Cannabis Knowledge & Insights

Los Angeles Phase 3 Commercial Cannabis Licensing

Derek Davis and Lauren Estevez have been closely following the developments in Los Angeles’ cannabis business permitting process, and have a lot of helpful information to share!

In this webinar, they will cover the background of the permitting process, the Social Equity Program, your options and much more!

March 5, 2019 Update from LA City Council Meeting

Recommendations from Rules Committee to City Attorney to draft an Ordinance reflecting the following key changes to Phase 3* from 3/5/19:

  • DCR will pre-vet social equity applicants before Phase 3 opens to ensure they meet City’s criteria
  • This recommendation shows more prioritization of Tier 1 Social Equity (Companies with 51%+ equity ownership) vs prior drafts which treated Tier 1 and Tier 2 similarly.
  • New requirement: Certificate of Occupancy for building (in addition to lease or deed and correct zoning)
  • Phase 2 will be allowed to apply for delivery pilot, under this most recent proposal which is a change from a few weeks ago
  • Phase 1 EMMDs will NOT be allowed to apply for Phase 3 storefront
  • Social Equity business partners/investors will have ROFR (Right of First Refusal) to buy out social equity applicant after 3 years
  • Type 10 – Retail Storefront: First 75 licenses will go to Tier 1 Social Equity applicants, unless there are not 75 who qualify.
    • 1 application per applicant
    • Second phase will be another 100 licenses for Tier 1 and Tier 2 Social Equity
    • If Phase 3 storefront license applicant does not receive a license due to undue concentration, s/he will receive priority for a Type 9 delivery license
  • Type 9 – Delivery Pilot: 20 of the first 40 social equity licenses will go to Tier 1 Social Equity companies; the second 20 will go to Tier 2 social equity companies; there will still be 20 licenses reserved for general applicants.
    • Only 1 application per applicant

*N.B. City Council will then need to vote on the Ordinance for it to become law so these changes have not yet gone into effect.

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Here is a downloadlink to the slide deck.

Full Webinar Transcript

We are really, really excited to discuss LA phase three and the new updates. I’m sure as you guys all know, Los Angeles is the largest cannabis market in the US and arguably the world, so we’re really excited that they will start licensing new companies. I’m also very, very excited to introduce Lauren, who’s the attorney and founder of LME law. We will be doing the webinar today together.

So a little bit about us. We are GreenGrowth CPAS. We are a full service CPA firm. Currently we filed probably about a little over a thousand income tax returns over the course of the last two years. We have between 300 to 400 cannabis clients spread throughout the entire supply chain, so distribution, manufacturing, cultivation, retail. We are currently in 11 states and we have done a little over 12 audit and assurance related projects and valuation projects. We also recently, were registered as a Canadian board of Accountancy Corporation, so we’re really excited that we’re doing to RTOs is here and we will be the full CPA on both the US and Canada. Some other cool things about us is we broke seven figures last year, which was our second full year of business and we have a thorough and deep understanding of tax compliance and all assurance related activities.

Hi everyone. I’m Lauren Estevez. I’m the founder of LME Law and I’ve been an attorney in the cannabis space since 2017 in Los Angeles. I’ve worked on over a hundred legal matters to date since starting. All matters from corporate governance to company formation to compliance and licensing applications. So very excited to be here with you today and discuss LA City’s phase three for cannabis licensing. Prior to cannabis I worked with publicly traded life sciences companies at a startup and also graduated from Harvard Law School.

Quick little disclaimer and Lauren didn’t make us say this, but just to cover our bases. The information contained in this Webinar or presentation is a for informal purposes only and is not professional legal or tax advice. Further does not give personalized legal tax investment or any business advice in general.

So today we’re going to be talking about LA phase three which is the first licensing phase and the city of Los Angeles, which will allow for new businesses to apply for cannabis licenses.

So as many of you know, if you’re in the cannabis industry, there’s been a phase one for LA for existing dispensaries, also known as pre ICO’s by some and phase two which was a licensing round for cultivators, manufacturers and distributors who were in business before 2016 and also agreed to participate in the city’s social equity program.

So today we’ll be giving you the rundown of phase three which is coming up this spring. We’ll give you some background on LAs commercial cannabis permitting process. We’ll go through the LA Social Equity Program, which many have questions about, and we’ll talk about some issues that may occur in phase three as well as some very recent updates from city councils.

So the DCR presented some recommendations for amendments to the existing phase three process February 8th and city council is considering these changes in a new ordinance. So we’ll get into all those details as well.

So first, a little bit of background on LAs commercial cannabis permitting process. In March, 2017 the voters of city of LA passed Measure M which allowed the city to tax legal marijuana businesses that have a licenses to operate and to give them licenses in the first place. So it’s been a very slow rollout. The ordinance passed last year and called for three phases of licensing. The first phase for already existing and operating dispensaries that had to BTRC, which is the tax permit for city of LA for certain years. The second phase for already existing cultivators, manufacturers and distributors in the city of LA who were also already operating. And basically the impetus behind these phases was to get the businesses that are already existing in the city of LA online and paying taxes to the city. Since many had been operating for many years either in the gray zone or in the black market.

So now these businesses that have permits, phase one has already closed and there’s 170 dispensaries in LA that have permits through phase one and phase two has started issuing permits and approvals for city of LA. We’re estimating that there will be around 200 to 250 phase two businesses that receive licenses. But all of these phase one and phase two were for people who already had a cannabis business in la. So phase three is really exciting because creates new opportunities for business people to apply and get a Los Angeles cannabis license.

So phase three currently as it stands, phase three is being considered for retail and delivery. The ordinance also calls for new cultivation distribution and manufacturing permit. However, this has not been discussed in recent DCR communications. So for now what’s on the table is storefront, retail and delivery.

So the keystone of LAs Policy Program for cannabis is the Social Equity Program (SEP). The executive director of the DCR Cat Packer, worked at the drug policy alliance before taking this position. And really her hallmark policy is the social equity program. And basically what the social equity program does is it creates priority for those who were affected by the war on drugs. So either people who had a prior cannabis conviction or who lived in a neighborhood that was disproportionally impacted by the war on drugs based on the number of arrests. And we’ll get into the details of that as well. But basically the social equity program will allow people to apply earlier in the process. So under the current proposal DCR made on February 8th there’s to be a hundred new retail licenses available to social equity applicants and there’s going to be 60 delivery permits available. 40 of those are going to go to social equity applicants and 20 will go to general.

So it’s really in your interest to participate in the social equity program. The good thing to know is that you yourself don’t actually have to qualify for the social equity program. You can partner with someone who does and tier one and tier two of the Social Equity Program require 51% ownership by social equity applicants for tier one and tier two is 33.33%. so even if you yourself don’t qualify for this program and have a prior cannabis conviction or low income or live in a neighborhood that’s been disproportionately affected by the war on drugs, you can still get priority licensing by going into business with someone who does qualify.

Okay, so there’s a couple of problems that may occur during the phase three regulations that currently aren’t being amended. The biggest one is competition, so it’s really important that you understand that there are no other preexisting applicants within a 700 foot radius. This is really hard to independently verify because if you’re going for a retail license and someone you know four doors down is also going for that at the same retail license. The DCR is unfortunately going to have to pick one applicant. As of today, we’re not entirely sure who they will go with and what that process will look like, but it is an issue such that the DCR does not want to have multiple dispensaries in the same location, but on the same regards, who are they going award that a license to.

The second issue is over-saturation. So we don’t know exactly how the DCR is going to allow, you know, let’s say a manufacturer or a cultivator, what type of proximity that they have to one another and how they determine who will be awarded the license. We look forward to hearing back from the DCR. We have a couple inquiries with them right now. So you know, once we’re able to finalize these questions, we’ll be able to follow up with everyone and let them know how the DCR plans to approach this.

A couple of other problems that may also occur during the phase three regulations which aren’t currently being addressed right now is the underdeveloped social equity program and the Social Equity Program must be fully established before general applicants can also participate in the licensing. So what that means is that the DCR will allow social equity applicants to go before general applicants. It’s not entirely clear the number of tier one and tier two applicants and then how that will be subsequently broken out amongst social equity and non social equity general public.

The last potential issue that we may see as the total number of storefront retail permits being around 200 that part we’re still not entirely sure. Once phase three opens up, which we’re hoping in spring of this year, the BLC will be able to then provide better clarity on the on these issues. But right now it’s still not very clear with specific regards to which social equity applicants are going to get the permits and then which general public applicants will be getting the permits.

So yeah, so what Derek was talking about with the limited number of retail licenses is basically and measure m and in the ordinance that passed, the number of licenses that will be given in city of LA is tied to the population. So the city council was thinking they don’t want to have thousands and thousands of dispensaries. If there are only this many residents of LA, but one thing to think about with phase three is the relationship between phase one and phase two with phase three because there are many existing legal dispensary owners who are interested in potentially expanding or starting new businesses in addition to their existing ones.

So city council is not passed the amendments that DCR proposed yet, but there may be some restrictions on phase one and phase two operators participating in phase three. We’ll have to see how it turns out once there’s an amended ordinance presented to city council and they vote on it, but right now it is part of dcrs proposal to put some restrictions on that, but new operators will definitely be able to apply for delivery or storefront rather.

Under the current proposal the delivery pilot program does not allow you to apply for delivery and retail storefront. So many had been planning to operate the way the phase one dispensaries do in LA, which is they have both a retail storefront license and they are able to do deliveries under the DCR proposal. It would split those up so that you couldn’t participate in both. But again, it remains to be seen one city council votes on the final ordinance.

So one of the issues that Derek brought up was how will the DCR decide who gets a license if two applicants apply and they’re within 700 feet of each other right now there’s three ways that it could go. One is first in time, which is what it sounds like. Basically they’ll decide based on the timestamp and when your application is complete.

Two is a merit based system and we’ve seen this in other cities like Santa Monica, Palm Desert, West Hollywood where the city defines application criteria and assigns each category is score and then we’ll grade each application and that one with the highest score would take precedence in that case.

The third way the city would determine who gets the license if two applicants are within 700 feet of each other is a lottery. And a lottery is just what it sounds like. It’s luck of the draw. We’ve seen this in other cities like Oakland in determining who gets cannabis retail licenses. So in one way it’s the fairest way to do it because there’s no interfering with the a lottery system. But on the other hand, there could be situations where someone is much more prepared and they have a much stronger business model and existing relationship, et Cetera, and they don’t get the license and someone who’s less prepared does get the license.

One thing I just want to back up that this is not in here, but you going to need a property to get a phase three license. So you need a compliant property that’s far away enough from all of the sensitive uses. A lease is okay, you don’t need to own the property. You will need your landlord to consent to having it used for cannabis, but you will need a property. If you are tier one or tier two you’ll be able to get certified through the DCR and then you can be matched up with someone who has a property. But if you’re not tier one or tier two, you definitely need a property in order to get that license. So that’s really the first step. If we have any listeners who are just kind of starting out on this journey and exploring starting cannabis business in LA. Look for a property first and make sure that you got it professionally mapped by title search companies so that they can verify that it does meet the city’s specifications.

Processing restrictions for first come, first served and lottery methods. So one really important facet of DCRs recommendations of February 8th is that what they’re saying is that you’re going to need one social equity applicant per address. So you couldn’t have three separate addresses. Say all with the same social equity partner. You would need to find three separate social equity partners, one for each address. So again this is subject to change. The city council has not voted yet and there’s no amended ordinance presented but this is the current DCR proposals. So if you’re a property owner and you have multiple locations that qualify for phase three and you’re applying for multiple licenses, you will need a separate social equity partner for each application if you do want to apply under the social equity program.

So I’ll talk a little bit about the delivery non storefront pilot program. DCR is proposing that they’ll issue 60 delivery licenses, 40 to social equity applicants and 20 to general as part of a pilot program. And this is really important because if you’ve been following the state law, California now allows statewide delivery even in jurisdictions that have a ban.

So if you get a delivery license in LA and you get your state license, you’ll be able to deliver all over California. You could have operations in San Francisco, San Diego, and everywhere in between and you can have up to $5,000 worth of inventory in your car. So you can basically have mobile dispensaries under this delivery model. The delivery pilot program will only be open to those who do not have a phase one or phase two license. So those are excluded and this is really for new people and it’s going to exclude those who are applying for retail storefront license in phase three. So under the current proposal you’ll have to decide whether you want to do delivery or you want to do retail storefront.

This is another really important aspect of phase three a the recommended amendments the DCR has made, they are going to allow temporary licenses for phase three. Now again, this has to pass City Council and an amended ordinance, but under the original ordinance you were going to have to apply for the annual license for phase three and wait for that approval before you could operate. Whereas now it looks like they’re going to have a streamlined process where you can get a temporary approval from city of LA and operate once you get your state license. DCR has also recommended streamlining the social equity program, meaning that previously the different categories had different priority within the social equity program. And now what they’re saying is if you’re anyone of these three, you can qualify for social equity. And the three categories are low income with a prior California cannabis arrest or conviction. And yes, it’s California. Other states don’t count and yes, and arrest counts. So if you had an attorney that got your charges dismissed, you can still qualify as long as you were arrested. And that needs to be before licensing started. So if you have a 2018 arrest or conviction for cannabis, you will not be eligible to apply.

The second category is residing in a disproportionately impacted area for five years plus low income. The third category is residing in a disproportionally impacted area for 10 years and that does not require low income. So in terms of determining the neighborhoods that qualify, there’s a list of zip codes from the ordinance, but you also need to verify that you’re in the police reporting district that has a disproportionate number of arrests. So it’s not just the zip code, it’s also the PRD. And how can you prove you qualify for the social equity program to show low income? You could show a tax return. And I have the number right here. That’s the exact cutoff. For low income, it’s $45,644 per year. So, low income for individual. So 2017 or 2018 tax return, the chose less than 45,644 is low income in LA. And that’s based on the median income in city of La. And that’s in the ordinance. Not the exact number, but the percent of the median income.

So that’s how you show low income. If you have a prior California cannabis arrest or conviction, you could show the court records, you could show your police report, you could show an arrest record. If you had a previous criminal attorney, they should have your file, you can ask for your file back and you should be able to produce the documents that way. For the disproportionate impacted area, you have to verify that your zip code qualifies, that the police reporting district qualifies. And then you could show a lease, a sublease, a utility bill bank statement mailed to that address, et cetera.

But it is really important, it’s not going to be a self certification where you say, yes, I qualify for the social equity program. DCR is going to need documentation from the social equity applicants. So it’s really important to get your paperwork together and to pre-ve

t your social equity partner to make sure they actually do qualify for the program. So one of the, there are a few ways to find a social equity partner in LA. One of the proposals DCR made in that city council asked for is to have a database the way that San Francisco does, where you can find qualified social equity applicants online. It’s unclear whether DCR will be able to implement this in time. If I were a business owner, I would recommend finding social equity applicants yourself and vetting them yourself, finding someone who’s a good fit for your business because you are going to be going into business with this person and they are going to have an equity, significant equity stake in your company and voting rights, which was added in to the most recent ordinance.

So a lot of questions are coming up about this social equity agreement. When you go into business for the social equity partner, you’re going to need a contract that outlines the terms of your partnership. And this is extremely important. And under the current proposal, you’re going to have to produce this document to DCR within 60 days of either licensing, opening, or submitting your licensing application.

So some key takeaways from this webinar phase three will heavily prioritize social equity applicants. We knew this from the original ordinance that the retail licenses we’re going out two to one, but now it seems like only social equity applicants are going to be able to apply for the first a hundred retail licenses and then the subsequent 100 we’ll be taking place at a later date. So definitely think about participating in the social equity program.

If you don’t qualify, you can go into business with someone who does and make sure they qualify. Look at the tax returns, call an attorney to vet whether they meet the city’s requirements.

And then another key takeaway is you are going to ultimately need a compliant property to get the license. If you are tier one or tier two you may be able to get into the city system and be partnered with someone who does have a property, but you do need a property in order to get a license. So if you’re a new operator or a potential business owner listening to this, start with looking for a property and make sure you get it professionally zoned and meet with an attorney before you sign a lease.

Oh, another key takeaway that’s very important from this recent report from DCR is that they are going to consider issuing temporary licenses for phase three. So you will be able to operate once you get the temporary approval, you can apply for your state license and once you have that you can operate, which is a big change from the previous model.

DCR in terms of deciding who will get the first licenses, there’s three ways they could do it. One is lottery, one is first in time, and the other is a merit based system. So there’s three ways they could go. They’ve considered all of them and we won’t know until City Council votes on the final ordinance, which direction they’re going to go.

And then last two takeaways. One is that there will be a cannabis retail delivery pilot program that will issue 60 licenses. 40 of those will go to social equity applicants and 20 will go to general.

And then last takeaway, phase three is still estimated it start spring 2019 so stay tuned for more updates.

So thank you guys all for listening to our phase three Webinar. We’re really, really excited that Los Angeles will finally come online. So if you have any questions, please feel free to contact us and we look forward to hearing from you. Thank you.