Federal prosecutors, industry probe municipal cannabis agreements in Massachusetts

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massachusetts recreational cannabis, Federal prosecutors, industry probe municipal cannabis agreements in Massachusetts

Massachusetts’ mandated “host community agreements” (HCAs) between municipalities and marijuana businesses are under intense scrutiny, with cannabis companies complaining they are unfair and costly and federal prosecutors reportedly investigating their terms.

The probe comes in the wake of a cannabis bribery case in Fall River and only a few months after the FBI announced in a podcast that it was investigating potential public corruption in the marijuana industry.

Massachusetts is unusual in that it requires cannabis businesses and certain industries such as gaming to sign HCAs with the municipalities in which they are located.

Marijuana businesses must negotiate those agreements before applying for their state licenses.

Fallout for cannabis businesses

What chafes marijuana companies is that most municipalities have demanded the maximum 3% of gross sales as a community impact fee without evidence of actual costs, plus tens of thousands of dollars of “donations” and other payments.

Industry officials say the practice has had profound business impacts:

  • Cannabis companies have been faced with the decision to pay to play or walk away.
  • The agreements, in part, slowed the development of Massachusetts’ recreational cannabis market. Today, more than a year after the launch, just 33 rec stores have been licensed, resulting in little competition and high product prices.
  • Some say the lack of a robust market also has made it more difficult to stamp out illicit sales.

“I don’t know of any other industry except for gaming that has to pay a legalized extortion fee to open in the community,” said David O’Brien, president and CEO of the Massachusetts Cannabis Business Association, which has around 300 members.

O’Brien said that municipalities are supposed to show on an annual basis how that 3% is being spent to mitigate industry impacts, but he doesn’t believe that’s happening. He said his association plans to do a “deep analysis” of the situation.

Alleged corruption could reflect poorly on MJ industry overall

O’Brien and others said they welcome a federal investigation in the sense that it might root out “bad actors,” but in the meantime, it could tarnish the industry.

In Fall River, former Mayor Jasiel Correia faces multiple federal corruption charges in a case in which four marijuana business owners allegedly paid a total of $600,000 in bribes to pave the way for MJ licenses.

Two Massachusetts men who allegedly served as “middlemen” for Correia pleaded guilty to extortion, conspiracy and making false statements. Correia has denied the charges against him.

“I hope it’s not happening elsewhere,” O’Brien said of the Fall River case. But he said it’s important for public confidence to see proof that everyone is “playing by the law and the rules.”

The FBI and others have noted that local decision-makers in particular can become susceptible to political influence and corruption, especially in markets where cannabis licenses are worth millions of dollars.

Prosecutors appear to be casting a wide net.

Various reports indicate they’ve subpoenaed up to a dozen or more municipalities, including Boston, and The Boston Globe reported that a federal grand jury has been convened to consider evidence.

Elizabeth McCarthy, a spokeswoman for the U.S. Attorney’s Office in Massachusetts, declined comment.

Jim Smith, a Boston cannabis attorney, told Massachusetts lawmakers earlier this year that municipalities demanded excessive taxes and donations from his clients.

However, in an interview with Marijuana Business Daily, he said his clients didn’t experience the kind of egregious behavior charged in Fall River.

“What was alleged in Fall River, in our experience, hasn’t happened anywhere else,” Smith said.

Communities typically were charged the full 3% impact fee or a flat payment regardless of sales, plus donations, according to dozens of HCAs reviewed by the state, MJBizDaily and others.

Two examples:

  • NS AJO Holdings, a Massachusetts-based cannabis company, agreed to pay the city of Fitchburg a $50,000 impact fee as soon as it broke ground on its retail marijuana store, plus 3% of gross sales or $75,000, whichever is greater, according to the Sentinel & Enterprise. The company also was required to donate $75,000 a year to a “community relations board” that would disburse funds to charities.
  • Alternative Therapies Group, a Salem marijuana retailer, agreed to pay the city a 3% impact fee, donate $25,000 to charities, make a “voluntary contribution” to the city’s Transit Enhancement Fund and install a bicycle rack for public use.

A drag on cannabis business growth

Industry officials said the problem in Massachusetts was exacerbated by the fact there wasn’t an agency overseeing the community agreements, an area in which many of the municipality boards have little experience.

The state Cannabis Control Commission (CCC) decided in 2018 that it didn’t have the legal authority to regulate the agreements.

However, the CCC asked the state Legislature for such authority earlier this year. Legislation that would enable the CCC to oversee the agreements is pending.

Documents show the Massachusetts Municipal Association and Boston-based KP Law, formerly known as Kopelman & Paige, strongly asserted the right of communities to negotiate their own agreements with marijuana businesses without state interference.

Lauren Goldberg, managing attorney for KP Law, which provides legal services to about one-third of the state’s municipalities, wrote in a nine-page letter in August 2018 to then-CCC Chair Steve Hoffman that, while the 3% impact fee should “reasonably” relate to costs incurred by the municipality, the law doesn’t restrict a municipality from accepting “additional payments or nonmonetary benefits.”

Goldberg maintained negotiations between municipalities and cannabis companies were “amicable.”

But multiple industry officials told MJBizDaily that cannabis businesses were put in a difficult position, with little choice but to agree with the terms if they wanted a business license.

The end result, one cannabis executive said, is that the HCA process has been a major factor in slowing the development of the rec market.

“This process has delayed the implementation of the (adult-use) program because it takes a long time to negotiate these host agreements, and it also has given some towns the ability to effectively ban (recreational cannabis businesses) without passing a ban,” said Kris Krane, president of 4Front Holdings, an Arizona-based multistate operator with holdings in Massachusetts.

The bottom line for Massachusetts cannabis businesses and their customers?

“Prices are really high, and inventory is really limited,” Krane said.

Jeff Smith can be reached at jeffs@mjbizdaily.com