Prop. 64 and the Importance of Local Licensing

Prop. 64
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“Prop. 64 also retains the MCRSA’s local licensing requirement, so businesses will need both a local and state license to lawfully operate. This makes local licenses arguably the most important part of the entire regulatory system.”

With the recent passing of the Adult Use of Marijuana Act (Prop. 64), California residents officially legalized recreational cannabis. As of Nov. 9, adults over the age of 21 can possess up to one ounce of cannabis and up to eight grams of cannabis concentrates. Adults over 21 can also have a maximum of six cannabis plants (grown indoors) for personal use.

And, along with criminal justice reforms and an ambitious tax plan, Prop. 64 also creates a new state commercial cannabis industry. Beginning in 2018, all cannabis businesses must be licensed and comply with a number of both local and state regulations. Currently, we don’t know what these regulations will be; however, the state has recently announced that they will release a prospective regulatory system next year.

But, regarding the state licensing system, Prop. 64 modifies the existing structure created under the Medical Cannabis and Safety Act (MCRSA), which Gov. Brown signed into law last year. The MCRSA created a regulatory structure that requires cannabis businesses to obtain both a license or permit from a city or county, and a state license issued by the Department of Consumer Affairs, the Department of Food and Agriculture or the Department of Public Health (depending on the type of business activity).

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Under the MCRSA, state licenses are divided into types — Types 1, 2, and 3 for cultivation; Type 4 for nursery; Types 6 and 7 for manufacturing; Type 9 for testing; Types 10 and 10A for retail; Type 11 for distribution; and Type 12 for transportation.

Now Prop. 64 doesn’t materially change this structure (in fact, Prop. 64 was draft ed specifically to avoid any serious conflicts with the MCRSA). Rather, Prop. 64 merely removes the Type 12 transportation license, and adds a microbusiness license (which authorizes a small cannabis business to engage in retail, non-volatile manufacturing, distribution and cultivation for less than 10,000 sq. ft .) and a Type 5 series of licenses for “super grows;” cultivation that exceeds either 22,000 sq. ft ., for indoor or “mixed-light” grows, or exceeds more than 1 acre for outdoor grows (but these licenses won’t be available until 2023).

And Prop. 64 also retains the MCRSA’s local licensing requirement, so businesses will need both a local and state license to lawfully operate. This makes local licenses arguably the most important part of the entire regulatory system because a business must first obtain a city license before it can even think about applying for a state license.

Yet the issue for potential businesses is that obtaining a local license will not be easy. The shear volume of applications for cities such as Los Angeles will likely prove challenging for applicants and city employees alike, and may result in larger cities resorting to a public lottery system (which was previously used by both Long Beach and Santa Ana).

And keep in mind that cannabis licenses won’t be available in every city in California. Prop. 64 allows cities and counties to prohibit cannabis business activity within its borders. But cities can’t ban adults from growing six plants indoors for personal use. Currently, an overwhelming majority of California cities and counties ban commercial cannabis activity. Of course, the passing of Prop. 64 will encourage some cities to issue licenses in the near future, but the fact of the matter remains that many city governments and communities either remain hostile toward cannabis, or are simply not interested in commercial cannabis at this time.

And this reluctance carries over to when cties do decide to issue licenses. Cities are beginning to place limits on how many licenses are available for operators. For example, one desert city is issuing a maximum of 15 cultivation licenses, two manufacturing licenses, and two retail licenses, with another city expected to issue only two retail licenses. Los Angeles currently has a licensing ballot measure for next March that would limit the number of dispensary licenses to 135.

Now these limits are either good or bad, depending on your personal views on cannabis. On one hand, concerned residents don’t have to worry about pot shops on every corner. But, on the other hand, a limited number of local licenses means a limited number of opportunities for entry into the industry. And with a limited number of licenses potentially available, many current and future operators may find themselves either excluded from the industry or pushed into the black market.

So, in short, both residents and operators should understand the importance of local licensing and engage their local elected officials. These officials will ultimately adopt the ordinances that will determine who has a future in this industry, and who doesn’t. Arturo Castillo

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