California just released nearly 300 pages of new regulations for medicinal and adult-use commercial cannabis businesses. These long-awaited rules follow months of public comment, a substantial environmental impact report on cultivation, and a report from the state Water Resources Control Board on diversion and discharge relating to cannabis cultivation. Though the new regulations do not include wholly unanticipated changes, they do include the following that will impact cannabis businesses when it comes to real estate and land use:
- Cultivation aggregate size limits. Though there remains a 5-year prohibition on large (type 5) cultivation licenses for grows of more than 1 acre, and a 5-year limit of one medium grow license (10,001-22,000 sq ft) per person, there is no 1-acre aggregate limit on cultivation, which had been recommended in the environmental report. In other words, there is effectively no limit, other than a company’s monetary resources for license fees, that would prevent a large cultivator from converting an existing mega-farm into a cannabis farm by simply aggregating an unlimited amount of specialty (0-5,000 sq ft) and/or small grow (5,001-10,000 sq ft) licenses. This is a troubling development for small and medium-sized operators, as they had lobbied hard for an aggregate grow limit of one acre.
- Subletting and Storage. Though we already knew from MAURCSA that California would require each “premises” to be contiguous and occupied by only one licensee, the new rules go slightly further by forbidding a licensee from subletting any portion of its licensed premises and by requiring each location where cannabis goods are stored be separately licensed. This means any licensee subletting a portion of their space must plan out a proper demarcation of their premises and think carefully about using that old garage next door to store product without an additional license.
- Concurrent adult-use and medicinal operations. Under the new rules, one licensee can concurrently operate under both an “M” license and an “A” license on the same premises, if certain conditions are met—mainly that there is one licensee that conducts a single type of operation on the premises but keeps labeling and records separate for medicinal and adult-use. Though this seems like a common-sense regulation (why would someone need two licenses to make the same product in the same place?), it was not clear until issuance of the new rules how adult-use and medicinal licenses would interact, and whether they would be treated as truly separate licenses requiring separate premises.
- Renewable energy requirements. The prior proposed MCRSA (medicinal) regulations had required 42% of the energy used by indoor or mixed-light grow licensees come from renewable sources. The new cultivation rules require only that the licensee meet the “average electricity greenhouse gas emissions intensity required of their local utility provider” under California’s existing Renewables Portfolio Standard Program. This means that rather than having indoor grows become leaders in renewable energy standards, licensees now only need to fit in with existing requirements, and even if they don’t, they can purchase allowances and offsets under California’s cap-and-trade programs. There had even been talk of increasing the percentage requirement for renewable energy, but that seems to have fizzled out.
Though the new cannabis rules contain some business-friendly updates, some disfavor small operators. It remains to be seen what effect the licensing process and the state’s enforcement of the new rules will have on the market for cannabis and cannabis real estate. We will be discussing these new regulations a bit at our Southern California Cannabis Investment Forum on November 30 in Los Angeles and it would also behoove you to stay tuned for an announcement setting the date for our next webinar, which will delve into the new regulations in detail.