Phase II Licensing and Social Equity in the City of Los Angeles

Cannabis licensing in the City of Los Angeles has been a slow go. Though the City’s Department of Cannabis Regulation has licensed 155 Existing Medical Marijuana Dispensaries (“EMMDs”) there is still an entire line of existing cultivators and manufacturers, social equity applicants, and general public applicants waiting their turn for cannabis entitlements. The City announced earlier this month that Phase II licensing would open on August 1 and run for 30 days. This week, the public can for the first time see the documents required to secure Phase II licensing. Phase II applicants will need to prove a number of things, including that they were already operating in Los Angeles and supplying a valid EMMD prior to January 1, 2017. In addition, the City (and the world) is going to get its first look at initial social equity program entitlements in L.A.

Social equity in L.A. has been much debated and anticipated, namely because everyone knows that under local laws social equity applicants get a bevy of benefits and pretty much get to skip the line with priority license processing. Phase II is the first time we will get to see how social equity will work in practice since social equity eligibility is mandatory for Phase II licensees. Specifically, to qualify for Phase II temporary approval/licensing (which triggers priority licensing for existing “non-retailers” like growers and manufacturers — you will need to meet all of the following criteria:

1. The Applicant was engaged prior to January 1, 2016, in the same Non-Retailer Commercial Cannabis Activity for which it now seeks a License;
2. The Applicant provides evidence and attests under penalty of perjury that it was a supplier to an EMMD prior to January 1, 2017;
3. The Business Premises meet all the land use and sensitive use requirements of Article 5 of Chapter X of this Code;
4. The Applicant passes a pre­-license inspection;
5. There are no fire or life safety violations on the Business Premises:
6. The Applicant has paid all outstanding City business tax obligations;
7. The Applicant indemnifies the City from any potential liability on a form approved by DCR;
8. The Applicant provides a written agreement with a testing laboratory for testing all Cannabis and Cannabis products and attests to testing all its Cannabis and Cannabis products in accordance with state standards;
9. The Applicant is not engaged in Retailer Commercial Cannabis Activity at the Business Premises;
10. The Applicant attests that it will cease all operations if denied a State license or City License;
11. The Applicant qualifies under the Social Equity Program; and
12. The Applicant attests that it will comply with all operating requirements imposed by DCR and that DCR may immediately suspend or revoke the Temporary Approval if the Applicant fails to abide by any City operating requirement.

There’s a fundamental misunderstanding that social equity in Los Angeles means you’ve faced some kind of cannabis conviction, but it’s way more than that. There are three levels of social equity identified by tiers as follows:

1. Tier 1: Low Income (which means “80 percent or below of Area Median Income for the City based on the 2016 American Community Survey and updated with each decennial census”) and a prior California Cannabis Conviction (which means “a cannabis-related crime that occurred prior to November 8, 2016, and could have been prosecuted as a misdemeanor or citation under current California law,” though this definition is going to change to “an arrest or conviction for any crime under the laws of the State of California relating to the sale, possession, use, manufacture, or cultivation of Cannabis that occurred prior to November 8, 2016”); or Low Income and a minimum of five years cumulative residency in a Disproportionately Impacted Area (which means residency in “eligible zip codes” as established by the City). Tier 1’s can’t own less than a 51 percent equity share of the licensed business.
2. Tier 2: Low Income and a minimum of five years cumulative residency in a Disproportionately Impacted Area; or a minimum of 10 years cumulative residency in a Disproportionately Impacted Area. Tier 2’s can’t own less than a 33 1/3 percent equity share of the licensed business.
3. Tier 3: Tier 3’s have to enter into a Social Equity Agreement with the City to provide very specific capital, leased space, business, licensing and compliance assistance to a Tier 1 or Tier 2. Most people shooting for Phase II licensure will likely try to go for Tier 3 status, but they still have to find those coveted Tier 1s or 2s to play ball.

There are also a slew of regulations that apply to social equity applicants including having to disclose to the DCR any proposal to take on debt, any proposal to sell any equity in the business after licensure, and forking over bylaws and other corporate control documents.

At a roundtable I spoke on last week at the Vision Theater, L.A.’s social equity program was the topic of discussion. Cat Packer, executive director of the DCR, made clear that if people want to see changes to the social equity program, they need to show up to meetings with city council to voice their positions and desires. Ms. Packer also stated that Tier 1 and 2 social equity applicants are going to get retail licenses on a 2:1 basis relative to the general public and EMMDs (and on a 1:1 basis for non-retail). This means social equity applicants will get at around 310 retail licenses (there are 155 EMMDs) even before a single general public license ever issues. Combine those ratios with mandatory undue concentration limitations, and there’s a solid chance city license caps may be triggered with social equity, giving those applicants major leverage in what could be the world’s largest cannabis market.

The social equity program in LA is going to evolve and hopefully lead the way for other cities and counties looking at various social equity models. As Phase II approaches, social equity applicants need to be wary of hawkish and predatory practices that seek to take advantage of their status and discard them after the fact (see here for California’s recent cannabis schemes and scams).

source https://www.cannalawblog.com/phase-ii-licensing-and-social-equity-in-the-city-of-los-angeles/