On July 1, 2020, the Los Angeles City Council unanimously voted to pass substantial overhauls to the city’s Social Equity Program for cannabis licensure found at Article 4, Chapter X of the Los Angeles Municipal Code.  This week, KVK provides our breakdown of the most important changes to this legislation.

FULL LA DCR ARTICLE | LA CITY CLERK FILE MANAGEMENT SYSTEM

THE KVK PERSPECTIVE

DEFINITION CHANGES

• “Primary Personnel” this term was added to the definitions to identify the individuals who are required to pass a background check through the Live Scan process. The definition includes: (a) an individual with an aggregate ownership interest of 20% or more in the entity applying for a license; (b) the CEO, managing member, or general partner of a non-profit or other entity applying for a license; (c) the CEO, managing member, or general partner of any entity with an aggregate ownership interest of 20% or more in the entity applying for a license. 

• “Undue Concentration” the definition was revised to remove the cap on cultivation canopy within a Community Plan Area. The cap on the number of cultivation licenses per Community Plan Area still remains. 

LICENSE RESTRICTIONS

• Retailer Commercial Cannabis Activity – the restriction on ownership of more than 3 Type 10 licenses was revised to clarify that a person with aggregate ownership or profit-sharing interest of 20% or more cannot hold more than 3 Type 10 licenses, unless the interest is solely a security, lien, or encumbrance.  

• Non-Storefront Retailer – Type 9 licenses are no longer subject to the 3-license ownership cap. This cap only applies to Type 10 licenses (retailer).  

• Indoor Commercial Cannabis Cultivation Activity – a person with an aggregate ownership or profit-sharing interest of 20% or more in an applicant cannot own more than (x) three Type 3A Medium Indoor licenses; and (y) any combination of cultivation license types where the aggregate allowable cultivation area would exceed 1.5 acres.

APPLICATION PROCEDURE

• Addition of a “Preliminary Application Review” stage conducted by DCR after submission of an application to determine if the application is eligible for further processing 

• During the Preliminary Review stage, DCR will assess (i) the Business Premises location’s compliance with zoning requirements and sensitive use restrictions, and (ii) any criminal offender record information for Primary Personnel via Live Scans to confirm eligibility for a cannabis license. 

• Except for the Social Equity Individual Applicant who is an owner in an application, this amendment allows the Applicant to replace an individual who is disqualified from being an owner or from receiving the license – as opposed to disqualifying the application completely based upon the owner’s disqualification.
  
• The application process shall consist of the three stages:

First Stage 

• Preliminary Application Review
• Non-refundable Pre-application Review Fee

Second Stage

• Temporary Approval Application Fee 
• Initial Inspection of the Business Premises 
• Issuance of Temporary Approval
  

Third Stage

• Annual License Application Fee
• Final inspection of the Business Premises once DCR deems the application complete
• CEQA Clearance 
• Community meeting and public hearing  

• Renewal Inspection – license holders will have to undergo a License Renewal Inspection of the Business Premises prior to the renewal of a license 

MODIFICATIONS OF APPLICATION LICENSE

• Business Relocation: applicants and licensees can request a relocation of the applicant’s Business Premises upon payment of a modification fee, compliance with the zoning requirements and sensitive use restrictions and submittal of (1) an executed lease; (2) landowner acknowledgement; (3) property and premises diagram; and (4) State license. 

• Delivery, Distribution, and/or Non-Volatile Manufacturing Licenses are not subject to Undue Concentration. 

• Retail, Volatile Manufacturing, & Cultivation may only relocate within their existing Community Plan Area provided (1) it has not reached Undue Concentration and (2) the new location complies with the zoning requirements and sensitive use restrictions. 

• If an Applicant’s Business Premises is in an area of undue concentration, the Applicant is required to file a request form for City Council to find that approval of the license application would serve a public convenience or necessity, supported by evidence in the record. 
  
• Ownership Structure: when an entity is an owner, all entities and individuals with financial interest in the entity shall be disclosed to DCR. This includes all entities in a multi-layer corporate structure, as well as the CEO, members of the board of directors, partners, trustees, and all persons who have control of a trust and managing members or non-member managers of an LLC.  Each entity disclosed as having a financial interest must disclose the identities of persons until only individuals remain.

• Change of Ownership (consistent with the Bureau of Cannabis Control regulations) 

• The business may continue to operate if at least one existing Owner is not transferring is or her ownership interest and will remain as an Owner. 

• If all owners will be transferring their ownership interest, the applicant must resubmit all applications documents and pay all required application fees. The business shall not operate under the new ownership until a new license has been issued by DCR. 

• One or more owners leaving the business by transferring their ownership interest to another existing Owner is not considered a change in ownership.
  
• Written approval is required from the Owner transferring his or her interest to another existing Owner. 

• Legal Entity Name Change: Temporary Approvals or Licenses may change the legal entity name under which the Application, Temporary Approval, or License was submitted or issued, provided the Entity (File) Number registered with the SOS remains the same.
  
• Physical Modification: must receive prior written approval from DCR to perform interior physical modification, alterations, additions, or expansion of the Business Premises. Requests to modify the business premises shall comply with the following:
  
  1. Limit the expansion of the business premises footprint to 500 square feet or 20% of the existing floor plan, whichever is less.
     
  2. Submit a proposed premises diagram.
     
  3. Applicant may increase the cultivation area within the business premises or may expand the existing floor area provided that the resulting cultivation area does not exceed the maximum cultivation area allowed by the License Type under which the Application was submitted.
     
  4. DCR may require a copy of an executed lease with proof of deposit or property deed if the expansion includes additional adjacent units. 

• Fictitious Business Name Change: A new FBN or change to existing FBN after the application is submitted must be requested using the application modification form and pay the required modification fees. Applicant shall submit the necessary documents to demonstrate that the changes have been registered with the LA County Registrar and approved by the State. 

ISSUANCE OF LICENSES

• Application processing of Type 9 (non-storefront retailer) and Type 10 (storefront retailer) licenses will be limited to only Social Equity Applicants (“SEAs”) until January 1, 2025. 

Phase 3 Retailer Commercial Cannabis Activity Application Processing

• Phase 3 Round 1: DCR shall process an additional 100 applications from the list of Phase 3 Round 1 Social Equity Applicants. The list of applicants will be re-reviewed for any applications that were deemed ineligible for further processing due to a Community Plan Area reaching Undue Concentration or due to a sensitive use created by another Phase 3 Round 1 Type 10 retail applicant. These additional 100 Type 10 licenses will not be subject to Undue Concentration.
  
• Phase 3 Round 2: DCR will administer a lottery for Round 2 Type 10 licenses. The lottery will only be available to verified Social Equity Individual Applicants. Those applicants determined eligible to apply for a Type 10 license via lottery will be afforded one year to identify a Business Premises location within a Community Plan Area that has not reached Undue Concentration.
  

SOCIAL EQUITY PROGRAM

• To participate in the Social Equity Program, Applicants must be verified either, on criteria established under the 2017 Analysis or the Expanded Analysis.
  
• Revised definition of Social Equity Individual Applicant (“SEIA”) is any individual who meets any two of the following three criteria: 1) Low-Income, (2) a prior California Cannabis Arrest or Conviction, and (3) ten (10) year’s cumulative residency in a Disproportionately Impacted Area.
  
• Revised definition of Disproportionately Impacted Area in accordance with the Expanded Social Equity Analysis recommends using Police Reporting Districts instead of Zip Codes as the geographic unit for inclusion in the Program. The new criteria will apply to individuals who were not verified as Social Equity Applicant under the criteria but wish to participate in future Social Equity Program application processing.
  
• Equity Share definition expanded – SEIA must meet the following expanded Equity Share criteria before a license is issued or renewed:
  
  • Unconditional ownership – The Equity Share shall not be subject to conditions or arrangements causing or potentially causing the ownership benefits of the Social Equity Applicant/Licensee to go to another in any circumstance other than after death or incapacity. Community property laws will have no effect on unconditional ownership.
    
  • Profits – All SEIA shall receive at least their Equity Share of the distribution of profits paid to the owners of the Social Equity Applicant/Licensee.
    
  • Dividends – All SEIA shall receive 100% of the value of each share of stock or equivalent owned by them in the event that the share is stock or equivalent is sold.
    
  • Distributions (in the event of dissolution) – All SEIA shall receive at least their equity share percent of the retained earnings of the Social Equity Applicant/Licensee and 100% of the unencumbered value of each share of stock or equivalent in the event of dissolution.
    
  • Voting Rights – All SEIA shall receive at least their equity share percent of the voting rights on all business decisions.
    
  • Control – All SEIA shall receive the highest officer position (such as CEO) unless a natural person, who otherwise meets the requirements of a Social Equity Individual Applicant, but who is not an Owner is appointed to that position by mutual agreement of the parties or another natural person is appointed to that position by a mutual agreement of the parties.
    
• Additional Equity Share Requirements:
  
  • All Owners must (a) comply with the Equity Share requirements; (b) keep records evidencing their requirements; and (c) provide these records of compliance to the other party by reasonable request.
    
  • Any action or inaction taken by a party in violation of the Equity Share requirements shall entitle the other party to initiate legal action in the Superior Court of Los Angeles for specific performance, declaratory relief, and/or injunctive relief, to enforce the Equity Share requirements against the other party.
    
  • Any annual license(s) issued to a Social Equity Applicant may be suspended and/or revoked if it can be shown by a preponderance of the evidence that any provision in an operating agreement, contract, business formation document, or any other agreement between owners of the Social Equity Applicant violates any of the Equity Share requirements and is not cured within the time allowed by DCR.
    
  • All Owners are required to incorporate the following addendum intooperating agreementdocuments to evidence compliance with Equity Share:

“To the extent that any provision of this agreement, or part thereof, is or may be construed to be inconsistent with or in violation of the “Equity Share” requirements set forth in Los Angeles Municipal Code section 104.20, such provision(s) shall be ineffective, unenforceable, and null and void.”

• Management Companies: the amendments remove the requirement of a Tier 1 or Tier 2 Social Equity Individual Applicant to have DCR approve their Management Company. 

PROCESS TO FILE A PCN REQUEST

1. Applicant completes the PCN Application Form
2. DCR invoices the applicant and the applicant must pay the application fee within 10-days
3. DCR reviews the PCN Application Form 
4. DCR transmits the PCN Application Form and supporting documents to City Clerk
5. DCR provides written notice within 10-days of City Clerk’s receipt of the PCN Application Form. The notice will contain the link to the Council File.  
6. The City Clerk will publish the Committee or City Council agenda 72 hours before the meeting. 

• The ordinance is revised to state that if City Council does not act on the PCN request within 90 calendar days of the City Clerk’s date of receipt, the request shall be automatically denied (previously the request was automatically granted). 

PUBLIC CONVENIENCE OR NECESSITY REQUEST STANDARDS

The following standards were adopted to find that a commercial cannabis license application serves the public convenience and necessity:

1. The existing commercial cannabis businesses in the requestor’s Community Plan Area are concentrated in one area, such that the requestor’s business, located in another area, would serve the public convenience or necessity; or
   
2. The proposed business premises would serve an area of increased density or consumer traffic, including but not limited to an entertainment or commercial corridor, such that the proposed location would serve the public convenience or necessity by satisfying a higher demand for retail locations; or
   
3. The proposed business premises would be located in an area with a high number of unlicensed commercial cannabis retail establishments, such that an additional licensed location would serve the public convenience or necessity by satisfying a higher demand for retail locations and reduce patronage of unlicensed establishments; or
   
4. The requestor’s business would include clear specified public safety related features, such that the operation of the requestor’s business would serve the public convenience or necessity by likely reducing crime or nuisance activity in the surrounding areas. 

By Nellie Niakossary and Yelena Katchko, July 02,2020

Let the experienced and dedicated legal team at Katchko, Vitiello & Karikomi, PC help you navigate the complex, constantly changing and often confusing legal and regulatory landscape facing your cannabis business, contact us today.