LA Department Of Cannabis Regulations (DCR) Update
The Los Angeles DCR has had many setbacks with their commercial cannabis licensing program which began in the beginning of last year. As Phase 3 is set to initiate in Spring of this year, the DCR has proposed a number of changes to the licensing process in order to make it more efficient, transparent, and more equitable. These changes will have strategic implications as to how an applicant approaches the Phase 3 licensing procedure.
As Los Angeles gears up for Phase 3 to begin in Spring 2019, they have expressed that Phase 3 will be exclusive to Social Equity Applicants (except for delivery). As it stands there are around 200 licenses available before the city meets undue concentration limits, so General Population will not have an opportunity to obtain a license in Phase 3. The city has proposed two methods for issuing licenses in Phase 3 upon verification of social equity status, one of which will be used in conjunction with a merit-based system that will take approximately 9 months to process the remaining 100 applications.
Method 1
The first method would follow suit like previous phases by accepting the first 100 applications on a first-come first-serve basis. However, the city has proposed to modify this method because of the increasing issue of undue concentration limits. To remedy the situation the DCR has proposed that they will not deem an application complete until the applicant has submitted the following:
Letter of intent, lease agreement, or property deed at an address in the city & a landowner authorization, if applicable;
A complete premise diagram;
A dated radius map, including horizontal lines and labeling of any sensitive uses applicable to storefront retailers; and
A complete ownership and financial interest holder disclosure form.
Upon submission, the DCR will provide a time stamp that will resolve any location conflicts. An applicant deemed preliminarily complete will be eligible for annual licensing as long as they do not violate 700-foot buffer with earlier-in-time applicants with preliminarily complete applications, or in a community that will exceed undue concentration limits due to other earlier-in-time applicants with a complete preliminary application. The added submission requirements surrounding property will incentivize applicants to procure a viable location prior to submitting their Phase 3 applications.
Method 2
The City’s other proposed method, Method 2, will consist of a lottery style process. Once the verification window closes, each verified applicant will be allowed to register only one location for a lottery drawing. Each applicant picked in the lottery will receive a processing number that determines their priority over another applicant applying for the same location. Further, if two applicants are selected and they have the same address, the applicant who enters into the lease agreement first will be able to retain the address, and the other will be given a grace period to secure a different property.
Social Equity Uniform Qualifications
The DCR made further proposed changes to the licensing process by allowing any social equity applicant, who qualifies, to apply as either Tier 1 or Tier 2. Tier 1 and Tier 2 still have the same equity share requirements as before, 51% and 33 1/3% respectively, but the DCR is now proposing to allow applicants who meet any of the social equity requirements to choose if they will apply as Tier 1 or Tier 2. This will largely affect ownership agreements with social equity applicants who are partnering with cannabis operators and/or investors.
Non-Storefront Retail Delivery
By the spring of 2019, the DCR expects that they will only be able to handle a limited number of non-storefront delivery license applications. Accordingly, they have proposed a delivery pilot program, where 40 Tier 1 or Tier 2 applications and 20 non-social equity applications will be processed. The licensing process will be on a first-come first-serve basis and applicants who have received a retail license or an applicant applying for a retail license in Phase 3 will not be considered for a delivery license.
Looking Forward to LA
The most important takeaways from these proposed updates are: (1) the City’s potential decision to limit Phase 3 Retail Storefront Dispensaries to 200 licenses based on undue concentration limits, (2) the implied property requirement for applicants seeking to apply in Phase 3; and (3) the limitation that Phase 3 applicants cannot acquire both a storefront retail license and a non-storefront delivery.
The changes and proposed Merit-based system suggest that there is a definite advantage for Phase 3 Social Equity applicants who are able to secure a property prior to the licensing application period. While the DCR originally stated property would not be required for Social Equity applicants, and it still is not explicitly required, the proposed updates definitely make obtaining a license more difficult to social equity applicants who have not aligned themselves with deep-pocketed investors that can carry the weight of property costs through the application processing period.
The DCR will be proposing these amendments to the licensing process on February 15, 2019 at the Rules, Elections, and Intergovernmental Relations Committee meeting. It is possible that it may take some time for the dust to settle, given that there are thousands of parties with disparate interests in Los Angeles’ cannabis program. Since Cat Packer and the entire DCR are behind these proposed amendments, and they are likely to be approved in full, it is prudent for any prospective Los Angeles applicants to strategize accordingly.