The future of cannabis is not decided by the Feds – it is the locals

Nationwide, cannabis companies and advocates are hailing the Cannabis Administration and Opportunity Act as the savior of the future of cannabis (a copy of the bill is here). If the law is passed, we will finally have federal legalization and the consequences of the current federal conflict will end or at least be reversed in the minority of states that continue to ban the facility locally.

Such a development would of course be enormous. Since IRC 280E is no longer an issue, cannabis companies would have the unrestricted ability to secure banking transactions outside of the FinCEN guidelines of 2014, which means that there will no longer be pure cash transactions; they would have the ability to raise institutional capital without the threat of criminal liability, etc. But even if the bill is passed (and the chances of it getting smaller month by month) that won’t change (probably forever) the power of local governments to make or destroy America’s cannabis business.

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I have long preached that states are in total control of these unique democratic experiments, and they are definitely where they control license categories, compliance standards, taxes, reporting requirements, etc., but that power is ultimately limited by cities and counties . And the law pays great homage to states for upholding their independent cannabis regimes.

The catch is that all states have some (or rather a lot) faith in local scrutiny, as cities and counties have inherent police powers to protect the health and well-being of their citizens. I can’t name a state where local control hasn’t been a major problem for cannabis operators (retailers in particular have the worst in most cities and counties). Cannabis companies must now realize that even if the law is passed and states maintain their current licensing systems, cities and counties will remain one of the biggest barriers to entry.

The notorious trend among cities and counties is either to have an “all open” policy to allow all license types to be set up and run, to restrict businesses only by real estate buffer requirements and / or zone restrictions, or to be incredibly selective about the license to be species they allow within their confines, creating high barriers to entry (or worse, not allowing any commercial cannabis activity at all, which is their right).

Here are some of the local barriers to entry that operators are likely to encounter indefinitely regardless of state legalization:

License caps. Even if the state government does not introduce an upper limit by license category, cities and counties often use upper limits in order to avoid significant environmental and other effects that result from too many licensees or too many licenses of a certain license type within their borders.

Local claims. If a city or county allows cannabis businesses to be established and operated, there is a local authorization process that the cannabis business must approve for operation. In every city and county, this process will be different in terms of time frame and cost.

Some jurisdictions may require a simple cannabis-oriented permit in addition to traditional permits such as building permits and / or conditional use permits, depending on the property involved. Other jurisdictions may require a permit and local license, which will be a parallel avenue that requires filing a variety of information about the company and property in question.

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However, other jurisdictions may also require the applicant to sign a development contract (see here, here, and here) that includes a number of performance obligations. They could include anything from developing more parking spaces to beautifying a specific neighborhood near the property where the cannabis business operates. It could also contain indemnity agreements that protect the city / county from third party claims arising from the project. To know what you are dealing with, you need to take the time to read the applicable city or county ordinances on the subject.

Competitive licensing. To ensure that only the finest and wealthiest operators get a foothold in certain jurisdictions, certain cities and counties are implementing competitive licensing, which means operators have to spend hundreds of thousands of dollars just on the application / opportunity to work. Often times, these applicants are required to submit hundreds of pages of information about themselves and their business beyond what an ordinary business would have to offer to acquire a municipal business license, including things like smell plans, capitalization plans (and evidence of the funds to support those plans ), Inventory management plans, supplier lists for specific product types, community association plans, etc., etc. The city of West Hollywood, California was probably the most competitive local license application I have seen in over ten years of practice.

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Increased sin taxes. While state tax rates can (hopefully) be nominal, locals don’t necessarily have to stick to common sense. In countless cities, operators are encountering aggressive gross revenue taxes and other sin taxes that go only to the city and / or county in which they operate (on top of state and federal taxes).

Regulations for locals only. Even if a state doesn’t have a residence requirement, its cities or counties could. Operators need to read local regulations carefully to see who can populate their cap tables and inventory ledgers when they want to operate in specific cities or counties. Sometimes the local government directive is that a certain percentage of business property must be city or county residents (or you will get more points on your application scorecard if you have a local), forcing some hasty business reputations in the industry.

Increased distance requirements. State laws or regulators can (and usually do) impose certain distance requirements between cannabis companies and “sensitive uses” such as schools, parks and “youth centers”. Locals are free to be more restrictive and take on other sensitive uses such as places of worship or rehabilitation facilities, and of course they can also increase the buffer distance (which can effectively prevent cannabis shops from settling in entire neighborhoods).

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Objections from / disputes with neighbors. State cannabis laws will not address disputes between cannabis companies and their neighbors. However, local laws regulating cannabis companies always have mechanisms for angry NIMBYs to object to local claims being made to cannabis companies, which can result in massive, costly delays for the cannabis operator (and in all states you will need both local authorization and also the state license to open your doors).

Prohibitions / moratoriums. While cities and counties are free to regulate cannabis deals (including more restrictive than the state), many cities and counties in states with cannabis legalization, or “medicalization”, still prohibit commercial cannabis activities altogether. This is only to promote the illegal market and prevent the success of these democratic experiments, which depend heavily on providing consumers with reasonable and convenient access to cannabis and cannabis products.

RELATED: Will Schumer’s Marijuana Legalization Bill Pass Before End Of 2021?

Worse still, cities / counties often impose rolling moratoriums to study the effects of cannabis, which can take years to resolve while cannabis operators hang in limbo. Or a city or county can decide that they no longer want cannabis companies within their borders and, depending on the existing local laws, declare cannabis companies for non-compliant uses with a deadline for settlement and closure.

Here in California, local control has the implementation and overall success of the Law on the Regulation and Safety of Cannabis for Medicinal and Adult Use in a stranglehold. That hold is loosening as more cities and counties realize that starting cannabis businesses can be a significant financial boon without causing major social harm. According to MJ Biz Daily, more cities are now diving into licensing cannabis companies (though the total number of pharmacies in the state is pretty pathetic compared to its citizens).

I’m sure California isn’t the only state where this trend of tolerance is occurring. Still, cannabis operators shouldn’t get too excited about the pending federal legislation. Locals can be extremely harsh with cannabis companies and their budgets, and even passing the law isn’t going to change that for the foreseeable future (for better or for worse).

Hilary Bricken is a partner at Harris Bricken. This story was originally published on the Canna Law Blog and reposted with permission.