Industry Update: New Statewide Commercial Cannabis Regulations in California Create Opportunities for Savvy Investors

6 min

Following the State of California's legalization of adult-use cannabis in November 2016, cannabis regulations have been growing like weeds (pun intended). Earlier this year, state regulators at the Bureau of Cannabis Control ("BCC"), the California Department of Public Health ("CDPH"), and the California Food and Drug Administration ("CDFA") finalized statewide regulations for commercial cannabis activities. With some stability slowly emerging in a newly regulated industry, more local governments are beginning to adopt regulations to allow some form of commercial cannabis activity, meaning the time is good for entrepreneurs with an appetite for high risk and high reward to enter the industry. Venable employs a wealth of industry experience to help clients capitalize on these new opportunities.

The California regulatory regime remains complicated, but there are several trends that broadly apply, and for which savvy market entrants into the commercial cannabis space should consider as they evaluate the market:

  • State Regulations – Commercial cannabis is regulated by the Medicinal and Adult-Use Cannabis Regulation and Safety Act ("MAUCRSA"), which legalized adult-use cannabis and which provides the basic framework from which all other state regulations are drawn. Yet MAUCRSA is just the beginning, and commercial cannabis operators must also be aware of the multitude of regulations put in place by the BCC, CDPH, and CDFA. Most importantly:
    • Any commercial cannabis operator is required to have approval from both the state and the local jurisdiction in which the operator is based in order to lawfully conduct commercial cannabis activities.
    • There are 20 types of state licenses, broken down roughly into Cultivation, Manufacturing, Testing Laboratory, Retail, Distribution, and Microbusiness. Each type of license requires its own application, and operators should be aware of vertical integration provisions that regulate the context in which an operator may hold multiple licenses.
    • Buffer zones – California law requires that a commercial cannabis operator not be located within a 600-foot radius of a school, day care center, or youth center that is in existence at the time the license is issued, unless a local jurisdiction specifies a different radius.
    • State Taxes – California imposes a number of taxes and levies on commercial cannabis operators dependent upon the type of license and business activity conducted by such operators. California's Sales and Use Tax Law and Cannabis Tax Law are administered by the California Department of Tax and Fee Administration. Cannabis operators are potentially subject to a multitude of state taxes (and associated reporting requirements) including state sales tax, cannabis excise taxes, and cultivation taxes.
  • Local Regulations – MAUCRSA permits local governments to maintain broad authority over the commercial cannabis activities that can take place within their jurisdictions. Any operator will need to be aware of applicable city or county ordinances governing commercial cannabis activities, and any limitations placed on operations by the applicable local jurisdiction. Most importantly:
    • Zoning – Where are commercial cannabis operations permitted to operate within the jurisdiction? Has the local government established its own buffer zones that differ from state law? Many jurisdictions require commercial cannabis operators to locate only in certain zones (e.g., so-called "green zones"), and may require that they not be concentrated near each other by including other cannabis businesses within their buffer zone restrictions.
    • Local Taxation – Local governments can, and do, institute their own cannabis taxes and fees on top of state taxes, often in the form of a gross receipts, business tax or excise tax based on the local license or other classification of cannabis operator; understanding the implications of a local tax rate and the differences among local jurisdictions with respect to local taxes is essential for any potential operator. The local taxes are generally payable and reportable in additional to applicable state taxes.
    • Limitations on number of operators – Many local jurisdictions will allow only a limited number of operators at any given time, and may accept applications only in narrow windows.
    • Williamson Act – A California law that provides relief of property tax to owners of farmland and open-space land in exchange for an agreement that the land will not be developed or converted to another use. Any land use diligence for cultivation or development on agricultural land will need to determine whether current Williamson Act contracts would permit conversion of the land for use in the cultivation of cannabis. The California legislature is currently considering SB-527, which would specifically include industrial hemp within the ambit of Williamson Act contracts, but would leave the question of cannabis to future regulation at the state and local levels.
  • Entitlements – Opening a commercial cannabis business is not as simple as knowing the regulations at the state and local levels. In most jurisdictions, a variety of other entitlements are required in order to operate, including:
    • Conditional Use Permits – Many local jurisdictions consider commercial cannabis businesses special uses, which must obtain Conditional Use Permits in order to operate. These permits allow the city or county to impose special conditions to ensure compatibility with surrounding land uses and the jurisdiction's General Plan. They frequently require negotiation and will need to be approved after public hearings.
    • Development Agreements – A development agreement is a voluntary contract between a local jurisdiction and a property owner, detailing the obligations of both parties and specifying the standards and conditions that will govern development of the property. These types of agreements can be beneficial for both the public agency and the developer, in that they allow the local jurisdiction to impose further conditions (frequently including the payment of fees and contractual indemnities that could not otherwise be charged or legally required without voter approval) and freeze the regulations governing the property in question, assuring the developer that the regulations will not shift in detrimental ways during the period of development.
    • Business Licenses – Business licenses are permits issued by government agencies that allow individuals or companies to conduct business within a particular jurisdiction. These are usually required of all businesses in a jurisdiction, including cannabis businesses.
    • Building Permits – Prior to constructing or remodeling the premises where a commercial cannabis business is located, an operator will need to obtain proper building permits from the local jurisdiction, resulting in a Certificate of Occupancy, which will allow the operator to occupy the space and begin operations.
    • Environmental Approvals – Commercial cannabis businesses must comply with the California Environmental Quality Act ("CEQA") in the development of their premises. An understanding of CEQA and the impacts this process can have on entitlements is essential to obtaining project approval.
    • Local Cannabis Licenses – Many local jurisdictions require separate licensing in addition to state approvals, which may require detailed background checks for all operators and may place limitations on the ability of an owner to transfer its license(s) to another potential operator without local approval.

    Venable LLP is a prominent full-service, national law firm that regularly handles all of the land use, zoning, entitlement, regulatory compliance, corporate, tax, real estate, litigation and intellectual property issues facing state and locally licensed commercial cannabis and industrial hemp operators.

    Venable can compile a project team with extensive on-the-ground experience throughout California to help commercial cannabis operators navigate the complex regulatory and entitlement process and get operational as soon as possible. Don't get lost in the weeds – Venable can provide dynamic, timely and cost-effective solutions as you enter California's commercial cannabis industry.

Contacts

Matthew A. Portnoff
Venable LLP
(310) 229-0374
MPortnoff@venable.com

Jordan Ferguson
Venable LLP
(310) 229-0326
JFerguson@venable.com