california cannabis l.a. social equity phase 3The final countdown is on for Round 1, Phase 3 retail licensing in Los Angeles. On September 3rd at 10 a.m., the L.A. Department of Cannabis Regulation (DCR) will open the flood gates to would-be Round 1 applicants. And in its own announcements on the subject, the DCR states that it has verified over 800 social equity applicants (out of 1800 applicants that applied–though the City is continuing to process people) that will vie for the first 100 coveted Type 10 retail licenses (75 of which will go to Type 1 social equity applicants and 25 of which will go to Type 2 social equity applicants). Where Round 1 licensing is first come, first served with an online application via the City’s Accela licensing portal, it’s going to be fast and furious on September 3rd to get a license.

In case you missed it, I’ve written many times about the evolution of and qualifications for Phase 3 licensing in L.A–see here, here, and here (and here for delivery licensing). Importantly, if you failed to get your social equity applicant qualified by the City by July 29th, you’re automatically out. And if you were proposing to apply in an area already hit by undue concentration, you’re also toast. The City announced that the following community plans are off limits for Round 1 applicants:

  • Central City
  • Central City North
  • Harbor Gateway
  • Sherman Oaks – Studio City- Toluca Lake – Cahuenga Pass
  • Sun Valley- La Tuna Canyon
  • Venice

The City’s useful licensing map shows us what’s still up for grabs by community plan when it comes to undue concentration limitations.

If you’re applying in an area that’s reached undue concentration, the City isn’t leaving you completely hanging. Instead, you must first receive a finding of Public Convenience or Necessity (PCN) from the City Council before DCR will accept and process your application. You can still file on September 3rd, but you’ll be re-routed automatically to the PCN process. You have to pay a $1,499 PCN fee within 10 calendar days of submitting the PCN request. The PCN request is then transmitted to the Office of the City Clerk for City Council consideration. Importantly, “PCN requests are not pending applications, do not receive a timestamp, and do not prevent another applicant from submitting a competing PCN request in the same area.”

One of the hallmark criteria for Round 1, in addition to meeting the social equity qualification, is proof of right to real property for your intended license type. And the City has revealed what it wants to see to prove this requirement–either a lease or deed in the name of the applicant, with proof of deposit in the event of a lease (see discussion below). The real property also has to meet all sensitive use buffers and zoning requirements, too.

If you’ve checked the boxes on social equity verification and your property meets the sensitive use buffer, zoning, and undue concentration requirements (and you have a lease or deed in the name of the licensing applicant), you should be turning your immediate attention to the licensing checklist recently compiled by DCR. Here are the key elements for filing on September 3rd:

  1. You need your own Accela account and you should create it way before September 3rd to avoid technical glitches. I highly recommend having your own Accela account and not having a lawyer or a consultant create that account and then submitting your application on your behalf. This is the easiest and best way to know and be sure in a first come, first served system that you’ve submitted everything yourself (including attestation forms that must be executed by the applicants, themselves). It’s completely fine to have your lawyer or your consultant looking over your shoulder to confirm you’re doing everything correctly as you go along, but applicants should be the primary on the account and be the ones to actually submit, in my opinion.
  2. Get really friendly with Zimas for the City as you will have to, in real time, verify that your property qualifies under City rules.
  3. As soon as possible, prepare the documents you need to generate for yourself (meaning, the information required hereunder will not be provided on a form generated by DCR):
    • Lease or deed. Please remember that putting together a decent cannabis lease is no picnic and be aware of the many pitfalls, especially as the lease may actually go live if you secure a Round 1 license. Also, DCR will not accept non-binding documents like letters of intent, and the lease or property deed must be in the legal name of the applicant applying for the license. If you submit a lease, you must also provide a proof of depositProof of deposit for a lease “in the form of a financial record that reflects the deposit, including but not limited to a copy of a check, money order, or financial institution document may be submitted.”);
    • Premises diagram. This diagram has to be drawn to scale; if the proposed premises consists of only a portion of a property, the diagram must be labeled indicating which part of the property is the proposed premises; and the diagram has to show the boundaries of the property and the proposed retail premises to be licensed, showing all boundaries, dimensions, entrances and exits, interior partitions, walls, rooms, windows, and doorways. Notably, the diagram does not need to provide any information not listed above, such as the placement of security cameras or specific descriptions of the types of activities that will take place in each area of the premises); and
    • Equity share documents. You have to provide DCR all business records and agreements necessary to demonstrate that the verified social equity applicant maintains at least the minimum equity share in the applicant business entity. Basically all corporate governance and any equity transactional documents and/or agreements having to do with economic and/or control rights (including management agreements and even loans) have to be forked over to the DCR.  And “equity share” means a share of all of the following: a business’s profits, including dividends, distributions or other payments; the proceeds of a sale of a business’ assets, liquidation of a business, merger of a business into another business, or another transaction that would constitute the end of an original business; and the voting rights on fundamental decisions relating to the business. Without a doubt, there will likely be many applicants that do not submit secret side letters they have with their partners or other arrangements that violate L.A.’s social equity program, so winners in Round 1 may expect a swift audit by DCR to ensure compliance with the equity share rules).
  1. 4. The remaining documents required by the City for Round 1 will all be provided in a form format in the Accela portal. They are:
    • Ownership and financial interest holder disclosure form (note that DCR, unlike the Bureau of Cannabis Control (BCC), is not as concerned with multi-layered corporate structure disclosures–full organizational charts are optional on September 3rd);
    • Financial information form (this is identical to the BCC’s form for state licensing);
    • Proposed staffing and security plan;
    • Labor peace agreement attestation;
    • Indemnification agreement; and
    • Radius map attestation (this requirement is kind of a hybrid where applicants have to provide a copy of their own radius maps, too. This radius map can be either (i) a radius map prepared by a mapping or surveying company or (ii) a ZIMAS map prepared by the applicant along with the attestation.)

Applicants should not hesitate to begin forming their business entities and generating their “equity share” documents, which are extremely important and will take time to structure and negotiate (and they should afford contingencies for what happens if a Round 1 license is not secured). In addition, applicants, right now, should begin gathering the necessary information to satisfy all of the disclosure requirements they’ll have to face on September 3rd.  Without a doubt, Round 1 in L.A. has been long anticipated and many, many applicants will fight for the first 100 licenses. A combination of organization, preparation, and speed at the computer will rule the day for Round 1 in Los Angeles. So, prepare now!

l.a. cannabis phase 3
L.A. is not making things easy.

A lot of attention has been paid recently to brick and mortar retail licenses in the City of Los Angeles for Phase 3 licensing, which is set to commence in early September of this year. While L.A. is trying its best to champion social equity with its Phase 3 storefront licensing, it’s also going to develop a Delivery Pilot Program for social equity applicants in the City.

As a recap of Phase 3 in L.A., the first 100 Type 10 (brick and mortar retail) licenses will go to social equity applicants on a first-come, first-served basis (specifically, the first 75 Tier 1 applicants and the first 25 Tier 2 applicants will get licenses if they meet all eligibility requirements) in Round 1. For Round 2, which will be for 150 Type 10 retail licenses, this will also be on a first-come, first-served basis. The Round 1 window is going to be extremely short–only 14 calendar days (preceded by a 15 calendar day notice from the DCR). Businesses are only eligible to apply if they have a verified Tier 1 or 2 social equity “Owner” (with the mandated equity share in the business). Importantly, an individual can’t be the Tier 1 or Tier 2 social equity Owner for more than one applicant in Round 1, and existing medical marijuana dispensary (“EMMD”) owners can’t act as social equity Owners in this round either. The Round 2 window is 30 calendar days for 150 licenses that will also go to pre-verified Tier 1 and 2 social equity applicants (without any processing priority between those two groups). Note that the Department of Cannabis Regulation (“DCR”) began the pre-vetting process for social equity applicants for Round 1, Phase 3 licensing very recently– on May 28th, 2019. This window is open until July 29, 2019 (see here for how to demonstrate your social equity status to the City).

Specifically regarding Type 9 non-storefront, delivery only licenses, the DCR will, on a date to be determined in the future, begin accepting applications for delivery (there will be a 15-day notice before this particular window opens, too). Eligibility for a Type 9 license hinges on submitting at the time of filing: 1) a copy of an executed lease agreement with proof of a deposit or property deed for the business premises (yes, even as a delivery service, you have to have a physical facility to store your inventory); 2) a premises diagram; 3) proposed staffing, security, and delivery plans; 4) a dated radius map including horizontal lines and labeling of any sensitive uses relative to a Type 9 License; 5) an indemnification agreement with the City; 6) a current Certificate of Occupancy for retail use for the business premises; and 7) all business records and agreements necessary to demonstrate that a Tier 1 or Tier 2 social equity applicant owns the minimum equity share in the Type 9 applicant (i.e., a Tier 1 must own at least 51% and a Tier 2 must own at least 33%). Criteria number 7 is “as applicable” in that the City must also issue on a 2 to 1 basis Type 9 licenses to general public, non-social equity applicants.

Regarding order of priority for Type 9 applicants, the DCR will process a total of 60 Type 9 applicants in Round 1 of licensing (delivery actually has three rounds). 40 of these licenses will go to first Tier 1 and 2 social equity applicants, and 20 will go to the first general public applicants that don’t have any social equity component (to satisfy the 2:1 licensing ratio required under LA law). These licenses represent the City’s Delivery Pilot Program, and these applicants must submit 1-7 (7 as applicable) per the above at the time of filing.

For Round 2 of delivery licensing, importantly, if you applied but were rejected for a Type 10 license in Rounds 1 or 2 because your proposed storefront location was in a geographic area of undue concentration limits or within a 700-foot radius of another Type 10 application, you get priority processing for a Type 9 license relative to all other applicants except those in the Delivery Pilot Program.

And Round 3 of delivery licensing is for those non-retail applicants that applied for licensure in Phase 2 licensing. Those applicants can, at a time TBD by the DCR, amend their Phase 2 annual applications to include delivery.

Very importantly, even though we don’t have a set date yet for when delivery licensing will open in Phase 3, if you want social equity delivery licensing in Phase 3 as part of the Pilot Program, you still need to get vetted now during the social equity vetting window that’s open until July 29th. See here for that online application.

The bottom line is this: The same directives we’ve preached before apply for delivery licensing in LA–start now in gathering your business and real estate documents to ensure that you make a timely submission to the City when the delivery window opens, and do not forget to right now (through July 29th only) get pre-qualified as a social equity candidate with the City if you want in on the Pilot Program.

l.a. cannabis social equity tier 3The prelude to Phase 3 licensing in the City of L.A. is finally upon us. Today, L.A. will begin accepting applications for Phase 3 social equity applicants for retail and delivery in the City. Specifically, Phase 3 social equity applicants will have from today through July 29th to prove up their Tier 1 or Tier 2 status. And if they can do that, they’ll move on to be able to apply for actual licensure in Phase 3, which kicks off (or should kick off) in September of this year.

If you have any hope at all of securing a coveted L.A. brick and mortar retail or delivery retail license, you must apply as a Tier 1 or 2 social equity applicant in Phase 3 and you must first demonstrate your Tier 1 or 2 eligibility in this 60-day window set up by the Department of Cannabis Regulation (DCR). This is incredibly important as the City will not accept eligibility applications after July 29th. Moreover, only 250 retail licenses remain in the entire City.

Logistically, Tier 1s and 2s will apply online through the DCR’s licensing portal. This is the specific link to register for pre-verification. There is no application or verification fee and this is not a first come, first serve process–the City will simply review eligibility applications as they come in and respond to applicants as quickly as possible. The date at which you file in this pre-vetting window has nothing to do with your place in line when Phase 3 actually opens in September. Most important of all for this 60-day window is that applicants must also upload “various documents to prove certain eligibility criteria.”

Translated: you’ll need to provide physical evidence of your low income status, your residency in a Disproportionately Impacted Area, and/or your cannabis arrest or conviction when you file online.

In the future, DCR will make the rounds on verifying that social equity applicants receive their mandatory equity allocations in their cannabis businesses but, for now, DCR is solely focused on basic eligibility criteria. For more on that criteria and how to prove you meet it, see here. Now is the time to compile your eligibility documentation so that you’re not caught flatfooted at the end of July. And applicants should include their strongest, prima facie evidence of Tier 1 or Tier 2 status where the DCR allows a range of evidence to come in, including declarations signed under penalty of perjury (which you’ll need to draft yourself since there is no designated City form for that).

Finally, it’s worth revisiting the ownership thresholds at play in this convoluted process. A Tier 1 social equity applicant must own at least 51% of the applicant business and has to meet the following criteria:

  1. Low Income (which means means 80% or below of Area Median Income for the City based on the 2016 American Community Survey and updated with each decennial census) and prior California Cannabis Arrest or Conviction (which means an arrest or conviction in California for any crime under the laws of the State of California or the United States relating to the sale, possession, use, manufacture, or cultivation of cannabis that occurred prior to November 8, 2016); or
  2. Low Income and a minimum of 5 years cumulative residency in a Disproportionately Impacted Area (which means total (not consecutive) years in those eligible zip codes based on the “More Inclusive Option” as described on page 23 of the “Cannabis Social Equity Analysis Report” commissioned by the City in 2017, and referenced in Regulation No. 13 of the Rules and Regulations, or as established using similar criteria in an analysis provided by an applicant for an area outside of the City).

As to Tier 2, each social equity applicant has to have at least 33 1/3% equity in the applicant business and has to meet the following criteria :

  1. Low Income and a minimum of 5 years cumulative residency in a Disproportionately Impacted Area; or
  2. A minimum of 10 years cumulative residency in a Disproportionately Impacted Area.

Yes, there is overlap between the Tier 1s and Tier 2s per the above, and if you don’t know which tranche you qualify for, the DCR will let you apply for both in the next 60 days. The DCR’s social equity program FAQ is also a helpful resource for addressing ambiguities about the program, so be sure to check it out before you start throwing documents at the City.

It is incredibly important for stakeholders to understand that today doesn’t represent the actual opening of the Phase 3 licensing window–people won’t submit their business or real property documents to the DCR until September when Round 1 and 2 of Phase 3 licensing commence. This window is only dedicated to qualifying social equity applicants and that’s it.

So, gather and organize your eligibility documents and get them into the City well before July 29th. And if you haven’t sorted your business dealings yet for the actual cannabis businesses, it’s never too early to start planning for Round 1 in September. Last, because social equity applicants are going to be the hottest (and only) ticket in L.A. for retail licensing, be on the lookout for hawkish, predatory business partners as they’re a dime a dozen in L.A.’s emerging cannabis scene.

L.A. Phase 3 marijuanaIn case you missed it, at the end of last month, the City of L.A. finally decided on what to do with Phase 3 cannabis licensing regarding retail and retail delivery (see here and here for the City’s newest ordinances). In addition, City Council instructed the Department of Cannabis Regulation (“DCR”) to begin the pre-vetting process for social equity applicants for Round 1, Phase 3 licensing no later than May 28th, 2019 and to begin taking applications for Round 1 of Phase 3 no later than September 3, 2019. This is the first time the City has given any indication of when it expects Phase 3 to finally open. And when that pre-vetting opens, it’s going to be fast and furious for applicants to file as it will be when Phase 3 licensing commences.

There are significant changes to note for this Phase 3 overhaul. Prior to the commencement of opening Phase 3, the DCR must first determine social equity eligibility through a pre-vetting process that will take place for 60 calendar days (see here for a breakdown of social equity in LA). It’s highly likely that the DCR will use the same social equity eligibility criteria as it did in Phase 2 to decide who gets to proceed to the actual licensing window. And if you need to know who qualifies for what under social equity, check out the DCR’s FAQ page on the topic. The long-awaited “social equity assistance” for Tier 1 and 2 social equity applicants has to be in place for 45 days prior to Phase 3 actually opening. After social equity pre-vetting is done and technical assistance has been available for the mandatory time, the DCR will open Phase 3 for the first 100 Type 10 (brick and mortar retail) licenses on a first-come, first-served basis (specifically, the first 75 Tier 1 applicants and the first 25 Tier 2 applicants will get licenses if they meet all eligibility requirements (see below, too)). This is now known as Round 1. For Round 2, which will be for 150 Type 10 retail licenses, this will also be on a first-come, first-served basis. Notably, DCR’s determination of whether an individual is a Tier 1 or Tier 2 social equity applicant shall be made with no hearing and is final and not appealable.

The Round 1 window is going to be extremely short–only 14 calendar days (preceded by a 15 calendar day notice from the DCR). Businesses are only eligible to apply if they have a verified Tier 1 or 2 social equity “Owner” (with the mandated equity share in the business). Importantly, individual can’t be the Tier 1 or Tier 2 social equity Owner for more than one applicant in Round 1, and EMMD owners can’t act as social equity Owners in this round either.

The difference between Round 1 and 2 is mainly three-fold: more licenses will be given in Round 2, more qualifying information is required for Round 1, and the licensing window is longer for Round 2; showing that you have proof of right to real property for your commercial cannabis activity is required in Round 1 upon filing (and it’s not required in Round 2 at the time of filing). For Round 1, applicants must give over to the DCR: “1) a copy of an executed lease agreement with proof of a deposit or property deed for its Business Premises; 2) an ownership and financial interest holder form; 3) a financial information form; 4) a Business Premises diagram; 5) proposed staffing and security plans; 6) a dated radius map including horizontal lines and labeling of any sensitive uses relative to a Type 10 License; 7) a labor peace agreement attestation form; 8) an indemnification agreement; and 9) all business records and agreements necessary to demonstrate that a Tier 1 or Tier 2 Social Equity Applicant owns the minimum equity share in the business.” Round 1 and 2 businesses will still be subject to undue concentration unless they can secure a Public Convenience or Necessity waiver from the City Council.

The Round 2 window is 30 calendar days for 150 licenses that will also go to pre-verified Tier 1 and 2 social equity applicants. In Round 2 though, at the time of filing, applicants only have to submit to the DCR “a financial information form; a labor peace agreement attestation form; and an indemnification agreement.” Those 150 applicants will then have 90 days to supplement their applications with the more robust information required by the DCR.

The City also solidified its Type 9 delivery pilot program, which I’ll be covering in more detail in my next post on Los Angeles cannabis licensing next week.

Whether you’re shooting for Round 1 or 2, now that the DCR has a path forward, it is absolutely time to start gathering your proof of social equity eligibility. The DCR has been clear in the past about the documents it will accept to establish this status, so there’s no time to waste in at least beginning to look at the City’s previous guidelines to get organized for pre-vetting.

los angeles cannabis licensing tier IIIThis past weekend was the hallowed 4/20 holiday for those who celebrate and participate. Prior to 4/20, the City of L.A. made some progressive moves towards bolstering consumer protection in the City concerting illegal cannabis (see this pretty great interactive map for your legal cannabis providers in City borders) and rounding out (legally speaking) the Phase III licensing process that’s been long awaited by stakeholders.

When I last wrote about Phase III back in February, things were still fairly up in the air for how the City would allocate the remaining coveted retail licenses. In early February, the Department of Cannabis Regulation (“DCR”) proposed to the Rules, Elections, and Intergovernmental Relations Committee (“Committee”) the concept of a first come, first served system, lottery, or merit-based review to divvy up those licenses between those social equity applicants that had real property and those that didn’t in order to “make our licensing process more efficient, transparent, and, most important, equitable.” The Council (after a hearing with the Committee and the DCR) came back at the DCR with a different set of proposals for Phase III reform. Namely, to study how other cities have handled social equity and limited licensing.

On April 16th, after adopting the City Attorney’s April 12th report, the Council also decided to adopt this April 12th draft ordinance (subject to certain Council amendments and additions to the DCR and City Attorney from April 16th). Council will review this amended ordinance for adoption on April 30th.

The April 12th ordinance does a lot of things to reform cannabis regulations in L.A. It’s biggest impact is the creation of a first come, first served system for Phase III licensing, which basically tracks the original proposals from DCR from back in February. Here is a general overview of how Phase III will now work (assuming the revised ordinance passes on April 30th):

  1. When the DCR decides it’s time, for 60 calendar days (or, on Council’s April 16th recommendation, this window will close 30 days after Council “adopts the findings of the Enhanced Social Equity Analysis”), applicants for Phase III Type 10 retail licensing (i.e., brick and mortar) can apply to the DCR to be vetted and approved as either Tier 1 or Tier 2 Social Equity applicants. Licensing will then be split up into two “Rounds”.
  2. For Round 1 licensing, for a period of 14 calendar days (provided that the DCR posts written notice of Round 1 on its website 15 days before the 14-day window opens), the DCR will process the first 100 Type 10 retail licenses.
  3. To qualify in Round 1, an applicant business must have a Tier 1 or Tier 2 Social Equity applicant already verified (for more on social equity in L.A. generally, see here). Importantly, a Tier 1 or Tier 2 cannot be the social equity component for more than one business applicant in Round 1. And any individual who is an “owner” of an EMMD can’t be the Tier 1 or Tier 2 Social Equity applicant.
  4. During the 14-day application window, applicants have to submit to the DCR a complete application that includes the following: 1) a copy of an executed lease agreement with proof of a deposit or property deed for its business premises; 2) an ownership and financial interest holder form; 3) a financial information form; 4) a Business Premises diagram; 5) proposed staffing and security plans; 6) a dated radius map including horizontal lines and labeling of any sensitive uses relative to a Type 10 retail license; 7) a labor peace agreement attestation form; 8) an indemnification agreement; 9) a current Certificate of Occupancy for retail use for the business premises; and 10) all business records and agreements necessary to demonstrate that a Tier 1 or Tier 2 Social Equity applicant owns the minimum equity share in the business as required under current City law.
  5. The first 100 applicants that meet all of the foregoing will go forward for further license processing, which represents the “first come, first served” system in play.
  6. For Round 2 for the remaining Type 10 retail licenses (which Council instructed the City Attorney to increase the number to 150 from the originally contemplated 100 because of Undue Concentration), when the DCR decides it’s time to open the window, they’ll process Round 2 applications for 30 calendar days, but this Round 2 window cannot open “until DCR has made business, licensing, and compliance assistance available to  [pre-verified] Tier 1 and Tier 2 Social Equity applicants . . . for a period of at least 30 calendar days” (note that Council wants this assistance in place for 45 days before Round 1 opens instead of for 30 days before the commencement of Round 2).
  7. To qualify for Round 2, an applicant must have an individual “owner” that is a Tier 1 or Tier 2 Social Equity applicant that’s already been verified by the City.
  8. During the 30-day application period, applicants have to submit a complete application that includes the following: 1) an ownership and financial interest holder form (though Council requested that the ownership structure information only be required as part of number 9 below); 2) a financial information form; 3) a labor peace agreement attestation form; and 4) an indemnification agreement.
  9. The first 150 applicants that submit an application that meet the foregoing requirements then get 90 calendar days, when the DCR calls it, to then submit: 1) a copy of an executed lease agreement with proof of a deposit or property deed for its Business Premises; 2) a business premises diagram; 3) proposed staffing and security plans; 4) a dated radius map including horizontal lines and labeling of any sensitive uses relative to a Type 10 retail license; 5) an indemnification agreement; 6) a current Certificate of Occupancy for retail use for the business premises; and 7) all business records and agreements necessary to demonstrate that a Tier 1 or Tier 2 Social Equity applicant owns the minimum equity share required by current City law.

Note also that Council wants to add to the ordinance: the ability of Type 10 or 9 retailers to be able to add other non-retail commercial cannabis uses to their license applications when they’re in pursuit of their City annual licenses; that as of January 1, 2010, DCR is allowed to process additional Type 10 retail license applications so long as mandatory social equity ratios are honored and Undue Concentration isn’t violated; and a prohibition on the “sale or major change of ownership” of a social equity licensed business until “minimum standards are adopted” unless “extenuating circumstances” exist as determined by the DCR.

We finally know what Phase III is going to look like in L.A., which will probably cause a lot of relief and also major anxiety. Without a doubt though, Phase III retail licensing in L.A. is now going to be a massive race to get in complete applications, and it will be a feeding frenzy for business folks to partner with social equity applicants (so be on the look out for predatory tactics). For those out there that have been sitting on property in L.A. just waiting for Phase III to open, now is the time to start preparing for the submission of your complete application to the DCR as one missed or incorrect document can spell rejection. Be sure to organize and analyze accordingly.

We’ll be sure to keep our eye on the revised Phase III ordinance as April 30th approaches.

On April 10, 2019, the Los Angeles Department of Cannabis Regulation (or “DCR”), the local department that oversees cannabis operators, sent an email blast regarding its newly re-designed website. One of the many new features is an interactive city licensing map, which breaks down each individual neighborhood in the City of Angels for retail operations.

The interactive map allows users to hover over each neighborhood in the City of L.A. and see how many retail licenses may be issued, how many have been authorized, and how many are available. This is a big gift for phase 3 applicants who are still trying to determine where to apply (but remember, those retail licenses are basically going to social equity applicants).

The interactive map also has a “layered” feature (the box which has three square shapes over one another), which allows users to see pending applications and locally authorized businesses in each neighborhood. For each pending application, users can see what that application is still pending: for some, there have been address changes, others have been denied and appealed, some show ownership disputes. This feature is also likely beneficial for potential phase 3 applicants to determine which zones are best to apply in.

We still need to wait and see what the map looks like for non-retail stores. We don’t have any indications as to when that will happen just yet. Stay tuned to the Canna Law Blog for more L.A. cannabis updates.

phase three los angeles marijuana
Here we go…

Big changes are coming for L.A.’s long-awaited Phase 3 licensing regarding storefront retail. The last time I wrote on this topic, the Department of Cannabis Regulation (“DCR”) made several proposals to City Council on how to re-vamp Phase 3 licensing for efficiency and expediency, which at the time the City Council pretty much rejected. However, last week, the Council came around and Phase 3 is going to look a lot different than anyone may have anticipated. Needless to say there are going to be some winners and a lot of losers in the City of Angels.

On March 8,  City Council requested the City Attorney develop an ordinance (based on these instructions) to, among other things, overhaul Phase 3 licensing for type 10 retail storefronts. It’s no secret now that only 200 retail licenses remain in the City when you do the math on undue concentration limits. And all 200 licenses are destined for social equity applicants because of existing City laws. Previously, the DCR was weighing what to do with these 200 licenses–would they be given on a first come, first serve basis? Via lotto? Via merit? As of Friday, here’s how the City plans to proceed in Phase 3 regarding retail storefront licenses, which will now take place in two sub-phases:

Sub-Phase 1:

In a 14-day window, the DCR will first process the initial 100 storefront licenses for folks who have been “pre-verified” as Tier 1 or 2 social equity applicants (there is no mention of Tier 3 applicants getting any kind of priority here). Pre-verification means that the applicants can prove how they meet their social equity tier and that they ink an indemnification agreement with the City. Plus, those Tier 1s and 2s, at the time of application submission to ensure a complete application, also have to meet “basic qualifications,” which are to:

  1. provide a signed lease with proof of payment or deposit, or a property deed;
  2. meet all sensitive use requirements, including undue concentration;
  3. pay of required license fees;
  4. provide ownership organizational structure;
  5. provide financial information;
  6. provide proposed staffing plan;
  7. provide complete and detailed diagram;
  8. provide proposed security plan;
  9. provide the applicable radius map;
  10. provide a labor peace agreement; and
  11. demonstrate compliance with the City’s Equity Share rules (I.e., tier 1s get 51% of the business and tier 2s get 33%).
In addition, “75 percent of the licenses will be reserved for Tier 1 applicants, unless 75 qualified Tier 1 applicants cannot be identified,” only one application per applicant is allowed, and Type 10 EMMDs cannot participate in this sub-Phase 1. Importantly, these folks cannot relocate their businesses while in the licensing process, and the qualifying Tier 1 or 2 individual cannot sell their equity in the business and must maintain their equity share in the business during the licensing process.
Sub-Phase 2:
Unless and until the first batch of licenses is sorted and the City has established/funded compliance assistance programs for Social Equity applicants, no more Phase 3 retail licensing will occur. So, it could be a while before we see what goes down with the second hundred retail storefront licenses.
Once the first 100 licenses are taken care of and we have compliance assistance for Social Equity, DCR will proceed with processing the additional 100 Tier 1 and Tier 2 Social Equity storefront retail applications in a 30-day window, but there won’t be priority for Tier 1s and 2s during this Phase 2. The basic qualifications to apply are less than for Phase 1, but within 90 days of application, the applicants in this phase have to provide proof of right to occupy real estate as well as the other required documentation for eligibility including SOPs and a radius map. And the restrictions on this phase are the same as Phase 1–no moving locations during the licensing process and no selling of equity by the qualifying social equity individual who must maintain their equity throughout the licensing process.
Without a doubt, the City and applicants are going to face issues with the concept of submitting “complete applications” during the open windows. In both phases, applicants have 5 days from submission to correct any application deficiencies and then they’re locked out, so I don’t anticipate the City allowing applicants to amend their applications after-the-fact if it goes to completeness. The other question is what happens if the City receives more than 100 qualifying applicants in Phase 1? Presumably this mechanism of the “complete application” solves that problem though there are bound to be issues regarding timing without any official first come, first serve standard (though your application will be time-stamped and dated at submission). And if someone ahead of you is DQ’ed, do you move up in the line? And, if so, when? For folks who have been sitting on property in Los Angeles for some time now, there’s likely no guarantee of success in Phase 1 if you don’t act quickly to file and all have all of your ducks lined up within that two-week window.
The overall good news is that we now have a clear road map for licensing in Phase 3 in L.A. No one knows still when this window will actually. open, but when it does it’s undoubtedly going to be a serious race to file for those first 100 licenses.

Something has gotta give in Phase 3.

The City of Los Angeles has long endured questions surrounding its elusive Phase 3 licensing process for cannabis businesses. The City completed Phase 1 and 2 licensing without too much crazy change, but Phase 3 is very likely going to be a different story, and will affect a lot of stakeholders for better or worse.

On February 8, 2019, the Department of Cannabis Regulation (“DCR“) wrote to the Rules, Elections, and Intergovernmental Relations Committee (“Committee”), proposing total reform for Phase 3 licensing in the face of multiple regulatory issues caused by undue concentration, the promotion of social equity businesses, and the overall economic interests of various stakeholders who are waiting for Phase 3 to open. DCR wrote to the Committee that it wants to make certain strategic amendments to the licensing process in Phase 3 that “would make our licensing process more efficient, transparent, and, most important, equitable.”

DCR’s obvious concern in its letter to Committee is that Phase 3 successfully hoist up social equity applicants and be as efficient as possible at the same time. In particular, the letter states that:

DCR recognizes that the existing licensing process provided in the Cannabis Procedures ordinance and regulations will take significant time to implement and that many Phase 3 storefront retail applicants will have to make significant investments in the application process before knowing for certain whether they might be denied because another applicant within 700 feet of them gets licensed first or the Community Plan in which they are located reaches undue concentration before they obtain a license.

Based on its letter, DCR looks to be seeking to award those stakeholders that are patiently sitting on eligible commercial cannabis properties (bleeding rent and other costs while waiting for Phase 3 to commence) through swift and efficient licensing. The bottom line is that the current proposed licensing process potentially harms everyone, including social equity applicants who have either already made the investment in the unsettled program or that don’t have the resources to invest ahead of time to their detriment (since the City hasn’t yet established the assistance programs necessary to aid social equity applicants, but is finalizing a draft RFP “to identify vendors who can provide a suite of business and licensing support to Tier 1 and Tier 2 social equity applicants”).

Combine the foregoing with the fact the City “expects approximately 200 storefront retail licenses will be available through Phase 3 before undue concentration is reached in most or all of the City’s Community Plans,” and DCR has taken the position that Phase 3 licensing procedures must change, and fast. DCR therefore proposes in its letter that Phase 3 licensing for the remaining estimated 200 retail licenses (probably all of which will go only to social equity applicants per existing laws) take place as follows:

First come, first serve for verified Tier 1 and Tier 2 applicants (that also have locations ready to go) for the first 100 licenses OR a lottery system to issue the first 100 licenses (with various barriers to entry, including having a location on lock). And for the second 100 licenses, the DCR wants a merit-based system with various qualification criteria.

There were other pretty important recommendations made in the letter to Committee regarding other amendments to current LA cannabis licensing laws, but the change-up on the Phase 3 licensing process is, by far, the most impactful.

Even though the DCR has studied the foregoing issues for months, the City Council was not yet ready to act on the DCR’s recommendations. On Friday, February 15, after a hearing with Committee and then a hearing with Council regarding the DCR’s recommendations, Council instructed DCR “to report back at the next Rules, Elections, and Intergovernmental Relations Committee meeting with a further analysis of the recommendations for Phase 3 Storefront Retail processing and Non-storefront Retail processing, including consideration of a social equity applicant registry platform similar to the City of San Francisco” and to “suspend any Phase 3 processing until the enhanced Social Equity analysis for the San Fernando Valley, Boyle Heights, and Downtown Los Angeles is completed.”

What does all of this mean? Basically, we’re back to square 1 in L.A., and original Phase 3 processing remains in place despite the DCR’s attempt at an overhaul. Without question though, Phase 3 licensing should change. The current timing alone on issuance of Phase 3 licenses will bankrupt or scare off the vast majority of people. First come, first serve likely appeals to most people, but it’s just as imperfect and arbitrary as a lottery system. So long as the right barriers to entry and restrictions are implemented, either system can work to effectuate quick and efficient licensing (just ask Washington State whose biggest problem with a lotto system was actually movement of winners after-the-fact).

Lotto likely edges out first come, first serve if we’re talking maximum efficiency, because it eliminates the timing pressure and order of applicants at the outset when they file with DCR. With either proposal though, ambiguities would hinge around what a “complete” application really means and/or the ability of people to game the system by paying off family members (or whomever) to act as straw applicants to increase their chances of success. Merit-based also poses its own challenges regarding what qualities should net you the most points, especially when dealing with social equity applicants who remain the most popular form of licensing capital in L.A. and therefore the most vulnerable when it comes to scams and hawkish investor behavior.

Interestingly enough at Friday’s hearing, Council did instruct the City Attorney to draft an ordinance (with input from DCR) to, among other things:

  • grant temporary approval to phase 3 retailers (which would allow them to instantly open their doors upon securing state licensure),
  • exempt non-storefront retailers from hearing before the Cannabis Regulation Commission prior to full licensure,
  • force Tier 1s or 2s to give a right of first refusal on ownership transfers to their existing partners to purchase their ownership interests at market rate (after expiration of the applicable Social Equity Agreement term),
  • bar from Phase 3 retail or delivery licensure applicants or landowners with “evidence” against them for illegal cannabis activity at any time since January 1, 2018.

So, we know change is coming to Phase 3 licensing albeit at a glacial pace. For now though, it appears that the DCR will really have to persuade Council on adopting its Phase 3 recommendations for the licensing process, or all Phase 3 stakeholders will invariably suffer licensing by a thousand cuts.

los ángeles cannabis licensingThe ups, downs, and unknowns around L.A. cannabis licensing have abounded from the passage of Measure M back in March 2017. This is not uncommon, especially in large cities, as regulators determine how to handle things on the fly and as issues arise (see, for example, social equity in L.A. and the ability to re-locate for Existing Medical Marijuana Dispensaries (“EMMDs“). L.A., to its credit, has been transparent and pretty consistent in the way it’s treated licensees and stakeholders. To that end, this month, L.A.’s Department of Cannabis Regulation (“DCR”) released a Phase 2 licensing bulletin that’s significantly important for those Phase 2 would-be licensees that seek a temporary license.

Recall, to qualify for Phase II temporary approval/licensing (which triggered priority licensing for existing “non-retailers” like growers and manufacturers) — folks had to meet all of the following criteria:

  1. Engagement prior to January 1, 2016, in the same Non-Retailer Commercial Cannabis Activity for which it sought a license;
  2. Supplier to an Existing Medical Marijuana Dispensary prior to January 1, 2017;
  3. The Business Premises meet all the land use and sensitive use requirements under cannabis laws and the existing City code;
  4. The applicant’s premises have to pass a pre­-license inspection without any fire or life safety violations either;
  5. All outstanding City business tax obligations were paid to the City and the Applicant had to indemnify the City;
  6. Provision to the City of a written agreement with a testing laboratory for testing all Cannabis and Cannabis products and attests to testing all its Cannabis and Cannabis products in accordance with state standards;
  7. Attestation that the Applicant would cease all operations if denied a State license or City License, and the Applicant cannot do any retail activity at its premises;
  8. Qualification under the City’s Social Equity Program (see here for more info); and
  9. Attestation that the Applicant will comply with all operating requirements imposed by DCR and that DCR may immediately suspend or revoke the temporary approval if the Applicant fails to abide by any City operating requirement.
Number 4 above was causing a lot of heartburn amongst Phase II license applicants in that they didn’t really know what to expect. Pre-licensing inspections can be fairly labor intensive depending on the state of the property at issue versus the build out and business plans of a given applicant, and each City has a different standard for a passing grade. In L.A., pre-licensing inspection (which is a pre-requisite to temporary approval) “may include, but is not limited to [an inspection of the business premises by], employees or agents of the following City or county departments: DCR, Building and Safety, Police Department, Fire Department and Los Angeles County Department of Public Health.” And a pre-License inspection consists of, but is not limited to, the following: “approval of the premises diagram; on-site inspection of all applicable building code and fire code requirements; approval of the security plan; fingerprinting; and approval of the fire safety plan (if applicable).”

Plus, applicants must upgrade all applicable electrical and water systems to Building and Fire Code standards before their application will move forward. Again, this is no small task depending on how your building is holding up/what its previous uses and occupancies were.

Temporary approval in L.A. is essential for applicants to also apply for and receive their temporary licenses from the state, which will not be given out or renewed after December 31. This month, L.A. thankfully illuminated for Phase II applicants what to expect for pre-licensing inspections in the City. In its bulletin, the City states:

To be eligible for Phase 2 Priority Processing, among other requirements, an applicant must pass two inspections. One is a DCR inspection to confirm that the applicant’s business premises is built out to substantially match its business premises diagram (i.e., the location and layout of entry points, interior doorways, rooms and walkways match the diagram) and that the business premises is sufficiently secured. The other is a Los Angeles Fire Department Cannabis Unit inspection to confirm that the applicant’s business premises and operations comply with the Los Angeles Fire Code.

The onus here is on the applicant to confirm for the City that it’s ready for pre-licensing inspection. In addition, when DCR confirms a date for an applicant’s inspection, the applicant will be asked to provide its most up-to-date premises diagrams to the DCR (including showing. accurate placement of security cameras). The bottom line of the City’s bulletin is that the physical premises be substantially similar to the premises diagram submitted to the DCR and that the premises be sufficiently secured per City and state law. During the inspection, the DCR will:

  • Walk through each room or area in the premises and assess whether its layout and location is substantially similar to the premises diagram;
  • Determine whether surveillance cameras are recording all areas required to be under surveillance (practically, this is anywhere on the business premises where cannabis goods will be present at any point in time);
  • Determine whether the surveillance system is in a secured area, is functional and can play back recordings upon request; and
  • Determine whether the premises are equipped with a functioning alarm system.

Another big question in L.A. was what the DCR would do with premises that are not 100% built out. The bulletin tells us that:

DCR will inspect the built out area and if all other Phase 2 eligibility requirements are met, grant Temporary Approval for cannabis activities limited to that specific area. Once the remaining areas of the premises are built out, DCR will send out an inspection team again before authorizing cannabis activities in those areas. However, given the large number of Phase 2 eligibility inspections to complete, DCR cannot provide a timeline for when it will be able to schedule a second inspection for an applicant.”

All of this means that it is best to be fully built out (in accordance with your premises diagram and with the fire and safety code) and ready for inspection if you want to get your temporary approval in L.A. anytime soon for your entire facility.

On inspection, also don’t expect to sweet talk the DCR investigator or to learn about the status of your application. Neither will advance your cause with the DCR at this point. Instead, applicants should proceed with business as usual in a professional manner and be as helpful as possible to the DCR investigators and to LAFD.

Los Angeles Cannabis AttorneysCannabis licensing in the City of Los Angeles has been a slow go. Though the City’s Department of Cannabis Regulation (“DCR”) has licensed 155 Existing Medical Marijuana Dispensaries (“EMMDs”) there is still an entire line of existing cultivators and manufacturers, social equity applicants, and general public applicants waiting their turn for cannabis entitlements. The City announced earlier this month that Phase II licensing would open on August 1 and run for 30 days. And the DCR will run its first Phase II work shop on July 24th from 6-8 p.m. (see here)–would-be Phase II applicants should attend this work shop where they’ll learn about the Phase II process and eligibility (and see here where the City finally released its guidelines for Phase II eligibility). Phase II applicants will ultimately need to prove a number of things, including that they were already operating in Los Angeles and supplying a valid EMMD prior to January 1, 2017. In addition, the City (and the world) is going to get its first look at initial social equity program entitlements in L.A.

Social equity in L.A. has been much debated and anticipated, namely because everyone knows that under local laws social equity applicants get a bevy of benefits and pretty much get to skip the line with priority license processing. Phase II is the first time we will get to see how social equity will work in practice since social equity eligibility is mandatory for Phase II licensees. Specifically, to qualify for Phase II temporary approval/licensing (which triggers priority licensing for existing “non-retailers” like growers and manufacturers — you will need to meet all of the following criteria:

  1. The Applicant was engaged prior to January 1, 2016, in the same Non-Retailer Commercial Cannabis Activity for which it now seeks a License;
  2. The Applicant provides evidence and attests under penalty of perjury that it was a supplier to an EMMD prior to January 1, 2017;
  3. The Business Premises meet all the land use and sensitive use requirements of Article 5 of Chapter X of this Code;
  4. The Applicant passes a pre­-license inspection;
  5. There are no fire or life safety violations on the Business Premises:
  6. The Applicant has paid all outstanding City business tax obligations;
  7. The Applicant indemnifies the City from any potential liability on a form approved by DCR;
  8. The Applicant provides a written agreement with a testing laboratory for testing all Cannabis and Cannabis products and attests to testing all its Cannabis and Cannabis products in accordance with state standards;
  9. The Applicant is not engaged in Retailer Commercial Cannabis Activity at the Business Premises;
  10. The Applicant attests that it will cease all operations if denied a State license or City License;
  11. The Applicant qualifies under the Social Equity Program; and
  12. The Applicant attests that it will comply with all operating requirements imposed by DCR and that DCR may immediately suspend or revoke the Temporary Approval if the Applicant fails to abide by any City operating requirement.

There’s a fundamental misunderstanding that social equity in Los Angeles means you’ve faced some kind of cannabis conviction, but it’s way more than that. There are three levels of social equity identified by tiers as follows:

  1. Tier 1: Low Income (which means “80 percent or below of Area Median Income for the City based on the 2016 American Community Survey and updated with each decennial census”) and a prior California Cannabis Conviction (which means “a cannabis-related crime that occurred prior to November 8, 2016, and could have been prosecuted as a misdemeanor or citation under current California law,” though this definition is going to change to “an arrest or conviction for any crime under the laws of the State of California relating to the sale, possession, use, manufacture, or cultivation of Cannabis that occurred prior to November 8, 2016”); or Low Income and a minimum of five years cumulative residency in a Disproportionately Impacted Area (which means residency in “eligible zip codes” as established by the City). Tier 1’s can’t own less than a 51 percent equity share of the licensed business.
  2. Tier 2: Low Income and a minimum of five years cumulative residency in a Disproportionately Impacted Area; or a minimum of 10 years cumulative residency in a Disproportionately Impacted Area. Tier 2’s can’t own less than a 33 1/3 percent equity share of the licensed business.
  3. Tier 3: Tier 3’s have to enter into a Social Equity Agreement with the City to provide very specific capital, leased space, business, licensing and compliance assistance to a Tier 1 or Tier 2. Most people shooting for Phase II licensure will likely try to go for Tier 3 status, but they still have to find those coveted Tier 1s or 2s to play ball.

There are also a slew of regulations that apply to social equity applicants including having to disclose to the DCR any proposal to take on debt, any proposal to sell any equity in the business after licensure, and forking over bylaws and other corporate control documents.

At a roundtable I spoke on last week at the Vision Theater, L.A.’s social equity program was the topic of discussion. Cat Packer, executive director of the DCR, made clear that if people want to see changes to the social equity program, they need to show up to meetings with city council to voice their positions and desires. Ms. Packer also stated that Tier 1 and 2 social equity applicants are going to get retail licenses on a 2:1 basis relative to the general public and EMMDs (and on a 1:1 basis for non-retail). This means social equity applicants will get at around 310 retail licenses (there are 155 EMMDs) even before a single general public license ever issues. Combine those ratios with mandatory undue concentration limitations, and there’s a solid chance city license caps may be triggered with social equity, giving those applicants major leverage in what could be the world’s largest cannabis market.

The social equity program in LA is going to evolve and hopefully lead the way for other cities and counties looking at various social equity models. As Phase II approaches, social equity applicants need to be wary of hawkish and predatory practices that seek to take advantage of their status and discard them after the fact (see here for California’s recent cannabis schemes and scams).