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.

Nevada County CannabisCalifornia has 58 counties and 482 incorporated cities across the state, each with the option to create its own rules or ban marijuana altogether. In this California Cannabis Countdown series, we plan to cover who is banning, who is waiting, and who is embracing California’s change to legalize marijuana — permits, regulations, taxes and all. For each city and county, we’ll discuss its location, history with cannabis, current law, and proposed law to give you a clearer picture of where to locate your cannabis business, how to keep it legal, and what you will and won’t be allowed to do.

Our last California Cannabis Countdown post was on the City of Lynwood, and before that, the City of Coachella, Los Angeles County, the City of Los Angeles, the City of Desert Hot SpringsSonoma County, the City of Sacramento, the City of BerkeleyCalaveras CountyMonterey County and the City of Emeryville.

Welcome to the California Cannabis Countdown.

Nevada County has long been a popular spot for cannabis cultivation due to its location and climate, but many longtime growers in the area were displaced in 2012 when the County passed restrictive cannabis regulations. In early 2016, the County banned all outdoor cannabis cultivation but it has since repealed the ban and adopted less restrictive, though still very limited regulations for indoor and outdoor cultivation that have not been well-received by local growers.

Location. Nevada County is located in the Sierra Nevada region of Northern California, bordering the state of Nevada. It was once home to the California Gold Rush of 1849 and it lays claim to many firsts and historic moments, including the first long-distance telephone, the only railroad in the West that was never robbed, and the historic Holbrooke Hotel. The County itself has stated that its “unique geographic and climatic conditions, which include dense forested areas receiving substantial precipitation, along with the sparse population in many areas of the County, provide conditions that are favorable to marijuana cultivation. Marijuana growers can achieve a high per-plant yield because of the County’s favorable growing conditions.”

History with Cannabis. On May 8, 2012, the Nevada County Board of Supervisors passed Ordinance No. 2349, which created regulations for medical cannabis cultivation.

On November 4, 2014, voters in Nevada County rejected Measure S, an initiative from the Nevada County branch of Americans for Safe Access designed to overturn the County’s ordinance and replace it with less restrictive provisions.

On January 12, 2016, the Board adopted emergency Ordinance No. 2405, banning all outdoor cultivation and limiting indoor cultivation to 12 plants per property. At the same time, the Board passed Resolution No. 16-038 to submit Measure W to the voters of the County.

On February 9, 2016, the Board passed Resolution No. 16-082, which clarified that if Measure W was not approved by a majority of Nevada County voters, the Board intended to repeal the ban on outdoor cultivation and adopt other regulations at the next available meeting after the election.

On June 7, 2016, voters in Nevada County rejected Measure W, an initiative proposed by the Board of Supervisors to ban all outdoor cultivation, commercial cultivation, and all other commercial cannabis activities. As a result, the emergency ordinance from January 12th remained in place.

On July 26, 2016, to follow through on the Board’s intention to repeal the ban on outdoor cultivation, the Board approved urgency Ordinance No. 2416 to allow limited outdoor cultivation in the County.

Current Cannabis Laws. Under Ordinance No. 2416, cultivation is permitted in residential and agricultural zones in Nevada County in very limited amounts.

In residential zones:

  • Indoor and outdoor cultivation is prohibited in all R-1, R-2, and R-3 zones
  • In areas designated as residential and estate and zoned R-A:
    • On parcels of 5 acres or less, indoor and outdoor cultivation is prohibited
    • On parcels greater than 5 acres and up to 10 acres, a maximum of 12 plants may be cultivated indoors only; outdoor cultivation is prohibited
    • On parcels greater than 10 acres and up to 20 acres, a maximum of 16 plants may be cultivated indoors, outdoors, or a combination of both; a maximum of 12 plants may be cultivated indoors; outdoor cultivation must be on one contiguous staked grow area not exceeding 800 square feet
    • On parcels greater than 20 acres, a maximum of 25 plants may be cultivated indoors, outdoors, or a combination of both; a maximum of 12 plants may be cultivated indoors; outdoor cultivation must be on one contiguous staked grow area not exceeding 1,000 square feet

In agricultural zones (e.g., AG, AE, FR, TPZ, and areas designated as rural and zoned R-A):

  • On parcels 2 acres or less, indoor and outdoor cultivation is prohibited
  • On parcels greater than 2 acres and up to 5 acres, a maximum of 6 plants may be cultivated outdoors only; cultivation must be on one contiguous staked grow area not exceeding 300 square feet
  • On parcels greater than 5 acres and up to 10 acres, a maximum of 12 plants may be cultivated indoors, outdoors, or a combination of both; outdoor cannabis cultivation must be on one contiguous staked grow area not exceeding 600 square feet
  • On parcels greater than 10 acres and up to 20 acres, a maximum of 16 plants may be cultivated indoors, outdoors, or a combination of both; a maximum of 12 cannabis plants may be cultivated indoors; outdoor cultivation must be on one contiguous staked grow area not exceeding 800 square feet
  • On parcels greater than 20 acres, a maximum of 25 marijuana plants may be cultivated indoors, outdoors, or a combination of both; a maximum of 12 plants may be cultivated indoors; outdoor cultivation must be on one contiguous staked grow area not exceeding 1,000 square feet

In addition, all indoor and outdoor marijuana cultivation must comply with the following setbacks, as measured in a straight line from the nearest border of the grow area to the property line of any adjacent, separately owned parcel:

  • On parcels greater than 2 acres and up to 5 acres: 100 feet
  • On parcels greater than 5 acres and up to 10 acres: 150 feet
  • On parcels greater than 10 acres and up to 20 acres: 200 feet
  • On parcels greater than 20 acres: 300 feet

Proposed Cannabis Laws.

The regulations under Ordinance No. 2416 were passed amidst criticisms and protests from Nevada County residents, but the Board has said the ordinance is meant to be temporary in order to buy time to draft permanent regulations.

On November 8, 2016, the same day as the passage of Proposition 64 in California, the Nevada County Board of Supervisors formed a subcommittee to develop a permanent cultivation ordinance. The County is currently seeking stakeholder and community input on the ordinance and is also seeking proposals for consulting and facilitation services for their Marijuana Regulation Community Advisory Group.

Prop. 64 permits adults in California over age 21 to cultivate up to six plants for personal recreational use. While cities and counties can still ban outdoor cultivation, Prop. 64 does not allow cities and counties to ban indoor personal cultivation though they are allowed to regulate it. In response, the Nevada County Board of Supervisors introduced an amendment to Ordinance No. 2416 on December 13, 2016, to allow indoor personal cultivation of up to six plants per private residence. The Board will consider adopting the amendment at its meeting on January 10, 2017.

California cannabis bankingNow that California will have significant regulation of both its medical and adult use cannabis industries under the Medical Cannabis Regulation and Safety Act and Proposition 64 (the Adult Use of Marijuana Act), respectively, questions are turning to what will happen with California cannabis banking. As the largest state, it’s hugely important California cannabis businesses be able to secure bank accounts (at a minimum). But will they be able to given the federal illegality of cannabis? Despite what we don’t know regarding how California will regulate cannabis businesses, if the FinCEN guidelines from 2014 hold up and if there are some enterprising financial institutions willing to experiment, we think the answer will be yes.

Because cannabis is federally illegal most banks and financial institutions want nothing to do with it. Not only is there potential criminal liability for banks under the federal Controlled Substances Act for aiding, abetting, and conspiracy for taking cannabis money, there may also be liability under the Bank Secrecy Act for money laundering. Until 2014, there was no real banking solution for the cannabis industry because of these federal criminal law issues; if you didn’t lie to get a bank account, it was likely only a matter of time before the bank would shut down your account after discovering that you were engaged in state-sanctioned cannabis cultivation, manufacturing or distribution.

Once Colorado and Washington legalized adult use cannabis in 2012 and the Department of Justice issued the Cole Memo in 2013, the DOJ and FinCEN finally provided some relief for cannabis businesses by developing guidelines for financial institutions wanting to bank the cannabis industry. Those guidelines essentially give a green-light to banks opening accounts for cannabis businesses in state-legal and highly regulated marijuana states so long as they conduct necessary due diligence and monitoring of their cannabis clients and file a Suspicious Activity Report whenever opening such an account.

Since California will have a ton of cannabis regulations under both the MCRSA and Proposition 64, we are confident some California financial institutions will take advantage of the 2014 FinCEN guidelines and open accounts for cannabis businesses. This means that if you receive a California cannabis license under either the MCRSA or Proposition 64 (or both), you will likely be a good candidate for getting a bank account in California.

The main obstacle right now is that bank regulators like FinCEN, the FDIC, and the NCUA will likely withdraw even silent acceptance of cannabis banking if potential U.S. Attorney General Jeff Sessions or President-elect Donald Trump orders the nullification of the Cole Memo. Without support from FinCEN and other federal regulators, state-legislated resolutions on cannabis banking will likely fail. Colorado already tried this with a state-mandated banking cooperative and failed and we do not expect the courts to help on this issue either because of the federal law conflict. And “solutions” like Bitcoin still face a ton of hurdles.

On December 2, California’s State Treasurer, John Chiang, wrote to President-elect Trump, seeking guidance on California cannabis and banking:

Conflict between federal and state rules creates a number of difficulties for states that have legalized cannabis use, including collecting taxes, increased risk of serious crime and the inability of a legal industry under state law to engage in banking and commerce . . . We have a year to develop a system that works in California and which addresses the many issues that exist as a result of the federal-state legal conflict . . . Uncertainty about the position of your administration creates even more of a challenge.

Chiang also wrote in his letter that California may “exacerbate” the banking problem because California’s cannabis economy is going to be so large.

The Department of Treasury has done a commendable job of preserving and defending its marijuana banking guidelines; Treasury Secretary Jack Lew has defended the guidelines to Congress based on public safety and transparency. But Lew isn’t going to be around much longer and last month Trump announced Steven Mnunchin as his nominee for Treasury secretary. I couldn’t find any quotes from Mnunchin on marijuana banking or the FinCEN guidelines, so it’s hard to know whether Mnunchin will support the cannabis banking status quo or not.

Like everything when it comes to Trump’s administration and cannabis, California will just have to stay tuned on the banking front.

California Cannabis
       California Cannabis: possibly delays.

Though California officially legalized cannabis last month, those hoping to walk into a dispensary and legally purchase recreational cannabis will have to wait until state licensing begins. Proposition 64 requires licensing authorities to start issuing licenses by January 1, 2018, however there are now reports licensing could be delayed until 2019. A significant challenge faced by California rule makers are the two conflicting legalization initiatives passed under the Medical Cannabis Regulation and Safety Act (MCRSA) and the Adult Use of Marijuana Act (AUMA).

These challenges were recently discussed at a California cannabis event by Lori Ajax, the Chief of the Bureau of Medical Cannabis Regulation, which is the agency in charge of running both the medical and recreational systems. Assemblyman Jim Wood (who helped to author the MCRSA) also pointed out that the Acts take different approaches to issues ranging from ownership and residency requirements to timelines and license categories. The question then is whether the two systems should run in parallel, like they do in Colorado, or be combined into a single system, like in Washington.

In addition, the two Acts differ on state-level taxes. Both apply a retail tax to sales by dispensaries, however the AUMA also creates a new cultivation tax on licensed growers. California growers argue that the tax could apply to excess plant material that is never sold in market and request the law be changed, but to change a voter-approved initiative in California requires a two-thirds vote of the legislature, which could cause further delays.

Statewide licensing for both medical and recreational cannabis businesses, as well as the implementation of a track and trace system under the AUMA, will also require developing new technology platforms that currently do not exist. If they must be built from scratch, we can again expect further delays in the issuance of state licenses.

Finally, President-elect Trump’s nomination of Senator Jeff Sessions as Attorney General has many in the industry fearing a federal crackdown on marijuana that could slow legalization efforts not only in California, but across the United States. Moreover, cities and counties in California may be weary of moving forward with local licensing in case the federal government begins raiding local cannabis businesses. Since California operates under a dual license system, requiring local compliance before a state license can be issued, delays in local licensing could also lead to delays in the ability of cannabis businesses to apply for and obtain state licenses.

There are many elements at work here and though there is still a chance for everything to run smoothly towards state licensing in 2018, it is starting to look like it is going to be a bumpy ride to statewide regulation in California.

Cannabis lawyerWe have run quite a few real estate deals in Oregon, Washington and California cannabis. No two deals are the same, and as we previously have written, buying and selling land for pot ventures is a trip. An obvious reason for this is the lack of banking services, but another big reason is lack of certain title company services, like escrow. If you are hoping to enlist a title company as escrow in your cannabis property sale, we say to you, “good luck.”

Typically, title companies handle all of the paperwork to close a standard real estate transaction. It is probably easiest to think of these services in three distinct parts: (1) receiving, holding and sending money and key documents (escrow); (2) providing a spot for the parties to iron out details toward the end of a deal (including deeds and other formal documents (closing)); and (3) issuing title insurance. By providing this suite of services, a title company can serve as a “one stop shop” for closing most real estate deals.

Pot deals, of course, are different.

In our experience, title companies generally will close a cannabis deal, and they will even provide title insurance in most cases. However, they generally will not facilitate the exchange of funds. This seems strange initially, but it relates back to banks, and the fact that many banks refuse to service businesses even indirectly involved with cannabis. That includes title companies. Thus, title companies often have formal policies against serving as escrow in cannabis deals, especially where the land already is being used for a pot-related purpose.

Fortunately, it is possible to close a real estate sale without a title company performing escrow services. In those transactions, the buyer and seller will usually engage an attorney to serve as escrow, and the attorney will take instructions on how and when to distribute funds. Though attorneys tend to be more expensive than title companies for this purpose, they are safer than fringe operators offering escrow services, and an attorney worth her salt should be able to run the exchange efficiently.

With respect to title insurance, title companies generally will issue these policies on the rationale that the insurance product relates to land ownership, rather than to the activities taking place thereon. Of course, most title insurance policies in marijuana-related transactions will expressly exclude coverage for governmental actions, including civil and criminal forfeiture under the federal Controlled Substance Act. Before purchasing title insurance, we strongly recommend that the buyer disclose their intended use of the land. Otherwise, the title company has an argument not to pay on claims.

In the coming months, we expect to handle more and more real estate deals for pot businesses and also sellers. The California land grab will heat up in that state’s pot friendly counties, and our Oregon office has seen another spike in land deals from November’s local election results. Our Washington cannabis lawyers are also seeing an increase in land sales, mostly attributable to growers who got in early, but now wish to sell.

Ultimately, the laws around the purchase and sale of commercial real estate tied to cannabis are complicated, and vary state by state. An experienced cannabis attorney with commercial real estate chops will be able to facilitate the purchase or sale of real estate for pot commerce, from title examination through recording the deeds. The attorney will know how to work with the parties’ chosen title company to push the deal through, and how to navigate the unusual aspects of these transactions, like escrow.

 

California cannabis lawyers Since passage of the Medical Cannabis Regulation and Safety Act in California (“MCRSA”), our California cannabis attorneys have been getting calls nearly non-stop regarding what to do now to have a medical marijuana business later. Passage of Proposition 64, California’s legalization initiative, has only accelerated the questions on what to expect when California adds a comprehensive legal marijuana licensing system.

Though the three bills that comprise the MCRSA and Proposition 64 lay the foundation for California’s future medical and recreational marijuana licensing systems, these laws are only the beginning. California’s Bureau of Marijuana Control (“BMC”), and various other California state agencies granted governing authority under these new laws will be filling in the blanks on the actual substance of all medical and recreational rules and enforcement.

The below are the eight most relevant “blanks” for those planning on having a California marijuana business:

  1. Residency Requirements For Cannabis Licensees. The MCRSA does not include a residency requirement, but that could change with future rule making. However, Chapter 5, Section 26054.1(a) of Proposition 64 states that, “[n]o licensing authority shall issue or renew a license to any person that cannot demonstrate continuous California residency from or before January 1, 2015. In the case of an applicant or licensee that is an entity, the entity shall not be considered a resident if any person controlling the entity cannot demonstrate continuous California residency from and before January 1, 2015.” This residency requirement expires on December 31, 2019 unless the California state legislature renews it. If — as expected — California begins issuing cannabis licenses in 2018, California legal marijuana will at least at the start have a residency requirement. However, it is important to note that this residency requirement applies to “controlling persons”  and “controlling” is nowhere defined in the initiative. How the state eventually defines “controlling” will likely determine whether out-of-staters (including residents of foreign countries) can own a licensed California cannabis business.
  2. Cannabis Financing. California’s new laws do not address financing beyond Proposition 64’s residency requirement for ownership and “control.” This means it is not yet clear who can finance California’s marijuana businesses. In some states, residency requirements have essentially forced licensees to rely on money from family and friends (Washington State, for instance). In other states, rule makers have allowed financiers from anywhere to invest in their cannabis businesses. If California borrows from Washington, Colorado, or Alaska, financing for California cannabis businesses will likely be hamstrung by residency. If California takes its financing page from Nevada, Illinois, or Oregon (these are states which do not have residency requirements), cannabis investments in California will likely explode.
  3. For-Profit Cannabis Entities. Though still unclear, our California cannabis attorneys believe for-profit cannabis companies will be allowed under the MCRSA. The MCRSA defines a license “applicant” as an “[o]wner or owners of a proposed facility, including all persons or entities having ownership interest other than a security interest, lien, or encumbrance on property that will be used by the facility,” and defining a “person” as “an individual, firm, partnership, joint venture, association, corporation, limited liability company, estate, trust, business trust, receiver, syndicate, or any other group or combination acting as a unit and includes the plural as well as the singular number.” Proposition 64 has almost identical language for the terms “applicant,” “owner,” and “person.” Will California allow existing non-profit medical marijuana collectives to convert to for-profit companies or will it instead force its cannabis collectives to first wind down and then start brand new for-profit companies? This transition matters for things like the distributing assets upon dissolution, tax consequences, and using the non-profit’s already established goodwill. For more on our views regarding the California non-profit transition, go here.
  4. Priority Cannabis Licensing. Both the MCRSA and Proposition 64 contain priority licensing thresholds. Article 4, Section 19321 of the MCRSA states that “[i]n issuing licenses, the licensing authority shall prioritize any facility or entity that can demonstrate to the authority’s satisfaction that it was in operation and in good standing with the local jurisdiction by January 1, 2016.” Proposition 64 at Chapter 5, Section 26054.2(a) contains the following “priority” language similar to the MCRSA: “A licensing authority shall give priority in issuing licenses under this division to applicants that can demonstrate to the authority’s satisfaction that the applicant operated in compliance with the Compassionate Use Act and its implementing laws before September 1, 2016, or currently operates in compliance with [the MCRSA].” Proposition 64 also provides that “[t]he [BMC] shall request that local jurisdictions identify for the bureau potential applicants for licensure based on the applicants’ prior operation in the local jurisdiction in compliance with state law, including the Compassionate Use Act and its implementing laws, and any applicable local laws.” But none of this reveals much about what priority status will actually mean or the detailed standards for proving it. Does it put you first in line for a cannabis license? Does it get you a cannabis license that no one else can get? It will all depend on how the state defines it, which we likely will not know until it issues its initial rules.
  5. Number of Cannabis Licenses. The MCRSA mandates limiting the number of certain licenses, but it does not specify what those limitations will be. Limited licenses under the MCRSA include the “Manufacturing level 2” license “for manufacturing sites that produce medical cannabis products using volatile solvents,”  the Type 3 outdoor cultivation license, the Type 3A indoor cultivation license, and the Type 3B mixed-light cultivation license. Other than prohibiting large scale cultivation for the first five years of the program, Proposition 64 contains no licensing limitations, though that could change once California starts its rule making.
  6. Cannabis Distribution. The MCRSA mandates distributorships  and it defines “distributor” as “a person licensed . . .  to engage in the business of purchasing medical cannabis from a licensed cultivator, or medical cannabis products from a licensed manufacturer, for sale to a licensed dispensary.” Formerly, distributors were also the only channel through which cultivators and manufacturers could transport product to other manufacturers for further manufacturing, but this changed with this year’s passage of SB 837. Unlike in any other cannabis legal state, California cultivators and manufacturers must go through a licensed distributor to get their product to retail. We anticipate additional roles and responsibilities of the distributor will likely come from the governing state agencies through rule making. Though Proposition 64 requires all licensees use a distributor, that distributor does not have to be an independently-owned company, except for large-scale cultivators with a Type 5 license, which licenses won’t even become available until 2023. Expect future California rule making to clarify the role of distributors under Proposition 64.
  7. Cannabis Licensing Fees. Neither the MCSRA nor Proposition 64 reveal license fee amounts. Given how other recreational states have handled licensing and how California does not want to push out its existing MMJ operators, California likely will make its licensing competitive and its fees at least somewhat reasonable, though it may implement some sort of lottery system for the limited licenses under the MCRSA. In most recreational states, the license application fee has been $250 or less. In medical marijuana states however, license application fees have ranged from approximately $60,000 in Florida (non-refundable) down to $5,000 in Nevada. Both the MCSRA and Proposition 64 mandate license fees be on a “scaled basis” and cover the costs of administering the programs.
  8. Cannabis License Applications. Neither law reveals what California will require in its licensing applications. Even in less competitive cannabis licensing states (like Oregon and Washington) the state regulators want to see every detail of your proposed cannabis business from start to finish. And in the more competitive states (like New York and Maryland), the regulatory authorities usually want a thesis-level explanation of every arm of your business. Based on the experience of our cannabis lawyers in helping clients with cannabis licensing applications in more than a dozen states, we can tell you that, at minimum, you should expect California’s marijuana licensing applications to require the following:
    1. detailed financial and criminal background checks and disclosures for every owner and financier of the business,
    2. calculated start-up costs and annual budget,
    3. a detailed business plan and operational plan,
    4. a floor plan,
    5. proof of a lease agreement or right to use the proposed real property,
    6. buffer measurements,
    7. local law approval or compliance at some point,
    8. fingerprinting,
    9. proof of security measures,
    10. proof of environmental compliance (or capability of compliance),
    11. proof of insurance,
    12. a transportation plan including a planned transportation manifest,
    13. list of products to be cultivated, manufactured, and/or sold,
    14. a list of soil amendments or fertilizers to be used on plants if you’re a cultivator,
    15. the type of closed loop system you’ll work in if you’re a manufacturer, and
    16. how products will be stored and quarantined if you’re a retailer.

For more on what California’s new cannabis regime is going to look like, I urge you to check out our California cannabis page here.

californiaThis is proving to be a big year for cannabis. As a result, we are ranking the fifty states from worst to best on how they treat cannabis and those who consume it. Each of our State of Cannabis posts will analyze one state and our final post will crown the best state for cannabis. As is always the case, but particularly so with this series, we welcome your comments. As a result of the overwhelming success of many cannabis initiatives this November, all the remaining states in this series have legalized the adult use of recreational marijuana. This week we cover the Golden State: California.

Our previous rankings are as follows: 5. Alaska; 6. Massachusetts;  7. Maine; 8. New Mexico; 9. Nevada; 10. Hawaii; 11. Maryland; 12. Connecticut; 13. Vermont; 14. Rhode Island; 15. Kentucky; 16. Pennsylvania; 17. Delaware; 18. Michigan; 19. New Hampshire; 20. Ohio; 21. New Jersey; 22. Illinois; 23. Minnesota; 24. New York; 25. Wisconsin; 26. Arizona; 27. West Virginia; 28. Indiana; 29. North Carolina; 30. Utah;  31. South Carolina; 32. Tennessee; 33. North Dakota; 34.Georgia; 35. Louisiana; 36. Mississippi; 37. Nebraska; 38. Missouri; 39. Florida; 40. Arkansas; 41. Montana; 42. Iowa; 43. Virginia; 44. Wyoming; 45. Texas;  46. Kansas;  47. Alabama;  48. Idaho; 49. Oklahoma;  50. South Dakota.

California

Recreational marijuana. On November 8, 2016 California voters approved the Control, Regulate, and Tax Adult Use of Marijuana Act (AUMA). California is the largest state in the nation and after the AUMA is fully implemented, the 38 million people (children excluded) who reside in California will have access to legal marijuana. Needless to say, this is huge.

The AUMA is a complicated, 62-page measure. At its most basic, the AUMA allows adults (21 and over) to possess roughly an ounce of cannabis flower, eight grams of concentrate, or up to six plants. It also creates a regulated market for the production, manufacture, and sale of marijuana.

The AUMA creates 19 distinct cannabis licenses:

  1. Type 1 = Cultivation; Specialty outdoor; Small.
  2. Type 1A = Cultivation; Specialty indoor; Small.
  3. Type 1B = Cultivation; Specialty mixed-light; Small.
  4. Type 2 = Cultivation; Outdoor; Small.
  5. Type 2A = Cultivation; Indoor; Small.
  6. Type 2B = Cultivation; Mixed-light; Small.
  7. Type 3 = Cultivation; Outdoor; Medium.
  8. Type 3A = Cultivation; Indoor; Medium.
  9. Type 3B = Cultivation; Mixed-light; Medium.
  10. Type 4 = Cultivation; Nursery.
  11. Type 5 = Cultivation; Outdoor; Large.
  12. Type 5A = Cultivation; Indoor; Large.
  13. Type 5B = Cultivation; Mixed-light; Large.
  14. Type 6 = Manufacturer 1.
  15. Type 7 = Manufacturer 2.
  16. Type 8 = Testing.
  17. Type 10 = Retailer.
  18. Type 11 = Distributer.
  19. Type 12 = Microbusiness.

The AUMA allows for vertical integration of these licenses, with the exception of testing licensees; if you have a testing license, you cannot hold another type of license. This means one entity may hold licenses in multiple stages of production, possibly controlling cannabis from seed-to-sale.

State residency is required for licensure, as indicated by the following text in the AUMA:

No licensing authority shall issue or renew a license to any person that cannot demonstrate continuous California residency from or before January 1, 2015. In the case of an applicant or licensee that is an entity, the entity shall not be considered a resident if any person controlling the entity cannot demonstrate continuous California residency from and before January 1, 2015.

This provision expires on December 31, 2019, unless the California legislature extends it. This essentially creates a three-year residency requirement for California applicants. It is not clear who will be considered a “controlling” person of an entity and we expect the state to provide guidance on this issue as the AUMA is implemented.

Medical Marijuana. Twenty years ago, California became the first state to implement a workable medical marijuana program and the laws and rules have developed over time. In California, a patient may use medical cannabis upon receiving a approval from a physician. Patients may possess enough cannabis necessary for their personal medical use, but this amount must be reasonable and in compliance with any local ordinances that may limit personal amounts. Patients can purchase cannabis from cooperatives and dispensaries. Patients have the option to obtain a state ID card showing they are allowed to use medical cannabis. Under the AUMA, these ID cards may also allow for a local tax exemption.

The AUMA is intended to regulate the non-medical use of marijuana but, there will be some overlap in the agencies regulating cannabis under the AUMA. The “Bureau of Marijuana Control”, a sub-agency of the Department of Consumer Affairs will regulate and license California’s recreational marijuana market. This sub-agency is distinct from the Bureau of Medical Cannabis Regulation (BMCR) which oversees the medical market. However, the AUMA makes clear that it will “consolidate and streamline regulation and taxation for both non-medical and medical marijuana.” This means the BMC may eventually subsume the BMCR. The AUMA also reinforces stricter requirements on physicians who authorize medical marijuana use.

Californians should look at the cannabis progression in Washington State as an example of what may end up happening with recreational marijuana legalization in California.  When Washington Initiative 502 passed in 2012 and legalized recreational marijuana, many medical marijuana activists were concerned about its impact on medical pot and on July 1, 2016, the two markets (recreational and medical) officially merged. California is distinct from Washington because medical cannabis is already regulated by state and local agencies. Washington’s medical market was largely unregulated when I-502 passed. Time will tell what impact the AUMA has on California’s medical marijuana, but there is a good chance that California too will eventually see a merger of its medical and recreational cannabis regimes.

Bottomline. California legalized medical marijuana in 1996, becoming the first state to allow cannabis for medical use.  The AUMA is a detailed measure that should lead to a robustly regulated marijuana market. California legalization may be the tipping point that leads to legalization at the federal level. California has the potential to be the top cannabis state in the nation (by far), and we expect California’s ranking among the states to only rise. But for now, we rank it number 4, making it  our top state that has yet to implement a recreational program, but behind the three states that already have full-on recreational cannabis programs in place — Colorado, Oregon and Washington.

Our California cannabis attorneys are constantly writing about California’s cannabis laws and so if you want to read more about California, click California cannabis for all of our California articles.

California Cannabis LawyersOur California cannabis attorneys are constantly receiving inquiries from individuals interested in starting cannabis companies in the City of Los Angeles. But for many reasons, Los Angeles is not the best place to set up shop.

First, you will not be able to operate a legally compliant business (except under a very small exception). Los Angeles does not permit any cannabis businesses but allows a select 135 businesses to operate under immunity from prohibition under Proposition D. These businesses must meet certain criteria, the first of which is that they have been registered to operate in the city since 2007 (also known as “pre-ICO” businesses). This means your only options for starting a cannabis business in Los Angeles are to either purchase an existing pre-ICO business or find yourself a working time machine. (Note: Los Angeles County is even more restrictive with a nearly complete ban on all marijuana activities.)

Second, if you decide to move forward anyway and operate an illegal cannabis business in Los Angeles, you risk severe fines and possible jail time. The Los Angeles City Attorney has been busy cracking down on illegal cannabis businesses and claimed to have shut down over 500 illegal businesses as of early last year. More recently, the City began targeting illegal cannabis delivery companies through court-enforced injunctions and landlords renting to illegal businesses through criminal complaints. Here again is a list of over 400 criminal cases filed against illegal medical marijuana businesses by the Los Angeles City Attorney as of July 7, 2016.

Finally, if you are at all interested in obtaining a state license in 2018, then you would be wise not to locate your business in Los Angeles. Both the MCRSA and Proposition 64 require applicants to demonstrate compliance with local laws in order to apply for and receive a state-issued cannabis license. For Los Angeles-based businesses, that means showing compliance with Proposition D through confirmation to the state from the City itself. Again, this option will be limited to those select businesses that have been operating since 2007.

Yet even with all these factors against setting up a cannabis business in Los Angeles, there continues to be a lot of interest in the area. One explanation could be the dispensaries on every corner that lead some to falsely assume cannabis businesses are not only legal in Los Angeles, but very easy to start. Another cause of confusion is the fact the Los Angeles has continued to issue tax certificates to illegal cannabis businesses. But it is an “urban legend” that receiving a tax certificate means a business is legal. In fact, earlier this year, the Los Angeles City Council voted to stop issuing new tax certificates to medical marijuana collectives while emphasizing that an issued tax certificate does not indicate a business is legal.

We want to remind everyone operating or interested in starting a cannabis business in the City of Los Angles, that registering to pay taxes as a cannabis business gives you zero rights to operate in Los Angeles and provides zero defense if the City later shuts you down for operating illegally. To put it bluntly, unless you are one of the aforementioned 135 businesses granted immunity under Proposition D, you are operating an illegal drug business in violation of local, state, and federal law.

Cannabis real estate lawyersThe Denver Post ran a story Sunday on the high rents marijuana businesses have to deal with nationwide. In Portland, for example, rental property that typically goes for five dollars per square foot goes for three times that amount for cannabis businesses. Though rents for cannabis businesses in Washington and Colorado are stable, they are still well above the market rate. Real estate investors looking to lease to cannabis businesses are gambling that this trend will continue.

There are several things pushing up cannabis rents, many of which are discussed in the Denver Post article, all of which decrease the available supply of cannabis real estate. Any property with an existing deed of trust or mortgage held by a financial institution runs some extra risks. The vast majority of mortgages contain a clause mandating that the property only be used lawfully. If a property has a cannabis business use on it, the bank can call the loan in default and accelerate the principal so it’s all due immediately and giving the bank right to foreclose if the borrower cannot find alternative financing. Many cannabis businesses are at locations with mortgages now, and banks are tacitly accepting the businesses so long as the legal climate doesn’t change. If the legal climate does change and federal law enforcement becomes a real threat, the banks holding notes on cannabis properties could well use the legal changes as their opportunity to call their note in default, either getting their money back or allowing them to foreclose. Because of this threat from banks, most cannabis businesses prefer to lease property owned outright (without any bank note), and most landlords with financed property prefer to lend to businesses that are federally legal.

The hodge-podge of state and local cannabis regulations also tends to drive up the price of cannabis business real estate. State laws that limit how close cannabis businesses can be to a school, a park, a church, or another cannabis business also limits the number of properties available to cannabis businesses. When you add in local zoning codes that often push cannabis businesses to heavy industrial areas and building codes that often require cannabis production facilities to have full fire suppression and air quality systems in place, the list of available properties for the marijuana industry plummets even further. With so many marijuana businesses fighting for so few spaces, it is no wonder real estate prices skyrocket.

Finally, there is still a ton of money being invested into cannabis real estate from out of state and foreign investors. Many marijuana licensees lack sufficient capital to build out growing facilities, and they look to turn-key real estate opportunities, often with deferred rent, where they are expected to pay out the nose when they start making revenue. These higher-priced turn key facilities tend to increase the price ceiling even for landlords that only offer bare warehouse space. Hardly a day goes by where one of my firm’s cannabis business attorneys does not get a call from someone on the East Coast asking us about cannabis real estate opportunities in Washington, Oregon, or California. Even public companies are involved in the turnkey cannabis real estate market, including Innovative Industrial Properties, Inc., a cannabis related REIT that did an IPO on the NYSE just a few days ago.

So, is the upward trend in cannabis real estate likely to continue? Real estate investors are showing signs of skepticism. Innovative Industrial Properties didn’t have the strongest IPO, raising $67 million when it hoped for $175 million. The media has tended to blame President-elect Trump’s choice of Jeff Sessions to run the Justice Department, which is a real concern for everyone, but there may be other factors at work.

In Washington State, cannabis businesses that are renting warehouse space in heavily populated King and Pierce counties are facing fierce competition from outdoor growers from eastern Washington. Outdoor grown marijuana has long been perceived to be inferior to indoor-cultivated product, but outdoor growers are rapidly developing techniques to increase the quality and consistency of their products. The continued trend toward oils and other concentrates also puts downward pressure on the relative value of crafted indoor product.

Outdoor spaces, especially in rural counties, tend to be significantly cheaper than urban or suburban warehouse space. If more growers see those areas as real alternatives, warehouse prices may fall. And even if the Trump-Sessions administration makes policy choices that decreases the availability and increases the price of cannabis real estate, the long-term trend is still toward legality, with cannabis looking more like other businesses. As the cannabis industry “normalizes,” we should expect  lease rates for cannabis businesses to fall more in line with lease rates for other businesses. Real estate investors should be careful not to overpay based on their assuming the current cannabis leasing market will last forever.

What are you seeing out there? What are your thoughts on where cannabis real estate is heading?