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The Department of Cannabis Regulation (DCR) in the City of Los Angeles is making a big push for a comprehensive overhaul of certain parts of the City’s cannabis licensing protocols and its Social Equity Program. Los Angeles has been through the ringer on cannabis legal reform from the inception of the passage of Measure M back in March 2017.

The long and the short of it is that L.A. has three licensing phases for doing cannabis business in the City. Phase One was for existing medical marijuana dispensaries. Phase Two was for non-retail, existing operators in the City that also met certain Social Equity components pursuant to the City’s Social Equity laws and regulations. And Phase Three is currently split up into three separate categories:

• Round 1 retail licensing first come, first serve basis for 100 tier 1 and/or 2 Social Equity applicants
• a quasi-merit-based Round 2 for 150 retail tier 1 and/or 2 Social Equity applicants; and
• Round 3 to the general public for all license types (where licenses would be issued on a two to one ratio for Social Equity businesses and non-Social Equity businesses).

Phases One and Two have come and gone. Phase Three, Round 1 occurred but was heavily scrutinized in a City audit (where certain applicants got early access to the online application system before the ordering of applicants occurred). The audit determined that early access didn’t affect the integrity of the process, so the City is continuing to process the first 100 applicants accordingly. That audit also brought on a wave of desired reform for the DCR. See here.

The current status of licensing is that Phase Three, Round 2 has yet to commence, but the City is accepting applications for “public convenience or necessity” (PCNs) for those Community Plan Areas that already met Undue Concentration limits.

On June 16, the DCR went further than its previous requests to City Council, which had previously focused on refining the City’s social equity program and licensing. This time, DCR submitted four additional reports (see 1, 2, 3, and 4), which represent desired and comprehensive changes from the DCR, the Cannabis Regulation Commission (CRC), and stakeholders to the City’s Cannabis Procedures Ordinance. In an email to stakeholders, the DCR wrote:

It is the [DCR’s] position that immediate and comprehensive amendments are necessary for a more responsible and equitable Licensing and Social Equity Program. The [DCR] is seeking to improve the administration of the City’s commercial cannabis Licensing and Social Equity Program through a proposed comprehensive reorganization and revision to Article 4, Chapter X of the Los Angeles Municipal Code (Cannabis Procedures Ordinance).

Below are the highlights of the proposed changes the DCR is making to Council.

Regulatory Definitions

L.A. cannabis regulatory definitions would come more into line with those of the State of California (for example, the City would establish the definition of “Primary Personnel” to mirror the state’s definition of “owner”), and certain criminal convictions will disqualify individuals from acting as Primary Personnel (and owners). Further, changes of ownership would operate almost identically to how the Bureau of Cannabis Control handles them now (although it is somewhat unclear if closing has to take place before the DCR will review the change), and the vetting of owners and financial interest holders in a multi-layered corporate structure would also be the same as the BCC (see here for more details on how changes of ownership work with the BCC).

Undue Concentration

The definition of “undue concentration” would be tweaked slightly to adhere to the American Community Survey updated annually (rather than the decennial census) and, for cultivators, the maximum cultivation ratio by City zone would be removed.

License Limits

Regarding licensing limitations, the DCR is proposing that the City keep the current three-license limit on Type 10 retail licenses but include that any entity or individual with an aggregate ownership or profit sharing interest of 20% or more in the entity that holds a Type 10 can’t have more than three Type 10s.

For cultivators, the DCR is clarifying the cultivation cap per entity/person (that owns 20% or more in the licensed business or profit shares at the same level) of no more than three Type 3A cultivation, or combination of cultivation licenses, that total 1.5 acres City-wide. Cultivation applications submitted before the effective date of this proposed change wouldn’t be affected.

Business Relocation

The DCR is finally proposing loosening the reigns a little bit on business relocation–it was a bit of a black hole before now. If the DCR’s changes go through, delivery, distribution and/or non-volatile manufacturing commercial cannabis activities would be able relocate without restrictions related to the underlying Community Plan Area, because these activities are not subject to the City’s Undue Concentration or sensitive use restrictions (other than the state’s 600 foot distance requirement from schools).

However, if you’re in retail, volatile manufacturing and/or cultivation cannabis activities, you will only be able relocate within your existing Community Plan Area provided it has not reached Undue Concentration (and you submit your application before it reaches Undue Concentration) and the new location complies with zoning requirements and sensitive use restrictions.

And if you want to relocate, you will have to provide to the DCR:

1. a copy of an executed lease with proof of a deposit or property deed for the new location;
2. a landowner acknowledgement that the business has the right to occupy the property for commercial cannabis activity for which the business is seeking a license;
3. a site plan;
4. a business premises diagram;
5. copies of the licenses from the applicable state agency (take note that any local relocation will require new state licensing).

PCN Transparency

The PCN process is getting a much needed facelift where we’ll finally have details on how it actually works and what criteria could be considered by the City Council (see reports 1 and 4 above). DCR is proposing that:

1. for City Council-approved PCNs for applicants in Community Plan Areas where no license has issued yet, that that applicant go back to Council to get approval of the license at the proposed PCN location;
2. for City Council-approved PCNs for applicants that already have a license at their original location in a given Community Plan Area, those licensees can move within their same Community Plan Area accordingly so long as they submitted the PCN before Undue Concentration was reached AND they meet applicable zoning requirements and sensitive use restrictions; and
3. if City Council doesn’t act on a PCN request within 90 days of its receipt, it will be deemed denied.

Administrative Review Process

There are too many to mention here, but the general DCR administrative licensing review process would be clarified and a bit tightened and the timing on the payment of fees would also be revised;

Type 9 and Type 10 License Set-asides

Type 9 non-storefront retailer licenses and Type 10 storefront retailer licenses would only go to social equity applicants until January 1, 2025;

Lottery Time

Phase 3, Round 2 would proceed on a lottery basis until Undue Concentration is met on a City-wide basis, and Round 2 winners would get up to a year to find a compliant location within the City.

Revised Social Equity Eligibility Criteria

Social Equity eligibility criteria is changing for new social equity applicants based on revised 2020 criteria (proposed by DCR–see report 3 above), and the definition of “Equity Share” is also changing. If you’re a Social Equity applicant already taking advantage of/qualified under the 2017 criteria, a Tier 1 still has to own at least 51% of the business and a Tier 2 still has to own 33 1/3% of the business (tier 3 is the incubator model and that applicant isn’t really a Social Equity applicant–they just support tier 1s and 2s via Social Equity agreements).

And, if you’re a Social Equity applicant on track to qualify under the 2020 criteria, you’ll see expanded definitions of Disproportionately Impacted Area and Low-Income (and you must own no less than 51% of the business and there is no tier 2 Social Equity here). We also now know exactly what “Equity Share” in these businesses must mean to qualify as a Social Equity business in L.A. Lastly, there are serious restrictions around unconditional ownership, profits and distributions, and voting rights and control to gate against corporate and financial predatory practices.

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As of the writing of this post, on June 23, at a special meeting of the Rules, Elections, and Intergovernmental Relations Committee, that Committee adopted the DCR’s proposed changes and motioned that the City Council direct the City Attorney to draft ordinances (reflecting the changes) to be presented to the full City Council for adoption as soon as this coming Friday. Whether the L.A. City Council adopts the foregoing changes proposed by a combination of the DCR, CRC, and stakeholders is anyone’s guess though it is highly likely to happen. The wheels of reform can move very slowly and are typically pretty political. One thing’s for sure though: the DCR is hot on the tail of a fast-tracked legal overhaul of major portions of the City’s cannabis licensing program. We will keep you posted on how these proposed legal changes play out.

L.A. Cannabis: Is An Overhaul on the Horizon? on Harris Bricken.