As licensing delays continue to haunt California’s largest cannabis marketplace here in Los Angeles, the Bureau of Cannabis Control’s chief regulator Lori Ajax talked about local issues at the International Cannabis Business Conference.
The L.A. Licensing Dilemma
A week before Ajax took the stage, the Los Angeles Department of Cannabis Regulation released an update on the current state of licensing. As of right now, 188 dispensaries have received temporary approval from the DCR thanks to Proposition M Priority Processing. That part of the licensing program was designed for existing compliant retail commercial cannabis activity, which includes delivery, and on-site cultivation consistent with Proposition D. In the case of Phase 1 businesses, some operators now a decade old are sitting on temporary licensing.
These 188 — the most old school L.A. pot businesses, with some permits changing hands over the year — will be required to pay the city $4,030 by the last day of March to renew their licensing fees. If all goes according to plan, they should receive the invoices on or before March 2. The renewal of the Phase 1 temporary approved licenses will net the city $757,640 in fees alone, before you even start talking about the taxes they’ll rake in from these shops.
During Phase 2, 158 newer non-retailer commercial cannabis activities that were operating before January 1, 2016, received temporary licenses. The Phase 2 folks still could have some hoops to jump through, but the city has extended the deadline for Phase 2 applicants to pass pre-licensing inspections to March 31. Like Phase 1 operators, that’s the same day they’ll be required to pay their annual fees. Those fees will net the city another $636,740, bringing the total take from Phase 1 and 2 licensing fees to just under $1.4 million.
For both Phase 1 and 2 operators, applications that are not renewed by the deadline will be deemed abandoned by the city.
The most controversial bit of licensing in Los Angeles is certainly Phase 3, where the application web portal opened early giving some operators what was considered an unfair advantage as hundreds of others filed their applications within minutes, often with custom computer programs designed to complete and file it as fast as possible. Now still mired in the ensuing drama, hundreds of applicants sit on properties across the city that could easily run into the tens of thousands in rent monthly at each location as city officials ordered a full audit by the City Administrative Officer.
The Phase 3 Audit
The CAO’s office is now auditing the 100 Phase 3 retail, round one Social Equity applicants selected to be eligible for further processing. We’ve covered the Social Equity Program and advocates’ concerns with it a couple of times over the last year. The city released a neighborhood map breaking down the stats about this current moment in the process.
But regardless of how the audit goes, there will certainly be a lawsuit filed by one of the hundreds of applicants that won’t make it. It happens everywhere. There are three kinds of pot permitting processes: blind lotteries, merit-based application processes like the one seen in West Hollywood, and Oklahoma, where, you just check the box on the form.
Merit-based stuff leaves the most room for a legal challenge. Like in West Hollywood when MedMen said someone’s previous work with a nonprofit they donated too for a bit disqualified them from being a part of the application committee. All kinds of arguments like that will start to pop up once a few hundred people in L.A. burn a couple million each trying to open a dispensary. I promise. And the longer the audit goes, the more bitter they will be in defeat. Some of them with good reason likely, others just haters.
The update also featured a letter from the DRC’s executive director Cat Packer where she quickly reestablished local regulators “are striving to create community and culture that is intentionally more responsible and more equitable regarding cannabis and its various impacts.”
The often embattled Packer has spent the last two years spinning the licensing and social equity program plates while standing on a platform of pre-existing policies. Packer went deep with the L.A. Times last month about the ethos that got her into the position and sharing the same dissatisfaction with the way things are going as those trying to get a foot in the door in L.A.’s cannabis market.
Will the State Help L.A.?
Last week at the International Cannabis Business Conference in San Francisco the state’s top pot official talked L.A.. Leafly’s California bureau chief David Downs asked BCC executive director Lori Ajax if the state would be stepping in to help at all with licensing in L.A. Downs prefaces the question on the fact he didn’t expect to see anyone new or existing get issued an annual permit.
“We stand ready, but at the same time, they don’t have an easy process to get through. We’re always there to help them,” Ajax replied, “They’re one of our equity grant recipients. One of the things you’re going to see us start doing is going around the state to do licensing workshops to work with the local jurisdiction.”
Ajax says, as the equity money gets distributed, they will start doing the workshops to make sure the state, city and operator are on the same wavelength.
Downs spoke of the number of unregulated storefronts in L.A. compared to the few legal ones. He asked Ajax if the BCC had any idea of how effective it’s verification tools are? Ajax replied they had changed the license lookup to CAPotCheck.com to make it easier; they are also going to be making some more changes since consumers can’t search by DBA, or the name a dispensary might be using under an umbrella parent organization, she added.
Ajax also pointed to the new mandatory QR code program that requires licensed retailers to put up a bunch of scannable QR codes that link to their license info.
But back in L.A., it’s more about getting the legal shops open than anything.
The Costs of Doing Business in L.A.
Cassia Furman is the managing attorney of Vicente Sederberg’s California practice group. The firm has helped potential cannabis entrepreneurs navigate their way to permits in 15 states since being founded a decade ago and was described by Rolling Stone as the nation’s first powerhouse marijuana law firm. While helping to steer the West Coast ship, Furman has kept a close eye on L.A. policy since founding Sederberg’s local office in 2016.
Furman kicked off our chat saying it’s been difficult for her to track the scope of the Phase 3 audit after I asked if she’d heard anything on timelines. “It’s been a little mysterious and the city hasn’t released many details that I’m aware of as to whether the auditor is reviewing the actual documents associated with the Phase 3 submissions,” she said, “The equity qualifications, the signing agreement between the social equity partner and the business.”
Furman currently has clients taking part in Phase 3. We asked how much the audit will end up costing them?
“I mean, they’re getting killed,” Furman emphasized, “We’ve got clients we’re working with that have been holding on to leases for two-plus years anticipating this next round of retail licensing.”
Furman called every day an additional expense. She said she understands it’s been a difficult process and DCR is doing the best they can with limited resources, but operators will face even greater challenges in getting their doors open the longer this stretches out.
We asked Furman about the potential legal challenges Phase 3 will face even after the audit.
“Well I have heard rumors what they’re calling the Top 100 of this Phase 3 round one group have been organizing and considering bringing action against the city if the process is further delayed,” she replied, “And I think the city has anticipated litigation all along from the companies that aren’t selected as part of this process.”
As for the rest of the 800 people sitting on properties across LA that didn’t make the top 100, Furman thinks they’re waiting to see the end of the audit. She thinks that some individuals within the city’s government are taking the same approach.
With L.A. so frequently proposed as what would be a model for regulation in the months after legalization, we asked Furman how important the successful regulation of the local L.A. market was to California being the standard-bearer for legalization. If the biggest municipality in the state can’t get it right how much value is there in copying the rest of the program apart from taking the lessons and scars other states would not want to repeat?
“I think all eyes are on Los Angeles as microcosm of the struggles the entire state is facing,” Furman said, “Those in the industry here in Los Angeles consider it to be the heart of the industry and a place that people come to from all over the world to experience cannabis and cannabis innovation.”
Furman closed noting everyone is watching what’s going on, it’s just difficult to predict anything with any certainty.
Waiting For Annual Licensing
One of the most prominent Phase 1 licensees is without a doubt Toluca Lake Collective, home to The Jungle Boys and all their crazy genetics. We reached out to TLC’s Tarzan and Chief Ivan for his take on the pace of licensing around renewals. That process is only a month, compared to the drawn-out Phase 3 process.
“The pace of everything has been, oh man, the average person trying to get into this industry, for them to obtain a license it’s very very difficult,” Ivan told L.A. Weekly in a phone interview.”
Ivan says things are trending toward massive entities that can keep up with the costs and changes while moving away from the folks who bootstrapped it, like the Jungle Boys, without outside cash.
Ivan believes everyone had some idea they, the growers and stores, were going to just apply for a license and get a license. “You go pay some fees and renew your license every year, it hasn’t been anything close to that,” he said.
We asked Ivan if having just the month of March to handle all of that renewal stuff was indicative of the challenges TLC has faced adjusting to the regulated marketplace following the implementation of Prop 64.
“For sure,” he replied, “I think that’s a very small thing, but it’s also a huge thing. There are a million other things we have to deal with. We’re being overtaxed, overregulated. Then testing, testing, testing, which is great.”
How would he split the weight on his shoulders right now between local and state regulators?
“I mean local isn’t that much of an issue because in L.A. they are spread so thin right? But they’ve definitely stepped up enforcement. L.A. went years with trap shops everywhere, anybody could cultivate, they didn’t know who was who. There were times we would get letters like we were about to get raided.”
Ivan called and told authorities they were a licensed shop, but they didn’t even have TLC on their list of people with proper paperwork in order. “They were like, “good thing you guys called us we were about to raid you tomorrow.”
We asked Ivan if he thought the upswing in enforcement was to level the playing field a bit for the forthcoming licensees that will have to compete with the underground market? He thinks everyone falls into two camps, the folks who were doing it for a long time and already did what they had to while surviving a threat of or actual federal interference, “like the Prop D people that followed the rules and did whatever they were supposed to do.”
Now from his view, there is a new corporate wave sweeping up licenses and attempting to align themselves with social equity applicants to gain an advantage in the licensing process.
“So now you have the one side that’s a small group of people that started with their own money trying to survive, and on the other side you have these giant corporations that have hundreds of millions of dollars to burn,” Ivan said, “We’re seeing that now with the failures of all these different companies. So going back to your question, I think those guys are the ones asking for stepped-up enforcement. Because for us, the people with the trap shops aren’t our competition.”
Ivan says since that cheap trap flower will likely be more akin to the flowers being produced by corporate entities, these new faces are the ones who feel the most threatened by its availability on the market.
“That is their competition because they’re in a race to the bottom top sell the cheapest shit, right?,” Ivan said, “Now those guys are going to the city complaining, turning these guys in.”
Jay Handal, the owner of Erba Markets, is participating in the Phase 1 and 3 rounds of licensing. We asked Handal if he was surprised that his Phase 1 application was still sitting on a temporary permit? “Knowing how the city of L.A. has worked on the original Prop D compliant licenses, nothing surprises me,” Handal replied to L.A. Weekly.
Handal is spending $30,000 a month in rent to hold on to his Phase 3 space.
“The landlords are making bank, and the city is claiming to not be culpable for their errors when the fact of the matter is clear all of this could have been avoided with a proper procedure for licensing. And typical of the way the city has handled cannabis since day one, they never miss an opportunity to miss an opportunity,” Handal said.
But what is the proper procedure? Handal pointed to his licenses in other municipalities like Santa Rosa and San Bernardino, saying he’s been through the process. After seeing it take five months in other places, he thinks the city messed up. He thought a proper system would have been a lottery where community and social impact plans could have been prequalified. If someone wins but it’s found their plan couldn’t materialize up to the standard they promised then that permit would move on the next lottery number on the waiting list.
“Requiring everybody to hold the property was just plain wrong,” Handal said referencing all the municipalities he’d worked in where a landlord letter would have sufficed. Not locking permits into specific addresses also protects permittees from getting extorted by landlords once all the paperwork goes through.
Handal says the last he heard, the audit could be done by the end of March. “Knowing now the city of L.A. work, let’s presume for a second it happens in March. Which is a great assumption. By the time they get it analyze it, run it through the city attorney, run it through the city council,” he said, “You’re looking at another three to five months.”
Because of those timelines he is expecting, he thinks everyone will be spending millions to rent empty storefronts for another six months.
The Equity Advocate
Jazmin Aguiar has been leading the Minority Cannabis Business Association effort in L.A. as the city attempts to regulate it’s vast cannabis markets. The MCBA has played a major role in making social equity language fundamental part of cannabis reform moving forward in support of its entrepreneurs from the communities hit the hardest by the War on Drugs.
Aguiar, a Phase 2 applicant, says she saw the perils for Phase 3 applicants coming from a mile away and it’s one of the reasons she didn’t take part.
She said with so many still sitting on temporary permits, “it’s beyond me why we’re moving forward with a new round when we haven’t even finished up Phase 1 and Phase 2.” Aguiar belives in the process of not finishing up those rounds of licensing, they hadn’t solidified a process to make it to the finish line by the time Phase 3 started.
Aguiar believes another issue is the city council is attempting to access the funds granted to them by the state for Social Equity programs. She thinks that money could have been used to reinvigorate the process.
Aguiar said everyone taking part in this process in L.A. needs to figure out three things. The first is expanding the social equity program on the zoning side to create more opportunity, second is tightening up qualification factors of who actually can take part and, finally, redirecting funds to make the programs have a broader impact.