California Marijuana Notebook: Seeking permanent relief from licensing headaches

(This is a regular column that delves into the widely varied and complicated issues surrounding California’s immense cannabis market from the vantage point of Marijuana Business Daily Senior Reporter John Schroyer. Based in Sacramento, he’s been writing about the cannabis industry since joining MJBizDaily in 2014.)

Obtaining business licenses has been a top challenge for California cannabis companies this year.

But now – in a situation that underscores the ongoing flux in the Golden State’s marijuana market – keeping those licenses has become a priority since much of California’s cannabis industry could come to a halt next spring without action from the governor.

That’s because temporary licenses – which the industry has been operating under this year – are forbidden under state law from being extended after Dec. 31.

The problem: There’s an enormous backlog of local applications that need to be processed before full annual licenses can be awarded up and down the supply chain.

And because temporary licenses have had to be repeatedly renewed throughout 2018, for a maximum of 90 days, that means they’ll all expire by early 2019.

Since the last day for a 90-day extension is Dec. 31, 2018, the longest any given temporary license would allow a California MJ company to legally operate is March 31, 2019.

Bill would right the situation

Enter Senate Bill 1459.

The measure – which cleared the Legislature and is awaiting the governor’s likely signature – would provide a regulatory Band-Aid to avoid a “major disruption in the commercial cannabis marketplace.”

How? The legislation would permit new, 12-month “provisional” licenses. They would differ from full annual business permits and be more like an extension of the easier-to-obtain temporary licenses, industry insiders say.

“Someone who’s applying for an annual license, they have to have full local authorization before the state can issue an annual license to them, and the local jurisdictions are not ready to do that. It’s taking way longer than anyone anticipated,” San Francisco attorney Nicole Neubert said.

“It’s crucial for all of our clients, pretty much. Some people have some local entitlement, but it’s a really small percentage that’s ready to go.”

For instance, Neubert said, it can take a year for companies to jump through all the necessary hoops to secure local authorization.

“They can easily take six, nine, 12 months to go through that process,” she said.

It could take even longer, said Keith Hart, the president of KJH Consulting, a Sacramento government relations firm that represents several cannabis companies. Because the problem may persist into 2019, he said the Legislature “might have to create another provisional license” next summer.

Hart said it’ll depend on how many cities and counties can process all their cannabis business permits and how many companies may still be waiting on licenses.

Details sketchy

Questions remain about how SB 1459 would correct the situation.

For example, it’s unclear how a licensee would obtain a provisional permit, given the bill doesn’t detail all the requirements, but those provisional license applicants would have already submitted their full annual license applications.

But Hart expects it’ll be fairly easy since SB 1459 is designed to keep companies operational.

There’s also no word yet from any of the three regulatory agencies on when they may begin issuing full annual permits, which originally were slated to be awarded this summer.

The business takeaway from the situation for both Neubert and Hart? California still has a long way to go before its market stabilizes.

“It’s going to be very bumpy for at least a few more years,” Neubert predicted. “This time next year, we’ll be talking about things that people didn’t anticipate or weren’t in the statute that need to be fixed.”

Hart added that the industry landscape could change dramatically come November, when at least 75 cannabis-related ballot measures will go before local voters in cities and counties across California.

The results could be dramatic, with regard to potential changes on local MJ taxes and business opportunities, according to Hart.

“I’ve been encouraging clients to not make any major decisions before November,” he said. “Let’s see what happens.”

Some success stories

With all the upheaval in California’s cannabis industry this year – new regulations, high tax rates, a booming illicit market – it’s easy to forget that some fully legal companies are doing well.

Case in point: the Garden of Eden, in the Bay Area town of Hayward.

The shop has been open since 2003, making it one of the longest-running dispensaries in the state. Its operators threw a “grand reopening” party Sept. 14 after finishing a nine-month remodel that gave the store a major face-lift.

Garden of Eden already sees 800-1,200 customers daily just from foot traffic. The business is planning to open at least two more locations in early 2019, said Shareef El-Sissi, Garden of Eden’s director of business development.

“We’ve probably grown 50% since January” on top-line revenue, El-Sissi told Marijuana Business Daily.

He said the typical sales breakdown is roughly:

  • 60% marijuana flower.
  • 30% disposable vaporizer cartridges.
  • 10% “everything else,” including edibles and topicals.

El-Sissi attributed the strong sales growth in part to a conscious business decision that Garden of Eden made before Jan. 1, when new state and local taxes kicked in: The company “split the difference” between the retailer’s revenue and the customer.

He said that resulted in more customers not facing the kind of “sticker shock” consumers experienced at other California retail shops because of the new tax rates.

Garden of Eden will also open shops in Union City and Sunol in the second quarter of 2019, El-Sissi said, noting: “Southern Alameda County is basically a cannabis desert, and we’re about to put two dispensaries in those areas.”

“We have some acquisitions on the slate,” he added. “We’ll probably expand to five or six dispensaries by the end of 2019 and continue on a growth pattern like that.”

(Click here to read the previous installment of this ongoing column.)

John Schroyer can be reached at [email protected]

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