This past Friday, the California Department of Public Health—the agency charged with regulating commercial cannabis manufacturing—issued new emergency rules to allow certain types of manufacturers to operate in shared use facilities and on shared equipment, under essentially a sort of timeshare sublease arrangement. The move is a win for small, medium, and artisan manufacturers that don’t have the budget to buy commercial property or take on an expensive lease, and who have the ability to run a lean operation without large space requirements.
The new rules require an existing “primary licensee” with a Type 6 (nonvolatile extraction), Type 7 (volatile extraction), or Type N (infusion) license that either owns or leases suitable manufacturing space. If the locality approves of the arrangement and issues the appropriate permits, the primary licensee can then enter into a use agreement with multiple “Type S” licensees— manufacturers that can engage in packaging and labeling, food infusion, and some butter and oil extraction operations required for the infusion process, all in the same space, as long as they have less than $500,000 in annual revenue.
Each Type S licensee must have their own designated space to store their cannabis and cannabis products, and the shared-use facility must have a security plan as with any other licensee. Under this new arrangement, however, Type S licensees can have exclusive access to the shared-use facility and equipment at their own designated times, like a time share. The California Bureau of Cannabis Control’s existing rules prohibit licensees from subletting all or part of a licensed premises. But under the new Type S rules, the use agreement creating the shared-use arrangement satisfies the requirement of lessees to demonstrate the legal right to occupy a space and obtain landlord approval for the proposed cannabis activity, implying that the relationship is akin to a sublease and thus seemingly creating a limited exception to the prohibition.
What this means for manufacturers looking to break into the market is that even in high-priced areas, there is an opportunity to cut costs by sharing rent and equipment—two of the largest recurring expenses for manufacturing operations. Companies with shared space can also potentially take advantage of group savings on expenses like insurance, maintenance and service contracts, utilities, security services, and distribution. On the other side of the equation, the new rules also present an upside for landlords and master tenant “primary licensees,” whose owned or leased space will now be able to command more overall rent, much like a dated 3-bedroom apartment in San Francisco can command $6,000: more tenants to spread the cost.
The next question will be what other actions the state might take to benefit small and medium commercial cannabis operations, as it faces challenges claiming that it has benefitted large scale operators at the expense of the still-growing artisan industry. Time will tell, but at the moment, small-scale manufacturers have cause to celebrate.