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As our leading practitioner for cannabis business in California, Tiffany advises clients on California’s existing and proposed state and local marijuana regulations, including preparing them for licensing under the Medical Cannabis Regulation and Safety Act (MCRSA) and the Adult Use of Marijuana Act (AUMA).

Humboldt County is going legal on cannabis in a big way
Humboldt County is going legal on cannabis in a big way

Since passage of California’s Medical Marijuana Regulation and Safety Act (“MMRSA“), some California cities and counties have already started to make their own local laws in response. Humboldt County, one of three counties in the legendary Emerald Triangle, is making significant strides towards robust MMJ regulation in anticipation of MMRSA’s implementation.

As of 2004, Humboldt had no specific regulations governing cultivating or dispensing in its unincorporated areas. All the county had was an ordinance implementing Proposition 215 and Senate Bill 420 regarding possession amounts and patient limitations that really only served to assist law enforcement in how to identify illegal operations. Since 2004, the county has gone back and forth on medical marijuana regulation and prohibition.

But the county’s ambivalence over local MMJ regulation is finally over and this is a big deal since cannabis farms make up a large part of the county’s overall economy. In a four phase roll out, Humboldt has finally adopted robust regulations over its growers and its collectives. In Phase 1 and 2 (October 2014), the county regulated indoor and outdoor personal use cultivation. Phase 3 (August 2015) covered regulation of dispensaries/collectives (changing direction from a three year ban). And Phase 4, the Commercial Medical Marijuana Land Use Ordinance (CMMLUO), (in January 2016) covers commercial cultivation of cannabis in the county.

The CMMLUO is a comprehensive piece of local legislation, covering zoning of and permitting for commercial cultivation (indoor, outdoor, and mixed-light), processing, manufacturing, and wholesale distributing of cannabis for medical use in the county’s inland and coastal zones. The ordinance even has provisions permitting medical cannabis nurseries and also contemplating “Humboldt Artisanal Branding” for some growers.

Depending on your zone, the size of your property or your grow or your commercial facility, whether you are an existing or a new grower (based on whether you were operating before January 1, 2016), you will need to obtain a variety of permits, licenses, and certificates for special use, use, conditional use, zoning clearance, and coastal development. Humboldt County now also has mandatory property setbacks from all property lines and from other designated sensitive uses that differ between the inland to coastal zone. Lastly, all permitting applications and supplemental information are due to the county by no later than December 31, 2016.

All applicants seeking to operate any sort of legal cannabis business within Humboldt County will by the end of this year need to have submitted  the following items to the county:

  • The name, contact address and phone number(s) of the applicant.
  • If the applicant is not the record title owner of the parcel on which the cannabis business will be operating, a notarized written consent from the property owner for the application.
  • A site plan showing the entire parcel, including easements, streams, springs, ponds, and other surface water features, and the location and area for cultivation on the parcel with dimensions of the area for cultivation and setbacks from property lines. The site plan shall also include all areas of ground disturbance or surface water disturbance associated with cultivation activities, including: access roads, water diversions, culverts, ponds, dams, graded flats, and other related features. The site plan also has to show the mandatory property setbacks depending on whether you’re in the inland or coastal zone.
  • A cultivation and operations plan that meets or exceeds minimum legal standards for water storage, conservation and use; drainage, runoff and erosion control; watershed and habitat protection; and proper use and storage of fertilizers, pesticides, and other regulated products to be used on the parcel, and a description of cultivation activities (outdoor, indoor, mixed light), the approximate date(s) cannabis cultivation activities have been conducted on the parcel prior to the effective date of this ordinance, if applicable; and a schedule of activities during each month of the growing and harvesting season. The operations plan shall also include a security plan describing measures to be taken to ensure the security of the medical marijuana and to safeguard against the diversion of medical marijuana for non-medical purposes, or access by minors.
  • A copy of the statement of water diversion, or other permit, license or registration filed with the State Water Resources Control Board, Division of Water Rights, if applicable.
  • A description of water source, storage, irrigation plan, and projected water usage.
  • If applicable, a copy of a Notice of Intent and Monitoring Self-Certification and other documents filed with the North Coast Regional Water Quality Control Board demonstrating enrollment in Tier 1, 2 or 3, North Coast Regional Water Quality Control Board Order No. 2015-0023, or any substantially equivalent rule that may be subsequently adopted by the County of Humboldt or other responsible agency.
  • If any on-site or off-site component of the cultivation facility, including access roads, water supply, grading or terracing impacts the bed or bank of any stream or other watercourse, a copy of the Streambed Alteration Permit obtained from the Department of Fish & Wildlife.
  • If the source of water is a well, a copy of the County well permit, if applicable.
  • If the parcel is zoned TC or TPZ, or involves the conversion of timberland as defined under section 4526 of the Public Resources Code, a copy of a less-than-3-acre conversion exemption or timberland conversion permit, approved by the California Department of Forestry and Fire Protection (CAL-FIRE). Alternately, for existing operations occupying sites created through prior unauthorized conversion of timberland, evidence may be provided showing that the landowner has completed a civil or criminal process and/or entered into a negotiated settlement with CAL-FIRE.
  • Consent for onsite inspection of the parcel by County officials at prearranged date and time in consultation with the applicant prior to issuance of any clearance or permit, and once annually thereafter.
  • For indoor cultivation facilities, identify the source of electrical power and how it will meet with the energy requirements in the CMMLUO, and plan for compliance with applicable Building Codes.
  • At the time of the application for a cultivation permit, all cultivators must also include a Processing Plan with all of the following:

    • Summary of Processing Practices.
    • Description of location where processing will occur.
    • Estimated number of employees, if any.
    • Summary of Employee Safety Practices.
    • Description of toilet and handwashing facilities.
    • Description of plumbing and/or septic system and whether or not the system is capable of handling increased usage.
    • Description of source of drinking water for employees.
    • Description of increased road use resulting from processing and a plan to minimize that impact.
    • Description of on-site housing, if any.

All of the above is in addition to eventually securing the appropriate licenses from the state under the MMRSA if you want to continue to operate in the county. And cultivation sites operating before January 1, 2016, must pre-register with the county by this summer to be considered a priority status applicant with the county and eventually with the state under the MMRSA. We’ve been in touch with the county on behalf of our Humboldt clients and they are telling us that permitting and cultivator applications will not be available until February 19th at the earliest.

So, if you’re cultivating or plan to cultivate in Humboldt, take a deep breath and get ready to embrace robust regulation, and fast. Things have changed in Humboldt County.

California Marijuana Businesses

There are a bunch of marijuana businesses in California, the vast majority of which are organized as state nonprofit mutual benefit corporations (NBMCs). Under current California law, there is no strong argument that marijuana sales by for profit companies are legal and S.B. 420 specifically states that it does not authorize “any individual or group to cultivate or distribute marijuana for profit,” which is why we have so many nonprofits there. This is true in many other states too. Cannabis possession by medical patients was legalized, but businesses were not, so different forms of nonprofit cannabis clubs developed.

It is also important to note that while many marijuana businesses are formed as nonprofits under state law, they operate as not for profit entities which are distinguishable from true nonprofits that are tax exempt at the federal and state levels.  Thus, while these businesses technically cannot earn profit, they still must pay tax on any revenue generated minus expenses (though not all business expenses are eligible under section 280E).

As states like California go legal, with regard to both medical and recreational use, many businesses that got started under an older legal regime will want to transition into whatever new licensing system is in place. And many businesses that originally organized as nonprofits will want to transition. In addition to getting licensed to operate in the new system, the directors and officers of these not for profits will often want to attempt to restructure into for profit corporations and LLCs, if such transitions are feasible. This is doubly true when medical businesses get priority in new licensing regimes, as those with priority will be the first targets for purchase or investment by newcomers to the industry. Can a nonprofit restructure in that way?

Not all nonprofits are the same, and not all state nonprofit laws are the same. Most states have a basic entity called a “nonprofit corporation,” and the limits on those businesses are pretty severe. A nonprofit corporation has no owners, but it does have officers and directors. No one has the right to receive distributions of cash or property from the nonprofit. On dissolution and liquidation of the nonprofit, any remaining assets are distributed as the articles of incorporation may govern, but generally officers, directors, and other insiders are not able to receive any types of asset distributions.

California’s nonprofit mutual benefit corporations, though, aren’t quite as limited as some other states’ general nonprofit corporations. Similar to other types of nonprofits, distributions of corporate assets is not allowed during the life of the corporation. If a nonprofit member, director, or officer wants to get money out of the nonprofit while it exists, they have to receive that money as either salary or as repayment of debt. Mutual benefit corporations diverge from some other types of nonprofits here. On dissolution — when the business shuts down — it can freely distribute its assets to its members. And these corporations can admit any individual to membership. This means that the directors and officers can also be members, and they can draft corporate bylaws to allow full asset distribution to members on dissolution.

But distributions on dissolution only get you so far. What if we want to keep the entity alive, so that it can rely on its business track record and reputation to receive a new marijuana business license, but then we simply want to restructure it afterward? Again, most general state nonprofits don’t really allow that type of transition, but mutual benefit corporations may be able to, using a merger. California allows mutual benefit corporations to merge with for profit corporations. So, if I wanted to restructure my California nonprofit mutual benefit corporation into a regular for profit corporation so that I could issue stock to new investors, I could form a new for profit corporation, execute a merger with the mutual benefit corporation, and then walk away with the new for profit company as the surviving entity. It’s a little more complicated than that, but it’s possible.

A nonprofit mutual benefit corporation in California can also convert to a for profit entity by amending its articles of incorporation and filing the amendment with the Secretary of State. The amendment will require approval from the state and may also require approval by its members.

That doesn’t mean that California businesses will necessarily be able to take advantage of this merger or conversion ability, however. First, we don’t really know what types of limitations the state of California will put on medical marijuana businesses. California may still mandate that they remain nonprofits as new regulations emerge. Even if it doesn’t, the state may give itself approval power over any merger or conversion involving a licensed cannabis business. Cannabis businesses operating in California as a nonprofit now should keep close watch on the situation and keep its options open as the state unveils its new systems.