The Emerald TriangleCalifornia Cannabis: Trinity County is a legendary marijuana cultivation region in California. Since passage of the Medical Cannabis Regulation and Safety Act (MCRSA), the three counties that make up the Triangle, Mendocino, Humboldt, and Trinity, have all been examining local marijuana regulations for cultivation. With Proposition 64, it’s becoming ever more important for local governments to set rules for their local marijuana markets through local licensing and permitting, and the Emerald Triangle has begun doing exactly that.

To date, Humboldt has adopted regulations and their application window for cultivation permits has come and gone. Mendocino is still weighing permitting and zoning ordinances in deciding how to regulate cultivation within its borders. Most recently, Trinity County decided to extend its deadline for commercial cultivation registration to February 28th.

So, if you haven’t had the chance to apply for a Trinity cultivation registration permit, you still have a bit of time to do so. And here’s what you need to know to secure one of those coveted permits from the Trinity County Planning Department:

  1. Trinity is only allowing for cultivation under the MCRSA and Proposition 64 at this time. And under cultivation, Trinity will only permit Type 1, 1B, 1C or Type 2 or 2B cultivators, which represent relatively small-sized grows.
  2. Applicants have to show that they’re registered with the North Coast Regional Water Quality Control Board and that they’re in good standing with the Board’s order (#2015-0023) regarding waste discharge and water quality.
  3. Applicants have to apply for and secure a Board of Equalization (BOE) seller’s permit.
  4. You cannot have any “serious felony convictions” or a Schedule I, II, or III felony (excluding non-serious felony convictions for marijuana-related crimes).
  5. Applicants have to demonstrate at least one year of residency in Trinity County prior to the application date.
  6. Applicants have to submit an accurate site plan of the entire parcel.
  7. Applicants that are business entities have to provide a breakdown showing the ownership of the entity.
  8. Proof of a deed to the cultivation land or a lease authorizing cultivation on the proposed land is required.
  9. Applicants have to provide to the County one of the following documents:
    1. Documents of incorporation
    2. Documents of taxes paid to BOE
    3. Proof of contracts with dispensaries
    4. Receipt of a BOE Seller’s number
    5. Employer Identification Number
  10. Only one application countywide may be submitted on behalf of one person, entity, or per legal parcel.
  11. Grow site registration is limited to 500 applicants. Thus far, County records show only 12 registrations have issued.
  12. There are also various setback and zoning requirements where marijuana cultivation is not allowed, including the following:
    1. Within 1,000 feet of any youth-oriented facility, a school, any church, or residential treatment facility and within 500 feet of an authorized school bus stop.
    2. In any location where marijuana is visible from the public right of way.
    3. A legal parcel without a permitted/legal housing structure, or without an active building permit.
    4. Within the Trinity County jurisdiction of the Whiskeytown-Shasta-Trinity National Recreation area and within the lease lots within the Ruth Lake Community Services District.
    5. Within the Timber Production Zones with an exception for applicants who can show enrollment under/compliance with the Regional Water Board’s order #2015-0023.
    6. Within the R1, R2, and R3 zones.
    7. Within 350 feet of a “residential structure” on any adjoining parcels.
    8. Within 30 feet from any property line.

Applicants also must satisfy a variety of performance to keep their registrations, including noise level standards, surface water restrictions, water diversion restrictions, erosion restrictions, fencing, security and storage requirements, lighting restrictions, and applicable California Fire and Fish and Wildlife standards.

As for fees, for 2016 Type 1 and 2 grows, you’re looking at a $2,500 fee “plus $1,000 towards the general plan update.” For registration after 2016 (assuming the County still allows it), Type 1 and 1B cannabis grows will have to pay $4,000 plus $1,000 towards the general plan update, Type 1C grows will have to pay $2,000 plus $250 towards the general plan update, and Type 2 and 2B grows will pay $5,000 plus $1,000 towards the general plan update.

Trinity’s commercial cultivation program permit application is relatively straightforward. Applicants must first schedule an appointment with the Department of Planning and then submit their application (with all required documentation and attachments) at that appointment. The actual permit will only issue after your cannabis cultivation application is approved and and after an initial onsite inspection ensures your application actually reflects what you’ve built out and set up for your marijuana grow site.

With February 28 fast approaching anyone interested in securing a Trinity County cultivation license should definitely get moving right away to gather up the documentation necessary to submit a top-tier and timely application to the County.

 

California marijuanaWe previously wrote about possible delays to California’s cannabis state licensing program due to conflicts between the state’s new medical and recreational laws under the Medical Cannabis Regulation and Safety Act (MCRSA) and the Adult Use of Marijuana Act (AUMA), respectively. The AUMA, aka Proposition 64, was passed by California voters last November and required state agencies begin issuing licenses by January 1, 2018 (hereinafter “the 2018 deadline”).

Last week, we provided an update on the work California legislators have been doing to get the state ready to issue licenses. Lori Ajax, the Chief of the Bureau of Medical Cannabis Regulation (soon to be the Bureau of Marijuana Control), promised audiences at a recent cannabis event that licenses would be issued by the 2018 deadline set under Prop 64.

However, California lawmakers are not so sure. On Monday, January 30, 2017, state Senate committees held an oversight hearing to discuss whether California agencies are on track to meet the 2018 deadline. During the hearing, Sen. Jerry Hill voiced “a considerable amount of skepticism” that the state would meet the deadline. Though lawmakers believe some agencies will be able to start processing applications by 2018, they doubt they will be able to issue all of the “tens of thousands” of licenses applied for by that time. Once the cannabis license applications are received, they could take months to process and complete the necessary background checks.

As Sen. Mike McGuire so aptly put it, the state is “building the airplane while it’s being flown,” and thus “it’s not realistic that all of the Proposition 64 rules and regulations will be in place by the new year.” The state’s process for rule-making includes the potential for further delays as public feedback could require a major reworking of regulations (followed by further feedback and more reworking) while new legislation could rewrite rules or change the process entirely (we covered proposed pot legislation here, here, and here).

Ajax admitted not everyone will receive their California cannabis license on January 1, 2018, but instead some could receive temporary licenses while the rest of the applications are being processed. She also stated that California’s state marijuana regulations will be in place by the 2018 deadline through a streamlined, “emergency regulation” process.

Ajax and her 11-person staff (six positions remain unfilled) are working hard to meet the deadline, but there is still a lot left to do. They have yet to convene the advisory committee required under Prop 64 to advise the Bureau and state agencies on drafting standards and regulations for marijuana businesses. Prop 64 also requires implementing a marijuana track and trace system the state has yet to develop. Besides creating the computer program behind the system, the government process will also involve long timelines for drafting proposals, selecting vendors, and completing a statewide rollout. Ajax has stated that applicants may not be included in the track and trace system by the 2018 deadline.

It’s currently unclear what would happen if California is unable to meet the January 1, 2018 deadline. Some argue it is better to have a well-crafted system later, than risk an ineffective system and a thriving illegal market. Since medical cannabis businesses can continue operating until state licenses are issued, the effect of any delay will fall mostly on prospective recreational cannabis businesses.

Los Angeles Cannabis lawyersSince passage of Proposition 64 in California last November, our California cannabis lawyers have been getting calls nearly non-stop about what it takes to secure a license to operate a marijuana business in the City of Los Angeles. Some are asking us about buying a Proposition D-compliant dispensary state license now to secure a California retail cannabis license in the future.

Because of Proposition D, there is no legal avenue for anyone to start new marijuana businesses in the City of Los Angeles or for anyone to legally purchase any of the 135 existing Proposition-D compliant dispensaries. But the tides may be shifting for the L.A. marijuana scene. On March 7 of this year, Angelenos will be voting on two ballot initiatives that could bring more regulation and oversight to marijuana businesses within Los Angeles city limits and that may, under certain circumstances, allow for an expansion beyond the existing 135 marijuana dispensaries.

In case you missed it, Proposition D, which passed in 2013 and was implemented in 2014, was intended to reduce the number of dispensaries within Los Angeles city limits to 135 – the number of dispensaries operating before September 14, 2007. A 2012 UCLA study estimated that Los Angeles had at least 472 dispensaries, and the city estimated that in 2013, when Proposition D passed, the city had around 700 dispensaries. Over the last few years, the City of Los Angeles has shut down hundreds of medical marijuana businesses that failed to meet Proposition D requirements for immunity. But new dispensaries pop up to replace those that have been shut down. The city has also fought hard to enforce a ban on cannabis deliveries and the California Court of Appeals has upheld that ban.

Los Angeles’s medical marijuana situation is reflected in California’s Medical Cannabis Regulation and Safety Act (“MCRSA“) of 2015. The MCRSA requires all applicants to first secure “local approval” before they can receive a California state cannabis license, with local approval meaning some form of local license, authorization, or permitting. Under the MCRSA, Los Angeles essentially received a carve out to be able to continue enforcing its Proposition D, regardless of whether a marijuana business receives a state license.

Then, realizing that Proposition D does not qualify as local licensing, permitting, or even authorization (since it’s really just a registration and taxation measure), combined with the fear that Los Angeles may never enact any form of “local approval” to enable marijuana businesses to secure state licenses, the California State legislature, tried to pass AB 2385, which would have dropped the local approval requirement for Los Angeles. Under AB 2385, marijuana business applicants under the MCRSA that could show compliance with Proposition D would be eligible to receive a California cannabis license. However, the governor vetoed AB 2385. Because Proposition 64 itself provides no special treatment for Proposition D, Los Angeles marijuana businesses will still need to comply with local laws to open their doors under the new recreational laws. What all of this means is that Los Angeles could be stuck with Proposition D and that means it will either have no medical marijuana businesses at all or only the 135 existing dispensaries assuming they all go recreational.

Until perhaps March 7. On March 7th, Los Angeles will vote on two ballot measures to replace Proposition D, which can only be repealed and replaced by a vote of the people. The first ballot measure, called the Cannabis Enforcement, Taxation and Regulation Act (“CERTA“), is backed by the City of Los Angeles. The second ballot measure is called the Los Angeles Marijuana and Regulation Safety Measure and that one was drafted by the United Cannabis Business Alliance Trade Association (“UBCA”).

The CERTA measure sets the stage for the City to enact whatever rules and laws necessary to regulate City of Los Angeles “cannabis activity” in the context of California’s new marijuana laws, while also creating new criminal and nuisance penalties and implementing new business taxes on marijuana sales. It also gives priority status in “processing of applications” to the existing 135 Proposition D dispensaries, but it does not say that the City is limited to regulating only those 135 dispensaries nor does it forbid the City from creating regulations for other marijuana businesses like cultivators and manufacturers.

The UCBA  ballot measure is much more comprehensive than the CERTA. This measure would create the Los Angeles Department of Medical Marijuana Regulation to oversee the Collective Commercial Cannabis and Commercial Cannabis permit programs, which would cover both medical and recreational marijuana businesses. This measure would also allow for permitting of cannabis cultivation, manufacturing, transportation, testing, and distribution businesses. Like the City supported measure, this measure too will give licensing priority to existing 135 Proposition D dispensaries; it calls for mandating that the City continue to allow these 135 cannabis dispensaries to operate and for these dispensaries to get their required permitting ahead of any new dispensary applicants. It also provides that if not all of the 135 existing dispensaries apply for and receive the required permitting, the City may allow additional dispensaries to participate in the Los Angeles cannabis market and that the City cannot have less than 135 dispensaries in operation. The measure also sets forth how the permit application process will work and the zoning and setback requirements required for all permit applicants.

Importantly, as of December of last year, UCBA has decided to formally support the City ballot measure. Nonetheless, the UCBA measure will still be on the ballot in March.

Though Forbes is predicting L.A.’s medical marijuana market could reach $1 billion, that’s not going to happen anytime soon unless the City starts allowing for significantly more marijuana commerce. The March 7 vote is crucial to the future of marijuana in Los Angeles as it will determine who can run or invest in a marijuana business in the City of L.A. and what it will take to do so.

Stay tuned.

California CannabisOn January 18, 2017, California state regulators attended a cannabis event in Sacramento to discuss cannabis policy and what lies ahead for California. Though previous reports indicated that California cannabis licensing could be delayed for an additional year, state regulators at the event promised a licensing program would be operational by January 1, 2018.

Lori Ajax, the Chief of the California Bureau of Medical Cannabis Regulation (soon to be renamed again to the Bureau of Marijuana Control under Proposition 64), told the audience:

We will not fail. We will make this happen by Jan. 1, 2018, because we have to […] It may not be pretty. But we will get there.”

Since Prop 64 passed last November, California regulators are now in charge of crafting comprehensive regulations and issuing state licenses to not only medical marijuana businesses but to recreational cannabis businesses as well. This includes 17 license types for medical businesses and 19 licenses types for recreational businesses, covering cultivation, manufacturing, retail dispensaries, distribution, testing, and transportation. The authority to regulate and license these cannabis businesses is divided among ten California state agencies.

The California Department of Food and Agricultural will oversee cannabis cultivation activities, and it created a new division, the CalCannabis Cultivation Licensing program, to issue permits and develop regulations for cultivators, including setting up a track and trace system for all cannabis plants that enter the California market. Amber Morris, a branch chief for CalCannabis Cultivation Licensing, was also in attendance at the event in Sacramento and she said that California state departments are working with economists to create a tiered permit fee program that will assign fees to cannabis cultivators based on the size and scale of their businesses.

A big challenge faced by state regulators is the lack of banking available to cannabis businesses and affiliated companies. Ajax expressed her hope that there would be some clarity on the matter by the time state licenses are issued, stating that banking is “a challenge for us, too. As we set up our online permitting system, we would like to accept credit cards. We don’t want to have to accept wads of cash.”

The banking issue has been high on the mind of California lawmakers, as we get closer to statewide regulation. In December, California Treasurer John Chiang wrote a letter to President Donald Trump seeking guidance ahead of California’s licensing program. In his letter, Chiang wrote that the new program could “exacerbate” the banking problem because California’s cannabis economy will be so large.

Due to federal prohibition on marijuana and anti-money laundering regulations issued by the Financial Crimes Enforcement Network (FinCEN), banks are reluctant to work with cannabis businesses. The banking challenge is not unique to California and it affects businesses in legal marijuana states across the United States. Several U.S. senators sent a letter to FinCEN in December asking for more guidance and explaining how the dearth of cannabis banking promotes tax fraud and creates a public safety issue because cannabis businesses are forced to deal in large amounts of cash.

Under the new California cannabis licensing program, state agencies will need to collect fees from licensed cannabis businesses. Yet most of these agencies have only one office — in Sacramento — which means anyone paying their fees in cash will need to carry that cash with them all the way to the capitol. To address this issue, California legislators recently introduced new legislation to increase the number of government offices that can accept payments from cannabis businesses for state fees and taxes. The legislation, known as the Cannabis Safe Payment Act, is sponsored by the Board of Equalization (BOE), which has been collecting sales tax from California medical marijuana businesses since 1996.

The BOE currently accepts payments in cash from cannabis businesses at its 22 offices across the state. However, to reach these offices, many California cannabis cultivators have to travel great distances with “bags of cash” in their cars, which BOE Chairwoman Fiona Ma agrees “is not the safest method of paying your taxes.” Thus, Ma states that the BOE’s “priority has to be increasing safety—for the business owner, the public, law enforcement, and state employees by enabling cannabis businesses to pay their taxes and fees in as many a safe and secure locations as possible.” Under the Cannabis Safe Payment Act, California counties that receive approval by board of supervisors and tax collectors will be able to accept cash payments from local cannabis businesses on behalf of the BOE and other state agencies.

With promises from the Marijuana Bureau to begin issuing state licenses by January 1, 2018, collaboration from state agencies to develop regulations and set permit fees, and efforts from state lawmakers to alleviate banking challenge, California legislators are showing they are hard at work creating a viable state licensing program for cannabis businesses. For cannabis businesses planning to take advantage of California’s new cannabis program, a lot of work lies ahead and you should start preparing now.

California Cannabis lawsSince Proposition 64 passed last November, there has been a spike in reports of California dispensaries advertising their willingness to sell recreational cannabis to anyone 21 years and older “with only a valid ID” (i.e. physician’s recommendation not required). However, Prop 64 requires dispensaries apply for and obtain a state retailer license to sell recreational cannabis or face criminal and civil penalties for each day of illegal operations. Since the State of California has yet to issue such a license, any dispensary currently selling recreational cannabis in California is doing so illegally.

For marijuana consumers, your options are simple: (1) obtain a valid physician’s recommendation and purchase medical marijuana from a dispensary; (2) grow your own recreational marijuana at home by following local regulations; or (3) get home grown marijuana from other adults in California through a free, sharing economy.

For dispensaries, your options are even simpler: (1) sell medical marijuana legally by following local laws and securing any necessary permits or licenses; or (2) operate illegally and face severe penalties, raids, and criminal prosecution.

Dispensaries in California have been making illegal sales long before Prop 64 passed. But local law enforcement believe dispensaries have become “more emboldened” now that recreational cannabis is legal in the state. Some dispensaries might wrongly believe that any and all sales are allowed under a Prop 64 regime, but others clearly choose to operate outside of the law. This angers legal dispensary owners who pay the high costs of operating a legal business (including taxes, licensing fees, and security costs) while also waiting to profit on recreational sales after state licenses are issued.

Though Prop 64 makes clear that anyone making retail sales or deliveries of recreational cannabis must have a California state license, the challenge faced by local (and soon state) prosecutors is how to go about shutting down illegal businesses. Often when a city or county attempts to shut down an illegal dispensary, the dispensary owner just relocates the business and changes the name, resulting in an endless game of “whack-a-mole” for local authorities. But now that cannabis businesses are beginning to set their sights on state licenses, is it more important than ever to play nice with your local city and county officials as local authorization is a requirement for state licensing. Businesses caught operating illegally can be disqualified from receiving a local permit, and even if state and local authorities cannot prohibit these business from applying for a California cannabis license, past troubles with following the law will likely be a negative mark on your cannabis license application.

We also expect state and federal enforcement to pick up over the next few years. California state agencies do not currently have jurisdiction over illegal cannabis businesses, but once state licenses are issued they plan to work with local authorities to enforce the cannabis laws. Even worse, If illegal businesses continue to thrive in California, the federal government could challenge California’s entire regulatory system under the guidance of the Cole Memo. With a new federal administration coming in, and the possibility of an anti-marijuana Jeff Sessions as Attorney General, California could face even greater scrutiny. So by operating an illegal business not only do you risk your own chances at the legal market, you also risk undermining the legalization effort California strived so long to achieve.

As California transitions into a regulated legal market, the grey areas we have long been dealing with will soon shrink. In a post-Prop 64 world you can either follow the laws and obtain a license to make legal recreational sales or you can risk fines, jail time, and the loss of the chance to ever operate again.

Proposition 64California cannabis laws states that adults in California age 21 and older may legally possess, plant, cultivate, harvest, dry, or process up to six marijuana plants as well as possess the marijuana produced from those plants. Though cities and counties can completely prohibit personal outdoor cultivation (and some already do), Prop 64 does not allow them to prohibit personal cultivation indoors or in an outside structure that is fully enclosed and secure.

However, Prop 64 does grant California cities and counties the authority to reasonably regulate these activities and requires that all persons cultivating cannabis for personal use comply with any local ordinances. In addition, Prop 64 limits personal cultivation to six marijuana plants per private residence (regardless of the number of adults living in the residence) and requires any marijuana produced from the plants that is over the legal possession limit of 28.5 grams be kept within the residence or in a locked, outdoor space not visible to the public.

Some California municipalities have already started passing local ordinances to regulate personal cultivation. Prop 64 allows cities and counties to “enact and enforce reasonable regulations to reasonably regulate” personal cannabis cultivation activities. So now the question is just how reasonable are these new regulations?

In December, the City of Indian Wells passed an ordinance that requires residents to register for a permit from City Hall to cultivate marijuana at home. To receive the permit, residents must allow home inspections by city employees and pay an annual fee of $141. According to Erwin Chemerinsky, Dean of University of California, Irvine Law School and prominent constitutional law scholar, Indian Wells’ regulation “goes significantly beyond what state law allows local governments to do.” There is also concern that by requiring individuals to register to grow, the City’s regulation forces them to self-incriminate themselves under federal law and is therefore unconstitutional.

Last week, the City of Los Banos also considered an ordinance requiring its residents to first register with the City to cultivate marijuana indoors for personal use. The stated reason for requiring residents to register was so authorities could educate them on how to safely grow marijuana and avoid fire hazards. However, one City Council member did not support the ordinance because he was concerned about creating a public registry that could potentially expose home growers to “shaming, harassment or violence.” The Los Banos City Council later amended the proposed ordinance to provide greater privacy for registrants by avoiding collection of personal data. The modified ordinance was approved unanimously on January 4th.

We’ve been working with plenty of cannabis companies in California on the local permitting and future state licensing processes, but this is the first time individuals are being asked to register to cultivate marijuana in their own homes for their own personal use. Ultimately, it may be up to a court to decide whether these new local regulations are indeed “reasonable,” as required under Prop 64. In the meantime, California residents should be aware that they cannot legally purchase recreational cannabis from any dispensaries and, if they happen to live in a city or county that has passed regulations on personal cultivation, they also may not be able to legally grow marijuana in their residences without first registering and complying with any new rules.

Yes, California has legalized recreational cannabis, but we still have a long way to go until it becomes widely available for all adults living in our state.

California cannabis

Proposition 64 (Prop 64 or the Adult Use of Marijuana Act), which passed last November and legalized recreational cannabis use throughout California, included stricter laws regarding driving while “high.” But California senators have proposed a new bill, Senate Bill 65 (SB 65), to close what they say is a loophole in the law that does not explicitly make it illegal to drive while consuming marijuana as long as you aren’t impaired.

One of the stated intents of Prop 64 was to maintain existing laws that make it illegal to operate a car (or other vehicle) while impaired by marijuana. Like driving under the influence of alcohol, it is illegal in California to drive or operate a vehicle under the influence of any drug. You are under the influence of a drug when your physical or mental abilities are impaired to the point where you can no longer drive with the caution of an ordinary, sober person under similar circumstances. However, there are no current state laws that address the legality of driving when not impaired but while still consuming marijuana or marijuana products.

Prop 64 provides that it does not permit any person to, among other things:

  • possess an open container or package of marijuana while driving, operating, or riding in the passenger seat of a vehicle
  • smoke or ingest marijuana or marijuana products while driving or operating a vehicle
  • smoke or ingest marijuana or marijuana products while riding in the passenger seat or compartment of a vehicle, except as permitted by a local jurisdiction

Note that even though Prop 64 does not permit these activities, it also does not prohibit them. However, it provides that any person with an open container of marijuana in a vehicle may be cited for an infraction and have to pay a fine of up to $250. For persons under the age of 18, drug education and community services will instead by required. In contrast, no penalties are included for smoking or ingesting marijuana while driving or riding in a vehicle, an oversight that the authors of Prop 64 simply forgot to include.

SB 65 would “remedy” this by making it illegal for a person to smoke or consume marijuana in any form while operating a vehicle, vessel, or an aircraft; and any violations could result in either an infraction or a misdemeanor. However, SB 65 would also prohibit consumption of CBD-only marijuana products while driving a vehicle, which could be a problem for many medical marijuana patients.

Though SB 65 would clearly allow police to ticket anyone caught smoking or ingesting marijuana red-handed, a challenge for the bill is how to test whether a driver who is pulled over for driving erratically recently consumed marijuana. There is currently no THC threshold for impairment established in California as well as no standard test for impairment (e.g. blood, saliva, breath). A separate bill, Assembly Bill 6, was recently proposed to allow law enforcement to perform saliva tests on drivers they suspect are impaired by marijuana use. But a similar proposal was rejected in 2016 because legislators were concerned about the dependability of field testing marijuana-induced drivers.

To address this problem, Prop 64 allocates some of the tax revenues that will be raised from recreational marijuana sales to the Department of California Highway Patrol to create protocols for determining whether a driver is impaired by use of marijuana. The state is currently exploring ways to test driver impairment, including the use of marijuana breathalyzers that have already been road-tested on California highways.

Finally, for those that are still unclear on California’s stance on using cannabis while driving, the state recently launched a $1 million anti-drugged driving campaign that uses television and digital ads to show the dangers of driving under the influence of marijuana. For California cannabis consumers, the state wants you to know “DUI doesn’t just mean booze” anymore. (You can watch the video here.)

Cannabis mortgages and bank loansMy law firm represents a large number of cannabis operators in Oregon, Washington and California. Some of these operators own the land they trade on; others simply lease. Whenever we are lucky enough to meet the client before the onset of cannabis activity, our first question is often whether the target property is mortgaged, or if it is owned free and clear. If the property is mortgaged, we ask “by whom?” If the answer is “a bank,” we tend to say, “let’s talk about that for a minute.”

Your standard institutional mortgage contains language allowing the mortgagee/lender to call the loan if the property is being used to conduct “illegal activity.” Lenders won’t budge on that provision: it relates back to federal lending guidelines, and attempting to pare back that language is impossible. If a borrower acquires a bank loan with the secret intention of operating or leasing to a cannabis business, that borrower is running a risk of foreclosure, to say nothing of allegations of fraud.

When a bank discovers that cannabis is being grown, processed, held or sold on its mortgaged property, it has the option, under contract, to call the loan. This means the bank can declare the entire mortgage balance due and owing on the spot. In practice, if a loan is in good standing it won’t always get called; but if a bank learns that cannabis is being traded on the property, a real possibility exists that the mortgage will get called. And refinancing with the lender will be all but impossible.

Although banks typically do not troll their commercial loans looking for pot merchants, many loans require borrowers to inform lenders about tenants and new leases on the property. When a bank decides to call a loan due to cannabis activity, the bank may give the mortgagor a limited window of time to cure the defect (stop the cannabis activities), or to find alternative lending. Given the realities of business investment and operations, the strictures of leases and the high cost of private lending, this can cause tremendous headaches.

There is no work-around for the “illegal activities” issue in institutional lending, but that hasn’t stopped some folks from trying. Among other creative ideas, we recently saw one owner give a second, unrecorded mortgage to a cannabis operator as “insurance” against the first loan getting called. Not only would this approach fail to prevent the first mortgage from getting called, it would typically allow the first mortgagee to declare the balance of its loan payable immediately, as “due on sale.” Such an action could wipe out the junior, unrecorded mortgage interest in any subsequent foreclosure.

Finding a cannabis property is not always easy, but it’s important to understand how the property is financed (or otherwise encumbered) before you sign a lease or begin operations. If you intend to purchase a cannabis property and cannot pay cash, seller financing is a popular option we have written about elsewhere. Otherwise, it’s hard money or trying to fool the bank. Neither of those is a good business plan.

California cannabis lawsA new California bill, Assembly Bill 64, is currently being considered by California legislators. AB 64 would amend the marijuana advertising rules under Proposition 64 (aka the Adult Use of Marijuana Act, or AUMA) to create stricter regulations for advertising on highway billboards. Though Prop 64 already bans marijuana ads on any billboards on California interstate highways or state highways that cross the border of any other state, AB 64 would extend that prohibition to exclude advertising on billboards on any highways within the state.

The sponsors of AB 64 state that the stricter regulations are meant to further enforce prohibitions against advertising cannabis to minors under the age of 21, who would be able to see ads on highway billboards even if the ads are targeted specifically at legal adult consumers and medical marijuana patients. In addition, the bill’s sponsors are concerned that cannabis businesses that have not yet received a state license to sell medical or recreational cannabis are already advertising on highway billboards across California.

AB 64 would prohibit not only licensed businesses, but any entities operating in California from placing marijuana ads on interstate and state highways. The bill would also extend all other restrictions under Prop 64 on marijuana advertising and marketing from licensees to all entities operating within the state; thus closing a loophole that currently exempts unlicensed cannabis businesses from new state advertising laws. What’s more, the bill would extend the prohibition on billboard ads to the marketing of medical cannabis and medical cannabis products.

Though the new advertising restrictions are already receiving pushback from the cannabis community, AB 64 is not all bad news for California cannabis businesses and license hopefuls. If passed, the bill will also provide clarification on major issues concerning many California cannabis businesses, specifically whether for profit businesses and delivery-only businesses will be allowed under new statewide regulation.

Under AB 64, the Medical Cannabis Regulation and Safety Act (MCRSA) would be amended to explicitly allow medical cannabis collectives and cooperatives to operate for profit. In order to operate for profit, these businesses will be required to obtain a valid California seller’s permit from the State Board of Equalization and a valid local license, permit, or other authorization from the city or county where the business operates.

AB 64 would also amend California law to specify that Type 10 dispensaries and Type 10A producing dispensaries under the MCRSA, as well as retailers (and by association microbusinesses) under the AUMA, may be either:

  1. a “storefront dispensary” for locations that have direct physical access for the public, or
  2. a “nonstorefront dispensary” for locations that do not have direct physical access for the pubic.

For the amendments under AB 64 to pass, two thirds of California legislators will need to vote in favor of the bill. This is California’s first attempt to consolidate the provisions of the MCRSA and the AUMA, which contain several conflicting provisions due to differing approaches on key issues under the two state initiatives. However, this will most likely not be the last attempt as the state prepares to license both medical and recreational cannabis businesses beginning as early as January 1, 2018. We will be closely following any changes to California cannabis laws throughout 2017 and those interested in securing a state license should be following along.

In our California Cannabis Countdown, Tiffany Wu (of our San Francisco office) regularly analyzes the various local city and county ordinances governing California’s ever-changing cannabis industry (see here, for example). Local cannabis laws have always been important in California, but they’ve become even more important now that the Medical Cannabis Regulation California Cannabisand Safety Act (“MCRSA“) requires local government approval before you can get a state medical cannabis license. And though you don’t need that local approval before getting a state license under Proposition 64, you will have to be in compliance with local law before you can open and operate your adult use cannabis business in California.

Some California cities and counties have gone back and forth for months over what their local marijuana market should look like, with some even banning marijuana businesses altogether. Mendocino County, part of the famous Emerald Triangle, is no different, though it is getting closer to some form of comprehensive regulation even if it only addresses medical cannabis cultivation for now.

Mendocino County codifies its current medical cannabis regulations under Section 9.31 of its county code, which it amended in May of this year with an urgency ordinance. The County basically has two standards for current growers: growers cultivating no more than 25 plants per parcel, and growers cultivating more than 25 plants per parcel because they are authorized to do so by the County and/or the Sheriff as a result of having registered with the County by June 3 of this year.

Section 9.31 may end up being moot though since the County is looking to pass two new ordinances: one having to do with regulations and permitting for cannabis cultivation sites and the other having to do with zoning for the same. Copies of both proposed ordinances can be found here. Let’s start with the Medical Cannabis Cultivation Ordinance (“MCCO”).

Under the MCCO, should it pass, to be considered by the Agricultural Commissioners Office for a cultivation site MCCO permit, you will need to prove to the County that you had an existing, Proposition 215 and Section 9.31-compliant medical cannabis cultivation site prior to January 1, 2016. To prove the existence of such a site , the County will require the following:

  1. Photographs of any cannabis cultivation activities that existed on a legal parcel prior to January 1, 2016, including: ground level views of the cannabis cultivation activities and aerial views from Google Earth, Bing Maps, Terraserver, or other comparable services showing the entire legal parcel and the cultivation area in more detail. The date these images were captured must be noted.
  2. Photographs of any cannabis cultivation activities that currently exist on a legal parcel, including: ground level views of the cultivation activities from at least three different vantage points, and aerial views from Google Earth, Bing Maps, Terraserver, or other comparable services showing the entire legal parcel and the cannabis cultivation area in more detail. The date these images were captured must be noted.
  3. At least one additional document demonstrating proof of cannabis cultivation prior to January 1, 2016. A list of examples of the type of documentation that will meet this requirement are found in Appendix B to the application. Any reliable documentary evidence similar to that found in Appendix B which is deemed satisfactory to the Agricultural Commissioner, which establishes that medical cannabis was planted and grown on a parcel to be permitted prior to January 1, 2016, will likewise be accepted.

You can also re-locate your existing cannabis cultivation site if you can prove the above, but you will then be treated as a “new” grow, which really just means increased property setback restrictions. In addition to proof of a prior grow (and a bevy of other regulations relating to fencing, security, grow lighting, and track and trace requirements), MCCO permit applicants will be limited to two cultivation permits, one per legal parcel. There are ten different types of cannabis cultivation permits that vary by size and growing medium, including a nursery permit.

For all MCCO permit applicants, the following will be required by Mendocino County as part of the MCCO permit application:

  1. The name, business and residential address, and phone number(s) of the applicant.
  2. If the applicant is not the record title owner of the legal parcel, written consent from the actual owner allowing cultivation of medical cannabis on their property by the applicant with original signature of the record title owner.
  3. Written evidence that each person applying for the permit and any other person who will be engaged in the management of the collective is at least twenty-one (21) years of age.
  4. A site plan showing the entire legal parcel, including easements, streams, springs, ponds and other surface water features, and the location and area for cannabis cultivation on the legal 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 must include dimensions showing that the distance from any school, youth oriented facility, church, public park, or residential treatment facility to the nearest point of the cultivation area is at least 1,000 feet.
  5. A cultivation and operations plan which includes elements that meet or exceed the minimum legal standards for the following: water storage, conservation and use; drainage, runoff and erosion control; watershed and habitat protection; and proper storage of fertilizers, pesticides and other regulated products to be used on the legal parcel. Any fuel, fertilizer, pesticides, or other substance toxic to wildlife, children, or pets, must be stored in a secured and locked structure or device. The plan must also provide a description of cannabis cultivation activities including, permit type, cultivation area, soil/media importation and management, the approximate date(s) of all cannabis cultivation activities that have been conducted on the legal parcel prior to the effective date of this ordinance, and a schedule of activities during each month of the growing and harvesting season.
  6. A copy of the statement of water diversion, or other permit, license or registration filed with California Water Resources Control Board, Division of Water Rights, if applicable.
  7. An irrigation plan and projected water usage for the proposed cultivation activities, as well as a description of its legal water source.
  8. A copy of a Notice of Intent and Monitoring Self-Certification and any other documents filed with the North Coast Regional Water Quality Control Board (NCRWQCB), demonstrating enrollment in and compliance with (or proof of exemption from) 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 Mendocino or other responsible agency.
  9. 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 water source, you must show proof that you have notified the California department of Fish and Wildlife pursuant to Section 1602 of the Fish and Game Code and provide a copy of the streambed alteration permit obtained from the Department of Fish and Wildlife.
  10. If the source of water is a well, a copy of the County well permit, if available.
  11. A unique identifying number from a State of California Driver’s License or Identification Card for each person applying for the permit and any other person who will be engaged in the management of the cultivation operation.
  12. Evidence that the applicant or any individual engaged in the management of, or employed by, the cultivator has not been convicted of a violent felony as defined in Penal Code section 667.5 (c) within the State of California, or a crime that would have constituted a violent felony as defined in Penal Code section 667.5 (c) if committed in the State of California and is not currently on parole or felony probation. A conviction within the meaning of this section means a plea or verdict of guilty or a conviction following a plea of nolo contendere.
  13. A statement describing the proposed security measures for the facility sufficient to ensure the safety of members and employees and protect the premises from theft.
  14. If the applicant is organized as a non-profit collective, the applicant shall set forth the name of the corporation exactly as shown in its Articles of Incorporation, and the names and residence addresses of each of the officers and/or directors. If the applicant is organized as a partnership, the application shall set forth the name and residence address of each of the partners, including the general partner and any limited partners. Copies of the Articles of Incorporation or Partnership Agreement shall be attached to the application.
  15. The applicant shall provide proof of either a physician recommendation that the amount of cannabis to be cultivated is consistent with the applicant’s medical needs, the needs of the patients for whom the applicant is a caregiver, or a written agreement or agreements, that the applicant is authorized by one or more medical marijuana dispensing collectives or processors to produce medical marijuana for the use of the members of said collective(s) or processor(s).
  16. The Agricultural Commissioner is authorized to require in the permit application any other information reasonably related to the application including, but not limited to, any information necessary to discover the truth of the matters set forth in the application.
  17. Apply for and obtain a Board of Equalization Seller’s Permit and collect and remit sales tax to the Board of Equalization if applicant intends to sell directly to qualified patients or primary caregivers.
  18. Written consent for an onsite pre-permit inspection of the legal parcel by County officials at a prearranged date and time in consultation with the applicant prior to the approval of a permit to cultivate medical cannabis, and at least once annually thereafter.
  19. If applicable, clearance from CalFire related to compliance with the requirements of Public Resources Code Section 4290 and any implementing regulations.
  20. For activities that involve construction and other work in Waters of the United States, that are not otherwise exempt or excluded, include a copy of a federal Clean Water Act (CWA) Section 404 permit obtained from the Army Corps of Engineers and a CWA Section 401 water quality certification from the NCRWQCB.
  21. For projects that disturb one (1) or more acres of soil or projects that disturb less than one acre but that are part of a larger common plan of development that in total disturbs one or more acres, are required to obtain coverage under the State Water Resources Control Board General Permit for Discharges of Storm Water Associated with Construction Activity Construction General Permit Order 2009- 0009-DWQ. Construction activity subject to this permit includes clearing, grading and disturbances to the ground such as stockpiling, or excavation, but does not include regular maintenance activities performed to restore the original line, grade, or capacity of the facility.

If the Agricultural Commissioners Office approves you for an MCCO permit, you’ll then be kicked over to the Department of Building and Planning Services for zoning compliance. Under the County’s proposed zoning ordinance, cannabis cultivation of varying parcel and canopy sizes will be allowed in the following zones: RR 2, RR 5, RR 10, AG, UR, RL, FL, TPZ, I1, I2, and PI. And all permissible zoning will require either a zoning clearance, an administrative permit, or a minor use permit. Further, depending on the MCCO permit type, there are minimum lot size restrictions ranging from 5 to 10 acres. And also depending on whether you’re an existing cannabis grow or a “new” grow (based on whether you’re moving your existing grow), there are various property setback requirements you will have to follow to achieve compliant zoning.

Right now, the County is still deciding on whether to adopt these proposed ordinances, and they’re talking public comment on them until January 4, 2017. I list all of the above though just to emphasize how difficult and time consuming and expensive it will be to operate a cannabis cultivation business in Mendocino County. But the bad news is that we expect many other California counties to initiate similar requirements.

Stay tuned to see if Mendocino County will embrace the heavy regulations set forth above or go back to the drawing board on cultivation.