate law
  • Intellectual property law
  • Government relations
  • Administrative law
  • Compliance law
  • Employment law
  • Litigation
  • Insurance

3. Avoid law firms that do only cannabis law. How good can a law firm be if it does only one thing and that thing only recently came into existence? If they are now nothing but cannabis law, what were they doing before cannabis became legal? How much experience do they really have with representing companies on complicated business transactions or bet your company litigation matters?

4. Avoid law firms essentially made up of lobbyists and/or criminal defense lawyers. Lobbying lawyers are great for lobbying and criminal lawyers are great if you are facing jail time. But if cannabis is legal in your state and you are looking for a law firm to represent you on your cannabis business or your cannabis litigation matters, you need a law firm with experience handling business and civil (not criminal) litigation matters. You need lawyers who above all else know business law and work exclusively in that realm and lobbyists and criminal lawyers need not apply. Whenever we say this, we get a slew of complaints from lobbyists and criminal lawyers who are trying to make the transition to doing business law.

5. Closely review the credentials of the lawyers at the law firms you are considering. Did they go to top tier law schools? Do they have lawyers from a variety of law schools, not just those local to the law firm? Do their lawyers get plum speaking engagements on cutting edge legal issues? Do their lawyers speak before other lawyers (sorry, but speaking at cannabis conventions and teaching at cannabis “schools” should not count for anything but a demerit)? Do their lawyers speak and write on legal issues relevant to your cannabis business? How do their lawyers rank on various lawyer ranking sites? These sites are not definitive, but they can be a good indicator of the law firm’s reputation among the legal community.

6. Speaking of the legal community, if you know and trust any lawyers in the community in which you are seeking cannabis law help, ask them what lawyer they suggest you use.

7. Make sure you like your lawyer. We know most people don’t “like” lawyers, but because the lawyer you choose now may be your lawyer ten years from now, you really should choose someone who is a good fit for you. This means that before choosing the person or law firm that will be representing your business you should be sure you are comfortable communicating with them. If your gut is telling you not to hire a particular lawyer or law firm, you shouldn’t. If their views on cannabis make you uncomfortable because they are too “corporate” or too zealous or too much or too little anything for you on something important to you, move on. The attorney-client relationship should be built on trust and compatibility, and this is even more important when wading into the murky waters of legalized marijuana.

Choose wisely.

Cannabis Marijuana legalization

Imagine that. An American politician speaking clearly and reasonably and sensibly about cannabis, or about anything for that matter.

Representative Curbelo makes a very good point. From both a business and a legal standpoint, it makes no sense to prohibit legal marijuana businesses from doing business properly and at the same time denying them the same tax deductions as other businesses.

It is unfair and wrong and it must and will change.

 

Cannabis litigationCalifornia is in the process of transitioning from its gray market of medical cannabis collectives to a full-blown, heavily regulated regime under the Medical Cannabis Regulation and Safety Act (“MCRSA“). At the end of April, California dropped more than 200 pages of regulation for retailers, distributors, transporters, manufacturers, and cultivators, and it’s now taking public comment on the initial rules. Note that our firm will be hosting a free webinar on June 1 to discuss how applicants can secure licenses under the new regime. Though these rules will no doubt change before (and even after) they are finalized, what won’t change are NIMBYs  who don’t want cannabis businesses near them.

When cannabis businesses come into a community, there can and often will be all kinds of local impact and chaos. We’ve written in the past about various NIMBY lawsuits and how quickly local governments can flip when it comes to non-conforming uses and land use disputes, and that will be the case in California as well, just as it has been the case in all regulated cannabis states.

The entry of the cannabis industry to a state means an influx of entrepreneurs and, with them, an increase in rents in the areas in which they locate. And always there are the angry neighbors who don’t want to smell cannabis harvests every six weeks or so. Most cities and counties zone for growers and manufacturers to be on the outskirts of town or in industrial or agricultural zones and retailers to be in commercial or industrial areas. Occasionally, cities and counties will allow cannabis home farms, but that’s more the exception than the rule.

One of the first notable land use disputes since passage of the MCRSA took place in Santa Rosa, though it’s surely not going to be the last. Most importantly, there is much to be learned from that case. The city of Santa Rosa has welcomed California’s to-be regulated cannabis economy by allowing cultivators and manufacturers to operate in industrial zones. But at least one land developer cried wolf because the city is allowing medium-scale cultivation to move in next door to a long-time planned (but not yet built) residential development.

In February of this year, Fleuron, Inc. applied to and secured approval from the city (through a use permit) to build a 10,000 plus-square-foot cannabis cultivation and processing facility in an industrial zone (on Maxwell Court), part of which was supposed to transition into a residential area. A land developer, who pursued development of apartments for the past 13 years next to where Fleuron wants to build, opposed and appealed the city’s decision and went on record stating that “[i]t is impossible for housing to be built in an area with cannabis uses.” This developer also cited a variety of alleged issues attendant to cannabis grows, like nuisance, public safety, environmental and economic issues. Another nearby apartment land developer said that his investors are “nervous” at the prospect of having a marijuana cultivation site as a neighbor. And a nearby auto-body shop claims to have seen a recent 15% increase in rent attributable to cannabis operators coming in.

Just this week, the city council unanimously rejected the land developer’s appeal against the issuance of Fleuron’s use permit. The city’s mayor even stated that, right now, cannabis seems more “viable as a business than housing.” And council members touted Fleuron’s ownership as “well-regarded, professional businessmen following the rules Santa Rosa established.” Chalk this up as a clear victory for the cannabis industry. But there will no doubt be many more such fights as neighbors in the past have brought nuisance lawsuitsRICO actions, and lawsuits claiming bad odors. Our cannabis lawyers are aware of cases brought against cannabis businesses for creating “marred mountain views,” for making horse riding “less pleasant” during cannabis harvest time, and for loss of business at a hotel where guests allegedly cancelled their reservations upon finding out they were located next to a cannabis business that had not yet even opened.

Though many (most?) NIMBY lawsuits against cannabis businesses have little basis in reality or fact, this does not seem to stop determined NIMBYs from suing neighboring cannabis businesses to try to stop them from ever getting off the ground. NIMBYs are a fact of life in the cannabis industry (our cannabis litigation lawyers have defended enough of these to know this), but smart planning, transparency, and running a compliant business are usually enough to beat them.

We’ve written previously on options cannabis companies have when seeking financing. Since passage of Proposition 64, investor activity has noticeably picked up in California. It’s not surprising, as California is both the largest projected cannabis marketplace as well as home to roughly half of the country’s venture capital investors.

Cannabis Financing 101
Cannabis Financing 101

How are these investments structured? Below is a list of the more common types of cannabis investments we’re seeing, mostly in California, but in Washington State and in Oregon as well, in rough order of popularity:

Equity Financings. Our firm is doing “priced rounds” in the form of Series A equity financings with multiple investors, as well as individual investors purchasing minority ownership interests in LLCs. Cannabis companies are generally (but not always) preferring to have all investors within California so that they can do an intrastate offering for securities purposes.

Debt Financings. Companies with a track record of success are often preferring debt, as are investors that prefer not to have the exposure that comes with equity ownership. However, uncertainty on licensure processes and the timing when companies can fully operate has made payment schedules particularly risky for companies counting on revenues to pay back loans.

Convertible Notes. Convertible debt is traditionally used pre-Series A when a company is developing a product and still determining the size of the opportunity. A Convertible Note corrects for the difficulty in determining valuation at such an early stage by kicking the valuation can down the road to the Series A, but ensuring the investor gets at least as much value (and almost always more value) for their invested dollar, compared to the Series A investor. Typically notes have low interest rates, as investors are seeking equity upon conversion rather than by repayment.

For cannabis companies in California, convertible notes are taking on a new purpose: extending the question of valuation until 2018, when more will be known about the state’s cannabis regulatory regime. Conversion that is not automatic, but rather the option of the investor, also gives the investor an “out” should the investor not like the political climate around cannabis in 2018.

A slight variation on a convertible note is a “debtquity” arrangement where an investor provides a line of credit with a sliding scale of equity issuance based on the amount of capital accessed.

Alternative Financing Arrangements. Cannabis companies are proposing some non-traditional financing structures, such as investment via equipment leases, consulting arrangements, turn-key real estate, or investor-funded capital improvements. These are often a product of investor preferences or investor residency restrictions. Though these alternative financing arrangments are sometimes trickier for the lawyers to structure than a traditional investment, they often make for a good vehicle to provide cannabis companies with key resources needed at an early stage.