Updated on 10/07/2020: The Los Angeles Department of Cannabis Regulation released application information for cannabis delivery licenses for social equity applicants. Learn more here.

On July 1, 2020, the Los Angeles City Council approved an ordinance amending portions of Article 4, Chapter X of the Los Angeles Municipal Code related to the Licensing and Social Equity Program. These changes represent some of the most substantial to legalized cannabis in L.A. since January 1, 2018. It’s okay to have questions, feel free to reach out to MMLG directly. Also, if you missed our licensing team talk about the changes last week, click here to watch. Here’s what the amendments look like for cannabis retailers/social equity applicants in LA:

All Los Angeles Cannabis Retail and Delivery Limited to Social Equity until January 1, 2025

All retail and delivery applicants need to qualify under the new social equity applicant criteria until January 1, 2025. Phase 3 Round 1 is still under the previous social equity applicant criteria. Before these changes, all retail businesses needed to be on a 2:1 ratio with all non-Social Equity Applicants.

Additional Round 1 Processing

For storefront retailers, the new ordinance adds that after the initial processing of 100 Round 1 social equity applicants, the DCR will process the next 100 Round 1 social equity applicants before moving on to Round 2. These 100 applicants include those who submitted a Type 10 application in Round 1 but were ineligible because of Undue Concentration or having another Type 10 applicant within 700 feet.

Application Lottery

Round 1 involved a first-come, first-serve application processing model. The new ordinance updates Round 2 to a random selection (lottery), improving the transparency and fairness of the application process for pre-verified applicants.

No Property Needed to Apply

In Round 1, an applicant had to find a compliant property before applying. In Round 2, applicants who have been selected during the lottery will now have one year to find a property (although the DCR will approve locations in the order received, so applicants will still want to act quickly.)

Temporary Approval for Phase 3 Social Equity Applicants

The amended Cannabis Procedures ordinance included a provision that allows approved Phase 3 applicants to get Temporary Approvals to operate as opposed to waiting for an Annual License. The ordinance states that Phase 3 applicants, who have been approved for further licensing, can receive Temporary Approval from the DCR if:

1.  they receive authorization from the State;
2. the Business Premises location passes an Initial Inspection;
3. there are no fire or life safety violations at the Business Premises;
4. they submit the required attestations; and
5. they indemnify the City.

This was a significant inclusion because otherwise all of Phase 3 approved applicants would have had to wait until their annual applications were approved to operate. Given that Phase 1 applicants have now been waiting over a year to get any feedback on their annual applications, Phase 3 approved applicants would have to wait at least another year to operate if they had to wait on their annual applications. There will still be a wait since state licensure is required before operating but the BCC is moving substantially faster than the DCR with annual/provisional license review. This is incredibly important for social equity applicants that have been sitting on properties for years.

Requesting a Finding of Public Convenience or Necessity

For applicants to obtain licenses in Community Plan Areas that have already reached their capacity for Undue Concentration, they will need to establish a finding of Public Convenience or Necessity. Previously, this finding was solely determined by the City Council and, if after 90 days the City Council had not addressed the issue, there would be a finding of Public Convenience or Necessity.

The amended ordinance revised this section significantly. In addition to the City Council, an applicant needs to seek written input from the local area Neighborhood Council; Los Angeles Police Department (LAPD) Division; local chamber of commerce; and at least one substance abuse intervention, prevention, and treatment organization within the Community Plan Area. LAPD will also need to provide the City Council with crime data for the area, and a letter stating their position on the application request. Also, the default is now that the request is denied if the City Council does not respond within 90 calendar days.

This creates a more intricate process for determining finding of public convenience or necessity. Seeking input from the above-mentioned stakeholder will take time. Applicants seeking to establish a finding of Public Convenience or Necessity should expect a long wait. It is likely many applications will receive a de facto denial based on the City Council’

Amended Criteria for L.A.’s Social Equity in Phase 3 Round 2

For Phase 3 Round 2—the lottery—the amended ordinance revised the social equity applicant qualifications an individual with a prior California Cannabis Arrest or Conviction and who also meets one of the following two criteria: (1) Low-Income; or (2) ten years’ cumulative residency in a Disproportionately Impacted Area (DIA). For all other future social equity opportunities, a social equity applicant is defined as an individual who meets two of the following three criteria:

1. Low-Income;
2. a prior California Cannabis Arrest or Conviction;
3. ten years’ cumulative residency in a Disproportionately Impacted Area.

Previously a social equity applicant would qualify as Tier 1 or Tier 2 of social equity applicants depending on which of the previous criteria they met. The amended ordinance requires that the applicant have a California Cannabis Arrest or Conviction for Phase 3 Round 2 and increased the cumulative residency in a DIA criterium to 10 years for all social equity applicants.

The other changes are in the definition of DIA and Low Income. The amended ordinance narrowed DIAs from what was previously zip codes based on the original “Cannabis Social Equity Analysis Report” to Police Reporting Districts established in the Expanded Social Equity Analysis. Low Income now also includes a review of the applicant’s assets whereas previously it only included a  review of the applicant’s income. These changes close some of the loopholes that were used in Phase 3 Round 1 where applicants were either in neighborhoods that were not disproportionately impacted or had substantial assets even though they reported an income that qualified.

Social Equity Impact in Los Angeles, Expanded Definition of Equity Share

The amended ordinance expands the definition of Equity Share and establishes related requirements to provide additional protections to mitigate against potential predatory practices. Chief among the concepts of equity share is unconditional ownership. The definition of Equity Share was revised to address profits, dividends, and distributions or other payments more
appropriately. The definition clarifies the intent of the requirement and seeks to ensure that the Social Equity Individual Applicant receives profits equal to their Equity Share, or 100 percent of the value of each stock, member interest, or partnership interest in the event that the stock, member interest, or partnership interest is sold.

The definition of Equity Share is also clarified to address voting rights on fundamental decisions relating to the business. The expanded definition clarifies the intent of the requirement to mean having control of at least the Equity Share percent of the voting rights on all decisions involving the operation of the business. In addition, the amendments also require that the Social Equity Individual Applicant be offered the highest officer position of the business or that another individual is appointed to that position by mutual agreement of the parties.

Lastly, all applicants will be required to incorporate an addendum into their operating agreements that makes any provision ineffective, unenforceable, null and void, if it is inconsistent with, or in violation of, the Equity Share requirements.

Type 9: Non-Storefront

For non-storefront retailers, the ordinance removes the Delivery Pilot Program and the ability for non-retailer licensees to add a Type 9 license in Phase 2. Further, for those applicants who submitted a Type 10 application in Round 1 but were ineligible because of Undue Concentration or another Type 10 applicant within 700 feet, priority will be given over all social equity applicants for Type 9.

Facility Relocation Process

In the previous version of Los Angeles’s Cannabis Procedures, the process of facility relocation was nebulous and almost entirely absent from the Municipal Code. With the implementation of new amendments to the Cannabis Procedures, the City has finally clarified the process. We now know what types of cannabis businesses can relocate, what licensees need to submit to the DCR to relocate, and where in the City those businesses are allowed to relocate.

First and foremost, business relocation requires approval from the DCR which is predicated on the
following three steps:

• Licensees must submit an amendment request form and pay the Cannabis License Modification Fee ($1,700) to the DCR; Commented [RC4]: Should this be expanded on?
• The DCR reviews the new location request for compliance with land use and sensitive use requirements and notifies the licensee if the new location is compliant or not; and
• The licensee must provide: (i) a deed or executed lease with proof of a deposit; (ii) landowner acknowledgement of the right to occupy; (iii) a site plan; (iv) a premises diagram; and (v) copies of State licenses.

Additionally, where licensees are able to relocate their business is restricted by license type. License types able to relocate to any other location within the city (so long as that location is compliant with land use and sensitive use requirements) include:

• Non-volatile manufacturing (Type 6);
• Non-storefront retailer (Type 9);
• andDistribution (Type 11).

Other license types are only able to relocate to a new location within the same Community Plan Area given that the Community Plan Area has not reached Undue Concentration. Those license types include:

• Cultivation (Types 1A, 1C, 2A, 3A, and 5A);
• Volatile manufacturing (Type 7);
• and Retail store-front (Types 10 and 12).

If the license application was submitted with approval from the City Council that the business would serve the public convenience or necessity there are additional relocation requirements:

• Businesses without a license – the applicant must find a location within the Community Plan Area and request that the City Council find that the approval of the license at the new location serves the public convenience or necessity.
• Businesses with a license – the licensee may relocate within the same Community Plan Area even if it has reached Undue Concentration.

CEQA Clarifications

The City’s clarifications on the CEQA requirements for cannabis business applicants has the potential for big ramifications on the cost of the application. Previously, the Municipal Code only stated that no cannabis license would be granted without “written findings” that an applicant had taken measures “necessary to avoid or substantially lessen any significant impact on the environment.” What these “written findings” were was left up to the applicant to divine. Typically, this process involved paying thousands of dollars to hire an environmental consultant who would write an exemption report explaining why the cannabis business had no significant environmental impact and then praying the document submitted would be sufficient to meet the City’s guidelines.

With the implementation of these amendments to the Municipal Code, the DCR has assumed the position of Lead Agency in matters related to CEQA. This means that the DCR is now responsible for determining whether a business needs to obtain a complex Environmental Impact Report or a much less complex Negative Declaration. Additionally, on top of determining which documents are required, the DCR will also be responsible for preparing or overseeing the preparation of these documents. This allows the DCR to set more concrete standards for addressing the following  potential environmental impact areas: biological resources, cultural resources, geology and soils, hazards and hazardous materials, hydrology and water quality, noise, public services, and transportation.

However, even with these clarifications, obtaining the proper CEQA documentation might still become a costly burden for potential licensees. Depending on how much responsibility the DCR takes on as Lead Agency in preparing or overseeing the preparation of CEQA documents—and how willing they are to grant exemptions to cannabis businesses—this process may still end up costing potential licensees thousands of dollars to implement. The upside is, if the process of preparing or overseeing the preparation of CEQA documents is simple, and if the DCR is generous with CEQA exemptions or Negative Declarations, then the City has potentially saved licensees thousands of dollars in the application process.

Again, this is a lot to unpack. If you have questions about these many changes to Los Angeles cannabis licensing, feel free to contact MMLG.