29 Oct Get Ready Now for the California Cannabis Licensing Logjam
A California cannabis licensing backlog is imminent.
A backlog of cannabis license applications has no doubt happened in almost all of the other states that have medical and adult use licensing. You wouldn’t normally think this is such a big or concerning development, but in cannabis licensing delays can mean angry investors, a complete 180 for your business plans and even insolvency.
In California, a licensing logjam was bound to catch up with regulators, especially as cities and counties start to embrace the democratic experiment of legalization. And now we know that at least one state agency, California Department of Food and Agriculture (“CDFA”), which oversees cultivators, is feeling the pinch of hundreds and hundreds of license applicants.
On Friday, October 26, CDFA sent the following email to its stakeholder list serve:
FOR NEW TEMPORARY LICENSES ISSUED PRIOR TO DECEMBER 31, 2018
Due to the large number of applications being submitted for temporary cannabis cultivation licenses, the California Department of Food and Agriculture (CDFA) hereby notifies prospective applicants that any application for a temporary license received after December 1, 2018, may NOT be processed in time for us to issue a temporary license before January 1, 2019. After December 31, 2018, the authority for CDFA to issue temporary licenses expires. To provide sufficient processing time, please submit your temporary application to CDFA’s CalCannabis Cultivation Licensing Division by December 1, 2018.
Even though MAUCRSA makes clear that temporary licenses will no longer be around (or renewed) after December 31 of this year, CDFA is moving that timeline forward based on the sheer volume of applications for just temporary licenses its received. The kicker here is that you will NOT receive a provisional license (to continue to operate while you wait for your annual license) unless you’ve already had or have a temporary license for the same license type at your same location. And, in case you were living under a rock, provisional licenses are the new form of temporary licenses that the legislature okay’ed at the end of last month. Oddly enough, CDFA is the only agency so far that’s given its roadmap for how to get a provisional, but we imagine (based on statute) it will be pretty much the same protocol for the Bureau of Cannabis Control (“BCC”) and the California Department of Public Health (“CDPH”).
Why is all of this important? To date, temporary licenses (which are good for 120 days) represent the only means by which an operator can open and run its businesses before receiving its annual cannabis license. To get a temporary license, the licensee first has to secure local approval from its local government, which can be easy, somewhat challenging or extremely difficult, depending on the local jurisdiction. Importantly, temporary licenses can be renewed for 90-day increments so long as the license applicant is in pursuit of its annual license with the state. As a start-up business, it’s usually lucrative to be able to get operational very quickly because, in cannabis: 1) you likely already have an operational lease that you’re paying on; 2) you’ve completed a costly build out; and 3) you have to answer to your financiers or at least break even on your own contributions to keep going. If you can’t operate while you wait on your license, your fate is likely to just try to hang on while you bleed cash, and licensing can take months to get depending on the state.
The biggest wrinkle here in California is that many cities and counties are not really paying attention to, or cannot adequately address, this future gap in licensing–namely, if you can’t get your temporary license by the end of the year (which requires prior local approval from your city or county), you’re not operating at all in 2019 unless and until you receive your annual license, which is taking months to secure. (I have clients who applied for their annual license in April of this year and they still have no annual license.) A great example is West Hollywood, which for new license applicants for retail–by the City’s own admission–won’t even be done with its retailer selection process until the end of November. This affords successful applicants very little time, if any, to try and get temporary licenses from the BCC to be able to lock down their provisional licenses thereafter. And if you’re looking at Phase 3 general public licensing in the City of Los Angeles, you may not even get the chance to apply for local approval until 2019. This means you will miss the state temporary licensing deadline, and therefore the ability to get a provisional license altogether.
Indeed, many stakeholders will find that if they cannot get their city or county to give them some form of local approval by or before December 31 (or by December 1 if you’re applying to CDFA) so they can go get their temporary and eventually provisional license(s), they will be sitting on unusable businesses, likely paying rent, until they get their annual license from regulators. To us, this is nothing new as regulators constantly pump the brakes on licensing logistics across the board in order to make the situation more manageable for them. To that end, we’ll also likely see in the future prohibitions on being able to relocate your business while in the annual licensing process, prohibitions on changes of ownership while you’re in the annual licensing process, and prohibitions on changing your business plan or operational lay out in any way until you receive your annual license.
The foregoing all goes to show that regulators can and do shuffle the deck on licensing timelines all the time. Stakeholders have to have their heads on a swivel to survive, and failing to take into account how these licensing deadlines and expectations shift is a massive mistake that will inevitably foreclose the ability to participate for lots of would-be licensees. So, prepare accordingly!