Three in four California cannabis companies aren’t licensed; $100 million might help

Nearly four years after California started regulating its cannabis industry, three in four businesses still operate on provisional licenses.

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Budtenders prepare orders for customers to pick up at The Higher Path cannabis dispensary in Los Angeles on April 16, 2020. The shop is among 75% of California cannabis businesses operating on provisional licenses. (AP Photo/Richard Vogel)

As temporary license holders, 75% of the state’s cannabis industry lacks protections and privileges that come with holding full licenses — a situation that worries some in the business. Those temporary operators also haven’t passed extensive environmental reviews required of full licensing — a fact that concerns environmental groups.

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Cannabis licensing is slow for a number of reasons, ranging from the sometimes dizzying complexity of California’s environmental rules to conflicting language between state and local cannabis laws to the high costs for permits and a shortage of government workers needed to process the paperwork.

The weed licensing glitch also isn’t new. For several years, state legislators have extended the permitting process so that thousands of businesses don’t become unlicensed overnight.

But now, California is pushing to change the situation. The state has set aside $100 million to help 17 cities and counties transition their cannabis businesses from temporary to full licensees. Los Angeles is eligible for $22.3 million of that money, while five other Southern California cities — Long Beach, San Diego, Commerce, Adelanto and Desert Hot Springs — are in the running for a combined $6.9 million. Applications are due by Nov. 15.

Eligible cities say they’ll use the money to hire staff and, in some cases, to offer direct support to businesses. They’re confident that over the next few months they can make a significant dent in the problem.

“I know it will help,” said Edgar Cisneros, city manager for Commerce, which has seven fully licensed cannabis businesses and 12 others waiting to get through the process.

“There is a real need for staff and also consultants…  to get these permits to permanent licensing at a much faster pace.”

Still, while business owners and others applaud the one-time state funding, they say it doesn’t go far enough. Many cities and counties remain left out of the applicant pool, and there is no statewide plan to ease the business hurdles that caused the backlog in the first place.

“No amount of money is going to change the significant amount of time it takes to come up to speed for local approval,” said Hilary Bricken, a cannabis industry attorney out of Los Angeles who said some businesses have failed during the multi-year wait to get licensed.

Barriers cause delays

The voter-approved law passed in 2016 requires cannabis businesses to comply with a slew of environmental protection rules, including the state’s extensive California Environmental Quality Act, or CEQA.

That requirement was a political necessity to get support from environmental groups that, in previous years, had raised flags about the harms that illicit, unregulated marijuana farms have done to California’s natural resources. Rogue cannabis growers sometimes divert waterways or pollute them with pesticides, among other problems.

But in 2018 — recognizing that CEQA compliance can be a lengthy process — regulators created a program to let operators with temporary licenses remain in compliance with state law as long as they are working toward getting a full license.

Initially, that program was set to expire in January 2019. But with most businesses unable to meet the requirements, the deadline was extended to January 2020 and, later, to January 2022. And this summer, despite protests from groups such as the Sierra Club, legislators voted to let the state issue new provisional licenses through June 30, 2022 and to extend existing provisional licenses until 2025.

As of Friday, Oct. 15, just over 3,000 of the state’s 12,000 active cannabis licenses held full annual permits.

Many in the business haven’t been worried about the looming deadline, confident that the state isn’t going to let a new, growing industry grind to a halt. But while the latest extensions give businesses breathing room, operators say the barriers to getting fully licensed haven’t changed.

In some cases, there are conflicts between state law and local ordinances. In Long Beach, for example, rather than have cannabis businesses go through lengthy and pricey environmental reviews for each site, the city agreed to conduct environmental reviews that would cover all potential operators looking to do particular activities in specific city zones. The goal, according to Emily Armstrong with Long Beach’s Office of Cannabis Oversight, was to streamline the business license application process for cannabis operators, just as they do for almost all other businesses.

But the law in Long Beach doesn’t match up with California law. Updated regulations make it clear the state will issue a full license only to a cannabis business that has undergone an environmental review based on the specific site where that business plans to operate.

Though Armstrong is confident most cannabis businesses that have been permitted in Long Beach will not have to undergo full CEQA reviews, she also said it will take time — maybe months — for businesses to gather the documentation they’ll need for that exemption. She said cities need to dedicate staff to help cannabis businesses jump through the various hoops, or businesses need to hire their own, usually pricey, consultants.

Cisneros, of Commerce, said the regulations are important, but that even within a city there can be conflicts.

In Commerce, for example, city staff helps guide cannabis operators through site inspections and other permit-related red tape. But other oversight agencies in other towns, such as fire or water departments, take longer to process applications from cannabis businesses than they do to process applications from other types of business.

That happens, he said, even when a cannabis company’s equipment or operation is nearly identical to other businesses. Cisneros believes some inspectors link the entire cannabis industry — even those trying to follow all the rules — to the world of underground growers and extractors who don’t follow regulations and sometimes cause fires or explosions.

“It just seems like not everybody has caught up to this industry,” Cisneros said. “Hopefully, we can develop a greater understanding of the technology and equipment, and make this a little more routine.”

Then there are cannabis businesses who insist they’ve jumped through every hoop, but still haven’t been issued a full license.

“I don’t see any reason why we wouldn’t have our annuals by now,” said Rob Taft, who’s co-owner of 420 Central cannabis shop in Santa Ana and CMX Distribution company in Costa Mesa.

“We’ve filled out all the forms. We’ve done everything. It’s not like the state is asking anything more of us,” Taft said.

He attributes the delay to a shortage in staff to process the applications. But he also said he sometimes sees the situation in a more cynical light.

“It just seems like maybe the state is keeping everyone on a short leash because you get more rights with annual licenses,” Taft said, noting that one of those rights is to appeal a revoked license.

Los Angeles attorney Bricken said a company without a full license from California can also faces barriers in raising capital, particularly because cannabis remains illegal under federal law.

“Investors don’t like to hear that you’re on borrowed time.”

Grants will help

The $100 million grant program should reduce the backlog of businesses trying to transition to full licenses, according to staffers in cities eligible for funding.

Long Beach is poised to get up to $3.9 million, which Armstrong said they plan to use to hire staff and consultants who can help businesses meet CEQA review requirements. But, she added, the city is waiting on clarification from the state before deciding exactly how many people to hire.

Los Angeles is still putting together an application that will spell out how it intends to use its potential $22.3 in grant money, according to Cat Packer, executive director of the city’s Department of Cannabis Regulation.

In Commerce, Cisneros said they’ll use $416,870 in grant funding to help pay for two full-time staffer salaries and for a consultant to help process license applications. Cisneros said they didn’t want to rely only on consultants because even after this initial demand for help fades away, they’ll need workers who are focused on cannabis industry compliance checks and handling new applications.

When the grant money runs out, he added, he believes Commerce will have enough tax revenue from cannabis companies to support those positions going forward.

There’s been some grumbling from cities (and from businesses in those cities) that didn’t qualify for the grant money, noting they’re missing out on funding because they’ve done a better job of getting cannabis businesses fully licensed. No cities in Orange or Riverside counties qualified, for example.

Still, while the state money figures to be helpful, industry insiders say such one-time programs are just Band-Aids on larger problems. Five years after California voters approved legal recreational cannabis, illegal operators still outnumber licensed operators by at least two to one — giving an ongoing, unfair financial advantage to businesses that aren’t following the rules.

“If the state wants to help cities and cannabis businesses succeed, they should reduce taxes, period,” said Kenny Morrison, president of the California Cannabis Manufacturers Association and founder of VCC Brands, which makes and distributes cannabis infused products.

“Helping cannabis businesses transition to being ‘fully licensed’ really isn’t that helpful in the long run. The grants help runners get out of the starting gate, but they do nothing to lessen the regulatory and financial burden each runner has on their shoulders.”