culver city california cannabis marijuana
Adult use cannabis stores, coming soon.

On December 11, 2017, Culver City Council voted to approve an ordinance that allows for the establishment of medicinal and recreational commercial cannabis businesses. Culver City becomes the fourth city in Los Angeles (including West Hollywood, Los Angeles, and Maywood) to implement a framework for regulating both medical and adult-use cannabis.

Since January 1 and the legalization of adult-use cannabis in California, clients have been asking us constantly about licensing their businesses. As we have explained time and again, getting local approval is paramount before getting a state license.

Here is how the rest of Los Angeles County currently looks:

  • The City of Los Angeles is only accepting Prop M Priority Applications until at least March 4, 2018. The city has stated that applications for the general public probably will not be available until mid-2018.
  • West Hollywood has been processing applications, but the city is known for having high rents and minimal property space.
  • Maywood is one of the smallest incorporated cities in Los Angeles County. Although they allow commercial cannabis businesses, there is not a lot of space to establish one.

Culver City expects to have an application process open soon, sometime during the first quarter of 2018. The ordinance allows for the establishment of storefront retail, delivery only retail, manufacturing, distribution, laboratory testing, and indoor commercial cultivation. There will be limits placed on the number of permits issued for each type of business, so it will be important to be ready once the application process opens. The city expects that getting a storefront retail business permit will be competitive.

The ordinance additionally lays out strict standards for business permits. A commercial cannabis business permit is not transferable to other persons, projects, or locations. Businesses will not be able to relocate unless approved by the City Council. The ordinance also sets forth rules for changing ownership and changing the form of the entity. These types of things will be important to get organized before applying for a commercial cannabis business permit in Culver City.

Located in the heart of West LA and easily accessible by many major freeways, Culver City offers a great alternative to those seeking business licenses in the City of Los Angeles. Anyone interested should continue to monitor closely, and be ready to move quickly.

california cannabis marijuana
Roll up that California collective and get a license.

This week, the Bureau of Cannabis Control (the “BCC”) announced that as of January 9, 2019, Section 11362.775 of the Health and Safety Code (the “Code”) will no longer be in effect. The BCC notice ends the popular collective and cooperative models of cannabis cultivation, manufacturing and distribution in California. These models were promulgated through the use of “creative” legal advice in order to take advantage of the Compassionate Use Act’s multiple loopholes and ambiguities, and usually involved patients joining a “closed loop” membership system (sometimes a formal corporate entity and sometimes not) to receive medical cannabis from other patients in the collective who grow or process it for them.

California’s transition into a regulated commercial cannabis system left many operators, particularly those with non-profit mutual benefit corporations structured as collectives or cooperatives, uncertain as to just how much time they have left to operate. We’ve encountered some operators who, for a variety of reasons including the time and expense of the process, or their inability to comply with local zoning requirements at their current location, are reluctant to abandon the collective model in favor of receiving a state license under MAUCRSA.

Unfortunately, these operators will have no choice but to join the regulated system, and there are a laundry list of reasons why it makes sense to do that sooner rather than later. Given the recent dismantling of the federal government’s former cannabis enforcement framework, operators will be opening themselves up to much greater risk if they are choosing to operate outside of the state’s licensing framework. U.S. Attorneys now have full discretion to determine to what extent they can and should enforce federal law in the context of marijuana crimes, and we would be willing to bet that California’s U.S. Attorneys won’t be turning a blind eye to cannabis businesses that continue to operate in contravention of local law, or without a state license.

Following the implementation of MAUCRSA, qualified patients and their caregivers may continue to operate with limited criminal immunity without a state license, so long as: (1) the patients and caregivers operate in full compliance with state law, and (2) the local government does not prohibit the activity. See, H&S Code sections 11362.5, 11362.765, 11362.77, and 11362.7. But as we stated above, immunities for medical cannabis collectives (i.e., non-profit mutual benefit corporations, non-profit corporations, non-profit cooperatives, etc.) will expire on January 9th of next year.

And although MAUCRSA expressly exempts qualified patients and caregivers from licensure requirements, it does not allow qualified patients, their caregivers, or cannabis businesses to conduct commercial cannabis activity without a license. Any collective currently engaging in commercial cannabis activity that exceeds the strict qualified patient and primary caregiver limits is in violation of MAUCRSA and is operating illegally.

As a reminder, to be immune from prosecution under the Compassionate Use Act and MAUCRSA, a primary caregiver (or a collective) must operate within the following confines when acting without a state license:

  1. Cultivation, possession, storage, manufacture, transportation, donation, or provision of cannabis must be exclusively for the personal medical purposes of no more than five specified qualified patients for whom the caregiver is the primary caregiver. (B&P section 26033(b));
  2. The caregiver cannot receive remuneration for these activities other than for actual expenses, including reasonable compensation incurred for services provided to an eligible qualified patient or person with an identification card to enable that person to use cannabis, or for payment for out-of-pocket expenses incurred in providing those services. (B&P section 26033(b), H&S Code section 11362.765(c));
  3. The caregiver cannot possess more than eight ounces of dried cannabis per qualified patient unless a physician’s recommendation or local guidelines allow amounts in excess of this limit. (H&S Code section 11362.77(a)-(c)); and
  4. The caregiver cannot maintain more than six mature or twelve immature cannabis plants per qualified patient unless a physician’s recommendation or local guidelines allow amounts in excess of this limit. (H&S Code section 11362.77(a)-(c)).

In addition, everyone, including collectives and caregivers, must still comply with applicable local law. And collectives and cooperatives that opt not to apply for a state license right away will be limited in their ability to distribute their product. The bottom line is that commercial cannabis activity is only permitted among licensees, and once a business entity or individual receives and active temporary license or a full license from the state, they must immediately cease doing business with non-licensed entities, or they risk losing their license. See B&P section 26053(a). And for those licensees looking to “have their cake and eat it too” by obtaining a state license while maintaining a collective or cooperative, keeping that non-licensed entity will put the state license at risk.

With local license caps quickly being reached, stringent legal limitations on collectives and cooperatives, and an uncertain federal enforcement landscape, we cannot emphasize enough the importance of integrating into the regulated state system as soon as possible. Holding on to the collective model through the next year will make that transition much more difficult, and perhaps even impossible.

Marijuana Cultivation Los Angeles
It’s no easy calculation in Los Angeles when it comes to cannabis cultivation.

When the City of Los Angeles passed its ordinances allowing commercial cannabis businesses, the City placed limits on the total amount of licenses available in each community for each license category, based on “undue concentration.” The City made it easy to understand the “soft caps” for most of the licensing categories. For each neighborhood’s retailers (Type 10), microbusinesses (Type 12), and manufactures (Type 7) –the ratio is one license per 10,000, 7,500, and 7,500 residents, respectively. The City has even provided the exact number of licenses available on its Commercial Cannabis License Capacity Chart (“License Capacity Chart”), here.

However, the cultivation license limits are more difficult to understand. Here is how the city defines cultivation limits for Undue Concentration:

a ratio of 1 square foot of cultivated area for every 350 square feet of land zoned M1, M2, M3, MR1, and MR2 with a maximum aggregate of 100,000 square feet of cultivated area and a maximum aggregate number of 15 Licenses at a ratio of one License for every 2,500 square feet of allowable cultivated area for Cultivation (Types 1A, 1C, 2A, 3A, 4 and 5A).

After careful examination of this definition, here’s what we think the City means to do with undue concentration and available plant canopy:

On the License Capacity Chart, if you take the Total Square Feet of a given neighborhood and divide that number by 350 square feet, the result is the listed as “Cultivation + Microbusiness (with cultivation)”. For example, Harbor Gateway has 43,982,470 total square feet, which means that Harbor Gateway has about 125,664 total square feet of eligible canopy (43,982,470/350=125,664).

There can also only be 1 license for every 2,500 square feet of allowable cultivated area. Sticking with the Harbor Gateway example, 125,664 eligible square feet divided by 2,500 equals 50 potential licenses, max. However, that number assumes that all licensees will have grows no larger than 2,500 square feet, which probably isn’t the case. To that end, the City informs us that cultivation licenses will be processed on a first come, first serve basis.

The rules also stipulate a maximum of 100,000 square feet and a maximum of 15 licenses, but it is unclear whether these maximums apply to the neighborhood as a whole or to the individual licensee (who could stack up small cultivation licenses to secure 100,000 feet of canopy in aggregate). However, the initial total calculation of the eligible canopy area would be irrelevant for multiple communities if there was a maximum of 100,000 square feet total for that community. Therefore, we can assume that the 100,000 square feet should be applied per individual license, with no one person or entity holding more than 15 cultivation licenses within a given community.

All of that said, the key question remains: How many square feet can I apply for in my application? The ultimate answer is that “it depends.” No matter how much available canopy space there is in a community, the situation depends on factors like how many people apply for cultivation space, how much space each person applies for, how much space the City will grant, etc. We do know that as the City of Los Angeles grants licenses, the Undue Concentration license soft caps will become clearer.

For now, here’s a chart (with approximate numbers) to summarize how many licenses per community we will most likely see:

Community Plan Area

Square Feet of Canopy

Maximum Amount of Licenses (Actual*)

Average Canopy Space**

(sq. ft.)

Arleta – Pacoima

63,309

15 (25)

4,220

Bel Air – Beverly Crest

N/A

0

0

Boyle Heights

97,034

15 (38)

6,468

Brentwood – Pacific Palisades

N/A

0

0

Canoga Park – Winnetka – Woodland Hills – West Hills

22,392

8

2,799

Central City

72,563

15 (29)

4,837

Central City North

98,647

15 (39)

6,576

Chatsworth – Porter Ranch

169,165

15 (67)

11,277

Encino – Tarzana

2,422

1

2,422

Granada Hills – Knollwood

48,254

15 (19)

3,216

Harbor Gateway

125,664

15 (50)

8,377

Hollywood

20,825

8

2,603

LAX

N/A

0

0

Mission Hills – Panorama City – North Hills

38,553

15

2,570

North Hollywood – Valley Village

47,735

15 (19)

3,182

Northeast Los Angeles

100,725

15 (40)

6,715

Northridge

18,331

7

2,618

Palms – Mar Vista – Del Rey

33,528

13

2,579

Port of Los Angeles

N/A

0

0

Reseda – West Van Nuys

127,800

15 (51)

8,520

San Pedro

29,633

11

2,693

Sherman Oaks – Studio City – Toluca Lake – Cahuenga Pass

4,807

1

4,807

Silver Lake – Echo Park – Elysian Valley

3,028

1

3,028

South Los Angeles

16,453

6

2,742

Southeast Los Angeles

168,657

15 (67)

11,243

Sun Valley – La Tuna Canyon

222,321

15 (88)

14,821

Sunland – Tujunga – Lake View Terrace – Shadow Hills – East LA Tuna Canyon

2,291

1

2,291

Sylmar

66,600

15 (26)

4,440

Van Nuys – North Sherman Oaks

62,941

15 (25)

4,196

Venice

4,955

1

4,955

West Adams – Baldwin Hills – Lelmert

13,477

5

2,695

West Los Angeles

26,300

10

2,630

Westchester – Playa del Rey

34,770

13

2,674

Westlake

1,560

1

1,560

Westwood

N/A

0

0

Wilmington – Harbor City

248,428

15 (99)

16,561

Wilshire

4,284

1

4,284

*Actual maximum amount of licenses available if the City does not cap at 15 licenses.

**Average canopy space assumes that City will allow the maximum amount of licenses, and that each applicant will apply for an equal amount of canopy space.

California 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 cover who is banning cannabis, who is embracing cannabis (and how), and everyone in between.  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 California 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 Hayward, and before that Alameda County, OaklandSan FranciscoSonoma County, the City of Davis, the City of Santa RosaCounty and City of San BernardinoMarin CountyNevada County, the City of Lynwood, the City of CoachellaLos 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 Cityof Emeryville.

san rafael california marijuana cannabis
San Rafael’s next mission: medical cannabis

Today’s post is on the City of San Rafael.

Welcome to the California Cannabis Countdown.

LocationSan Rafael is a city in Marin County and dubs itself as “The City with a Mission” which is a play off its famous chapel. San Rafael is also the county seat and economic hub of Marin. No one likes spending time in a courtroom or in government administrative offices but if you’ve got to, having a civic center designed by Frank Lloyd Wright isn’t too shabby.

History with Cannabis: Ever since the passage of the Compassionate Use Act of 1996 (a/k/a Prop 215), San Rafael has prohibited medical cannabis dispensaries and other cannabis businesses from operating within its city limits. Although Marin County and its municipalities have the reputation of being liberal and progressive, that has not translated into forward-thinking cannabis policies. As we’ve covered in the past, Marin has proven to be quite a difficult jurisdiction for cannabis businesses to enter: the well-to-do enclaves of Sausalito and Mill Valley are maintaining their commercial cannabis prohibitions. Surrounded by cannabis friendly jurisdictions (San Francisco, Richmond, Oakland, Santa Rosa, and Sonoma County), Marin’s cannabis stance is probably closer aligned to Alabama’s than the Bay Area. It’s amid this prohibitionist backdrop that San Rafael is attempting to buck the Marin malaise.

New and Proposed Cannabis Laws: On December 4, 2017, the San Rafael City Council adopted a Cannabis Urgency Ordinance (“Ordinance”). The Ordinance was San Rafael’s first attempt to regulate commercial cannabis activities although there were a couple of caveats. The Ordinance would only allow for medical commercial cannabis activities and retail dispensaries were still prohibited. The Ordinance only established the bare contours of a regulatory structure as the City Council was in a rush to pass legislation prior to statewide licensing taking effect in 2018. Upon passage of the Ordinance, San Rafael’s Medical Cannabis Subcommittee prepared a Medical Cannabis Business Resolution (“Resolution”) that built on the framework established by the Ordinance. The Resolution will be up before the City Council today, January 16th. Here are some of its highlights:

  • Up to eight medical infused products manufacturing licenses will be available otherwise known as a “Type N” license from the California Department of Public Health’s Manufactured Cannabis Safety Branch.
  • Up to four medical delivery-only licenses will be available.
  • Up to four testing laboratory licenses will be available.
  • Commercial cultivation, manufacturing (other than Type N), distribution, and storefront retail are prohibited.
  • Adult-use commercial cannabis activities are still prohibited.
  • Applications will be ranked based off of business executive summary (20 points), safety and security plan (20 points), patient benefits and education (20 points), local enterprise preference (10 points), qualification of principals (20 points), and community benefits (10 points). An Applicant must receive a total score of at least 85 points to move forward with their application. A secured location is not necessary at this stage.
  • If the number of applicants with a score of 85 or higher exceeds the maximum number of licenses available then a lottery will be conducted to determine which applications will proceed.
  • Hours of operation for medical delivery businesses will be 9am to 9pm. Labs and manufacturers can operate between 7am to 6pm.
  • Six months after the adoption of the Resolution, San Rafael’s economic development director will prepare a progress report of City Council review.

Although by no means a bold entry into regulating cannabis businesses, San Rafael is still taking the initiative – which is more than we can say about the rest of Marin’s cities (only Marin County is proceeding with a medical cannabis delivery-only ordinance). Let’s hope that by the time the City Council reviews the progress of its medical cannabis program that it will be willing to expand its cannabis license types and authorize adult-use commercial cannabis businesses.

Los Angeles Cannabis Marijuana San FernandoOur Los Angeles cannabis business lawyers, including me, are constantly being asked about the local cannabis laws of the various 88 incorporated cities in Los Angeles County.

Because it is both important and difficult to decipher each individual city’s local laws, we thought it would be helpful to provide you with charts showing the same. We divided the county into four regions, and over the next few weeks we will publish charts for each of these regions to keep you updated on each of the cities and their current laws.

This week’s post highlights the cities located in and around the San Fernando and Antelope Vallesy. Here is a chart showing the laws regarding cannabis cultivation, dispensing, distribution, and manufacturing in those areas.

Before you can receive a California cannabis license (temporary or annual) you must provide the state with proof of local approval. Our charts in this series are intended to help you figure out whether such local approval is possible and, if so, what it takes to get it.  Please note that although we hope find this research useful, local cannabis zoning ordinances tend to change quickly, so you will want to confirm these findings and run related due diligence, prior to taking action.

California marijuana cannabis
ICYMI: We have answers to your marijuana retailer, distributor, and microbusiness questions from our MAUCRSA webinar

Last month, we hosted a webinar analyzing the emergency cannabis regulations released by the California state agencies in charge of administering the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). We had over 1,000 people sign up to find out what the California cannabis regulatory landscape will look like in 2018 for cultivators, manufacturers, distributors, retailers, and microbusinesses.

During the webinar, we took questions from attendees, but we couldn’t get to all of them due to the sheer number of questions asked. Alison Malsbury covered the webinar questions related to cannabis manufacturers, Habib Bentaleb handled the questions regarding cultivation, and I’ll cover the retail/distribution/microbusiness questions here.

Q: Please explain the logistics of distributors collecting excise tax from retailers. Is it collected at the time of invoice/delivery or can the retailer wait and not pay the distributor until up to 90 days later? If so, how the heck will distributors track all of this and what recourse do distributors have if a retailer doesn’t pay the excise tax?

A: The Distributor is the focal point in the California Cannabis and Excise Tax system. Cultivators and Retailers are prohibited from remitting Cannabis Taxes to the California Department of Tax and Fee Administration (CDTFA).  The law intentionally places a serious burden on the Distributor to pay up. Although only a Distributor may remit taxes to CDTFA, all licensees in the supply chain are subject to a 50% late payment penalty if the tax is not paid when due. Accordingly, Distributors should receive payment of the Cannabis Excise Tax from the Retailer at the date of sale. This will likely be a serious point of contention as the Retailer will want to defer payment until product is sold to a consumer, so be sure to cover it in your distribution agreements.

Q: Do retailer Exit Bags need to be labeled?

A: 16 C.C.R. § 5413 requires an “opaque exit package” for all product leaving a retail storefront going into a consumer’s hands, but the regs say nothing about having to have a specific label on that exit packaging.

Q: What are the child resistant packaging requirements for retail sales in the first few months?

A: During the transition period (January 1 through July 1, 2018), cannabis goods in a retailer’s inventory at the time of licensure that are not in child resistant packaging may be sold if the retailer puts them into child-resistant packaging at the time of sale. “Child resistant” means designed or constructed to be significantly difficult for children under five years of age to open, and not difficult for normal adults to use properly.

Q: Can licensed dispensaries purchase manufactured material from nonlicensed manufacturers during the transition period?

A: No. Licensees may only conduct business with other licensees, even during the transition period.

Q: What is a microbusiness?

A: A commercial cannabis business engaged in at least three of the following activities: cultivation (less than 10,000 square feet), manufacturing (non-volatile or no solvnets), distribution, and retail sale.

Q: Do microbusinesses activities need separate addresses?

A: No. In fact, microbusinesses must conduct all cultivation, manufacturing, distribution and retail activities on the same premises.

Q: Can you clarify what adult use licensees and medicinal licensees are allowed to do during the transition period? Can an adult use licensee purchase products from a medicinal licensee? Can a medicinal retailer sell to non-patients?

A: During the transition period, from January 1 through July 1, 2018, licensees can transact business with each other regardless of the “M” or “A” designation. However, a medicinal retailer cannot sell products to “adult use” customers and vice versa. In other words, medicinal retailers can only sell products to qualified patients and caregivers. A medicinal retailer cannot act as an adult use retailer during the transition period, or ever, without an adult use license.

Q: Can you talk more about the distribution license and if you will have to package, test, etc.?

A: It depends. You could be a “storage only” or a “transport only” distributor that does not handle packaging and testing. Otherwise, a distributor may package, re-package, label and re-label cannabis flower for retail sale. A distributor cannot, however, package, re-package, label or re-label manufactured cannabis products unless the distributor also holds a manufacturing license and is packaging, re-packaging, labeling or re-labeling its own manufactured cannabis products. Testing and quality assurance services are also on the table for distributors. Regarding testing, after taking physical possession of a cannabis goods batch, the distributor must contact a testing laboratory and arrange for a lab employee to come to the distributor’s premises to select a sample for testing. The distributor also has duties and obligations for which it is responsible during the testing sample retrieval process.

Q: Is self-distribution considered a “transport only” distribution license or can businesses wishing to self-distribute do all distribution activities package/label/testing/quality assurance review?

A: To be clear, a testing licensee is totally separate from all other licensees. A distributor is responsible for the coordination and verification of testing, but cannot do the testing itself. An entity with a distribution license, so long as it is not “transport only” or “storage only,” can engage in any of the activities that a licensed distributor is authorized to do.

Currently, the licensing fee schedule divides the distributor license into three categories: Distributor, Distributor Transport Only Self-Distribution, and Distributor Transport Only. Obviously, if you apply for the Transport Only Self-Distribution license, you will be limited to transport only (and even that has certain limitations regarding what you can transport and to whom).

Q: Would a cannabis yoga and meditation business be OK?

A: It depends on the local government. If onsite consumption is authorized, and the location is zoned for yoga and meditation (as well as onsite consumption of cannabis), then such activity would presumably be allowed pursuant to a retail or microbusiness license so long as the following are met: (1) Access to the area where cannabis consumption is allowed is restricted to persons 21 years of age and older, (2) Cannabis consumption is not visible from any public place or nonage-restricted area, and (3) Sale or consumption of alcohol or tobacco is not allowed on the premises. Appropriate permits/licenses from your local government would need to be obtained for yoga or meditation as well.

Q: Are you able to start a cannabis lounge, like a Hookah lounge?

A: The foregoing rules apply for cannabis lounges, too. Be sure to check on whether your local government authorizes onsite consumption.

Q: Can you have entertainment and onsite consumption?

A: See above regarding onsite consumption. Entertainment is often restricted by local zoning codes, but as long as it is locally authorized, live entertainment is expressly permitted by the regs so long as there is no nakedness, no live sex and no nipples (male or female)! Basically no strip club/consumption lounges are allowed in this context. See 16 C.C.R. § 5807 for more on that.

Q: Can you cover which of these licenses can be held concurrently? Or, if it’s a shorter list, which licenses have restricted concurrent licensing?

A: All licenses can be combined, with the exception of testing (and Type 5 cultivation licenses, which are not yet available). A testing licensee cannot hold any other cannabis licenses.

Q: Can distributors use professional employment organizations (such as ADP) and have these count as employees for the purposes of transport?

A: No. 16 C.C.R. § 5311 specifically states that transportation shall only be conducted by licensed persons or their employees. Further, Business & Professions Code § 26070(c) says “[t]he driver of a vehicle transporting or transferring cannabis or cannabis products shall be directly employed by a licensee authorized to transport or transfer cannabis or cannabis products.” Employees are expensive, but distributors need to budget accordingly if they want to comply with MAUCRSA.

Q: Can autonomous vehicles distribute cannabis or manufactured goods?

A: No. Unmanned vehicles are prohibited per 16 C.C.R. § 5311(c).

Q: If a product has been tested by a lab and deemed clean or cleared to go to market, why is the liability on the distributor and not the lab, cultivator or manufacturer if something ends up being wrong with that product?

A: Distributors are statutorily obligated to oversee the quality assurance process. A distributor is responsible for ensuring that the certificate of analysis from the lab correctly corresponds with the batch, that the label is consistent with the certificate of analysis, the packaging complies with MAUCRSA and is tamper-evident, the weight or count of the batch comports with that in the track and trace system, and that all events prior to receipt have been entered into the track and trace system. That does not mean that the distributor will be solely liable if something is wrong with the product, but we believe we will see a lot of distributors named in lawsuits involving product liability issues because of their statutory duty to do everything mentioned in the previous sentence. This does not mean cultivators, manufacturers, and testing labs are not also liable. As a result, insurance and indemnity agreements are key here.

Q: Does an indemnification contract remove the liability for the distributor? Or only possibly?

A: An indemnity agreement is a good tool to use to shift liability, but as I mentioned during the webinar, an indemnity agreement only works if the other party is well-capitalized and/or well-insured. If you have an indemnity agreement with a party that goes bankrupt and never carried insurance, you will not recover your losses. Nothing, not even a great indemnity clause, can guarantee full insulation from liability.

Q: What type of permitting or licensing do I need for a compassion program that is currently running is not a storefront. We do not sell cannabis at all, host our donation day at a brick and mortar and deliver to homes at no cost to patients that are low income, disabled or suffering from an acute illness.

A: For an answer to this question, please see California Cannabis Licensing and The Collective Model: How Long Will That be Going On? 

Q: Do I need to secure a location prior to applying for the license?

A: Yes. With your state application, you must submit the physical address of the premises, evidence of the legal right to occupy the premises, and a diagram of the premises, among other things.

Q: Is delivery considered a retail activity under the microbusiness license?

A: Yes. 16 C.C.R § 5500(e)(4) expressly contemplates non-storefront delivery as a retail element of a microbusiness.

California cannabis marijuana
Lookin’ good!

One of the most common questions our California cannabis attorneys get asked is “where can I start or expand my cannabis business?” It can be a tough question: as we often say on this blog, every one of California’s 58 counties and 482 incorporated cities can decide whether or not they’ll authorize commercial cannabis activities in their jurisdictions. This means that California’s local jurisdictions are constantly discussing whether to regulate, amend, or prohibit commercial cannabis activities. Jurisdictions that had previously authorized medical cannabis businesses to operate are now considering how to regulate adult-use cannabis activities. This leads me to the recent (and positive) developments in Santa Rosa.

As part of our California Cannabis Countdown series we covered the city of Santa Rosa back in May. Shortly after our post, Santa Rosa residents overwhelmingly voted in favor of Measure D, which was a ballot measure setting tax rates for cannabis businesses. Santa Rosa takes its cannabis policy seriously, as the city has held over twenty (20!) meetings to discuss cannabis policy over the last two years. Many of the meetings were held by the city’s Medical Cannabis Policy Subcommittee (“Committee”).

Since inception, the Committee has solicited feedback from the community and interested stakeholders and provided guidance to the City Council. To its credit, the City Council and Planning Commission showed a willingness to incorporate the Committee’s findings into new cannabis ordinances. Specifically, the City Council passed ordinances that allowed medical cannabis cultivation (indoor only), non-volatile manufacturing, distribution, and laboratory testing in Santa Rosa. This was a welcome development after seeing what happened in Marin County, Santa Rosa’s southern neighbor.

While moving forward with regulating medical cannabis business activities, the next item on the Committee’s agenda was adult-use cannabis regulation. The Committee drafted a comprehensive cannabis ordinance that would regulate both medical and adult-use cannabis businesses. However, when the ordinance was first proposed at the end of June it did not include provisions for adult-use commercial cannabis activities. Though after the passage of Senate Bill 94 (a/k/a the Medicinal and Adult-Use Cannabis Regulation and Safety Act), the City Council added adult-use cannabis activities to the ordinance. The updated ordinance was first “noticed” in November, approved on December 19th, and will take effect on January 19, 2018.

Without further ado, then, here’s a breakdown of the types of medical and adult-use cannabis activities allowed in Santa Rosa:

  • Cultivation (only indoor for commercial cultivation although outdoor cultivation for personal use is allowed subject two a two plant limitation).
  • Manufacturing (non-volatile and volatile).
  • Distribution.
  • Retail.
  • Delivery.
  • Microbusiness.
  • Testing Laboratory.

And here are some important things to keep in mind, under the new ordinance:

  • Cannabis businesses that have already received approval to conduct medical cannabis activities can incorporate adult-use activities into their permit with a zoning clearance.
  • Multiple cannabis business permits can be issued per site so long as there is a clear separation between license types.
  • The transfer of ownership or operational control of a cannabis business is allowed if the new owner/operator receives a zoning clearance from the city.
  • For cultivators square footage is determined by the size of the structure instead of by canopy.
  • Cannabis manufacturers that utilize a closed-loop system with will require approval from the city’s building and fire departments.
  • Only licensed cannabis retailers can conduct deliveries. The delivery-only dispensary model is currently not available.
  • Dispensaries may only operate between the hours of 9:00am and 9:00pm and are prohibited from having an on-site or on-staff physician to provide a cannabis recommendation.
  • On-site consumption and cannabis special events are allowed with the appropriate city approval.

Given Santa Rosa’s dedication to the conversation on cannabis, and the actual text of its new ordinance, we can safely way that the city is shaping up as a cannabis friendly jurisdiction (unlike these tough locales). Next, we will see how efficiently the city can administer its new marijuana ordinance come January 19th. We’ll be sure to keep you posted.

We recently wrote that we are working on a substantial number of merger and acquisition deals regarding Oregon marijuana businesses. One question that comes up in these deals, without exception, is how the Oregon Liquor Control Commission (OLCC) license acquisition process works for the incoming party. This is because licensing is a fundamental sale consideration: no economic activity will be allowed for the new ownership group until it receives state approval. Fortunately, when it comes to changes in ownership, OLCC works hard to expedite license turn-over.

A very common misconception among Oregon buyers and sellers is that a party can buy, sell or transfer an existing pot license. This is not allowed. Instead, as we explained last February on this blog, whenever 51% or more of a business is bought or sold—whether through an asset purchase agreement or stock sale—OLCC requires the new ownership group to apply for, and obtain, a new license.  The good news here is that the purchaser need not start from scratch: when representing buyers, we typically reach out to OLCC’s lead licensing technician and let her know that a new application has been submitted. She will pull the application out of the queue, and pass it along to one of two OLCC “change-in-ownership” technicians. In our experience, these individuals usually take about two weeks to review the application materials, and another week or so to schedule an inspection.

Assuming there are no issues with background checks or acquiring a replacement Land Use Compatibility Statement, OLCC will issue the new license and the buyer can begin to take on seller’s inventory. Typically, both the buyer’s and seller’s license are active for a day or two during the inventory transfer period. At this time, buyer presents an OLCC letter to METRC, and the parties put together a manifest to move everything over. After the inventory is fully transferred to buyer, the seller’s license is cancelled.

You may be wondering: “where can I find any of this information on the OLCC website?” The answer is, “you can’t.” OLCC has undertaken quite a few changes to its licensing process in the past year (mostly, for the better), and not all information applicable to licensing is available online, or even stated in the administrative rules. Instead, the parties and their lawyers need to work closely with OLCC to facilitate the licensing process, and both buyer and seller should try to keep abreast of any changes in protocol.

Finally, because the change-in-ownership licensing process takes three weeks or more, it is critical for the parties in any sale transaction to get the estimated closing timeline correct when drawing up paperwork. If the relevant sale agreements provide for a transaction closing date prior to when a license may realistically issue, at least one party will likely run the risk of default. For this reason, almost any well written sale agreement will be contingent upon the grant of a new OLCC license for buyer, and will not allow for the balance of the purchase price to transfer until the license issues.

For more on the purchase and sale of Oregon cannabis businesses, check out the following:

Adult use cannabis is on the way.

Our Los Angeles cannabis lawyers, including me, are constantly being asked about the local cannabis laws of the various 88 incorporated cities in Los Angeles County.

Because it is both important and difficult to decipher each individual city’s local laws, we thought it would be helpful to provide you with charts showing the same. We divided the county into 4 regions, and over the next few weeks we will publish charts for each of these regions to keep you updated on each of the cities and their current laws.

This week’s post highlights the cities located in and around the Long Beach Area. Here is the chart showing the laws regarding cannabis cultivation, dispensing, distribution, and manufacturing in the Long Beach Area Cities.

Before you can receive a California cannabis license (temporary or annual) you must provide the state with proof of local approval. Our charts in this series are intended to help you figure out whether such local approval is possible and, if so, what it takes to get it.  Please note that although we hope you will find this research useful, local cannabis zoning ordinances tend to evolve, so you will want to confirm these findings and run related due diligence, prior to taking action.

Be sure to look for additional blog posts on the remaining incorporated L.A. County cities over the coming weeks.

Best not to confuse your local regulators.

Across California local jurisdictions are opening licensing windows and evaluating commercial marijuana license applications. Often the scoring process is conducted by the staffs of city councils, zoning boards and planning commissions, working on a compressed timeframe, and giving scores for various categories using a scoring matrix: “Location,” “Safety & Security,” “Community Benefit,” are common categories, for example. There is typically a “Financial Stability & Capitalization” category, as well, where companies disclose their balance sheet, and their business plan going forward.

The scoring of these categories is unpredictable. Typical requests from the local regulators may be:

  • A budget for construction, operation, maintenance, compensation of employees, equipment costs, utility costs, and other operation costs. The budget must demonstrate sufficient capital in place to pay startup costs and at least three months of operating costs, as well as a description of the sources and uses of funds.
  • Proof of capitalization, in the form of documentation of cash or other liquid assets on hand, Letters of Credit or other equivalent assets.
  • A pro forma for at least three years of operation.

As we’ve previously written, early-stage companies are often raising early capital using convertible notes, as a means of kicking the valuation can down the road into 2018. Although notes are much more akin to equity investments, they show up on a balance sheet as debt. The impact of an applicant having outstanding debt is uncertain, but one can imagine that an applicant that has almost all of their cash on hand through issuing debt may be viewed unfavorably. And that can be a problem.

To a city staffer unfamiliar with a convertible promissory notes, the debt may appear to be nothing more than a short-term loan, and with a balloon payment set at a 12 to 24 month maturity date, the company may look like it needs a moonshot to survive. In reality, though, the company will have no payment obligations, so long as it achieves a priced round equity financing within that timeframe. In that case, investors will convert to equity, the debt is extinguished, and no debt service payments are made. However, in a competitive licensing application environment, explaining the intricacies of a convertible note to a city staffer means you’ve likely already lost the battle.

Rather than carry debt on the balance sheet through the application process, an alternative instrument for early-stage financing can be borrowed from the tech world: the SAFE (Simple Agreement for Future Equity). This instrument was developed for early company financing by startup accelerator Y Combinator. It serves the same function of a convertible note, and will often convert to equity on nearly identical terms. But is explicitly NOT a debt instrument. It’s a more company-favorable means of raising capital, as compared to the convertible note: the investor loses the security of holding a debt instrument, and the leverage of having a maturity date.

To the local regulator – likely unfamiliar with either instrument – the SAFE would appear to be much more like a letter of intent to issue equity in the future. And the SAFE investment received by the company appears on the balance sheet as cash on hand and unencumbered, making the company appear much better capitalized than a company whose capital all comes with a corresponding debt obligation.

SAFEs are not for everyone, and an investor familiar only with convertible notes but not SAFEs will almost always prefer to hold the convertible debt. However, for companies that can raise funds with a SAFE, there are a few potential advantages: 1) these companies may find their applications get a critical boost in their “Capitalization” score; and 2) they are easy to put together, as a SAFE is just a standard agreement with few negotiable terms – the Cap, the Discount, the Most Favored Nation Clause. If the terms are right, companies planning to navigating multiple local cannabis application processes would be wise to consider taking the SAFE route.