California Cannabis: Preparing for Phase 3 Licensing in L.A. on September 3rd

The final countdown is on for Round 1, Phase 3 retail licensing in Los Angeles. On September 3rd at 10 a.m., the L.A. Department of Cannabis Regulation (DCR) will open the flood gates to would-be Round 1 applicants. And in its own announcements on the subject, the DCR states that it has verified over 800 social equity applicants (out of 1800 applicants that applied–though the City is continuing to process people) that will vie for the first 100 coveted Type 10 retail licenses (75 of which will go to Type 1 social equity applicants and 25 of which will go to Type 2 social equity applicants). Where Round 1 licensing is first come, first served with an online application via the City’s Accela licensing portal, it’s going to be fast and furious on September 3rd to get a license.

In case you missed it, I’ve written many times about the evolution of and qualifications for Phase 3 licensing in L.A–see here, here, and here (and here for delivery licensing). Importantly, if you failed to get your social equity applicant qualified by the City by July 29th, you’re automatically out. And if you were proposing to apply in an area already hit by undue concentration, you’re also toast. The City announced that the following community plans are off limits for Round 1 applicants:

• Central City
• Central City North
• Harbor Gateway
• Sherman Oaks – Studio City- Toluca Lake – Cahuenga Pass
• Sun Valley- La Tuna Canyon
• Venice

The City’s useful licensing map shows us what’s still up for grabs by community plan when it comes to undue concentration limitations.

If you’re applying in an area that’s reached undue concentration, the City isn’t leaving you completely hanging. Instead, you must first receive a finding of Public Convenience or Necessity (PCN) from the City Council before DCR will accept and process your application. You can still file on September 3rd, but you’ll be re-routed automatically to the PCN process. You have to pay a $1,499 PCN fee within 10 calendar days of submitting the PCN request. The PCN request is then transmitted to the Office of the City Clerk for City Council consideration. Importantly, “PCN requests are not pending applications, do not receive a timestamp, and do not prevent another applicant from submitting a competing PCN request in the same area.”

One of the hallmark criteria for Round 1, in addition to meeting the social equity qualification, is proof of right to real property for your intended license type. And the City has revealed what it wants to see to prove this requirement–either a lease or deed in the name of the applicant, with proof of deposit in the event of a lease (see discussion below). The real property also has to meet all sensitive use buffers and zoning requirements, too.

If you’ve checked the boxes on social equity verification and your property meets the sensitive use buffer, zoning, and undue concentration requirements (and you have a lease or deed in the name of the licensing applicant), you should be turning your immediate attention to the licensing checklist recently compiled by DCR. Here are the key elements for filing on September 3rd:

1. You need your own Accela account and you should create it way before September 3rd to avoid technical glitches. I highly recommend having your own Accela account and not having a lawyer or a consultant create that account and then submitting your application on your behalf. This is the easiest and best way to know and be sure in a first come, first served system that you’ve submitted everything yourself (including attestation forms that must be executed by the applicants, themselves). It’s completely fine to have your lawyer or your consultant looking over your shoulder to confirm you’re doing everything correctly as you go along, but applicants should be the primary on the account and be the ones to actually submit, in my opinion.
2. Get really friendly with Zimas for the City as you will have to, in real time, verify that your property qualifies under City rules.
3. As soon as possible, prepare the documents you need to generate for yourself (meaning, the information required hereunder will not be provided on a form generated by DCR):
   • Lease or deed. Please remember that putting together a decent cannabis lease is no picnic and be aware of the many pitfalls, especially as the lease may actually go live if you secure a Round 1 license. Also, DCR will not accept non-binding documents like letters of intent, and the lease or property deed must be in the legal name of the applicant applying for the license. If you submit a lease, you must also provide a proof of deposit. Proof of deposit for a lease “in the form of a financial record that reflects the deposit, including but not limited to a copy of a check, money order, or financial institution document may be submitted.”);
   • Premises diagram. This diagram has to be drawn to scale; if the proposed premises consists of only a portion of a property, the diagram must be labeled indicating which part of the property is the proposed premises; and the diagram has to show the boundaries of the property and the proposed retail premises to be licensed, showing all boundaries, dimensions, entrances and exits, interior partitions, walls, rooms, windows, and doorways. Notably, the diagram does not need to provide any information not listed above, such as the placement of security cameras or specific descriptions of the types of activities that will take place in each area of the premises); and
   • Equity share documents. You have to provide DCR all business records and agreements necessary to demonstrate that the verified social equity applicant maintains at least the minimum equity share in the applicant business entity. Basically all corporate governance and any equity transactional documents and/or agreements having to do with economic and/or control rights (including management agreements and even loans) have to be forked over to the DCR.  And “equity share” means a share of all of the following: a business’s profits, including dividends, distributions or other payments; the proceeds of a sale of a business’ assets, liquidation of a business, merger of a business into another business, or another transaction that would constitute the end of an original business; and the voting rights on fundamental decisions relating to the business. Without a doubt, there will likely be many applicants that do not submit secret side letters they have with their partners or other arrangements that violate L.A.’s social equity program, so winners in Round 1 may expect a swift audit by DCR to ensure compliance with the equity share rules).

1. 4. The remaining documents required by the City for Round 1 will all be provided in a form format in the Accela portal. They are:
   • Ownership and financial interest holder disclosure form (note that DCR, unlike the Bureau of Cannabis Control (BCC), is not as concerned with multi-layered corporate structure disclosures–full organizational charts are optional on September 3rd);
   • Financial information form (this is identical to the BCC’s form for state licensing);
   • Proposed staffing and security plan;
   • Labor peace agreement attestation;
   • Indemnification agreement; and
   • Radius map attestation (this requirement is kind of a hybrid where applicants have to provide a copy of their own radius maps, too. This radius map can be either (i) a radius map prepared by a mapping or surveying company or (ii) a ZIMAS map prepared by the applicant along with the attestation.)

Applicants should not hesitate to begin forming their business entities and generating their “equity share” documents, which are extremely important and will take time to structure and negotiate (and they should afford contingencies for what happens if a Round 1 license is not secured). In addition, applicants, right now, should begin gathering the necessary information to satisfy all of the disclosure requirements they’ll have to face on September 3rd.  Without a doubt, Round 1 in L.A. has been long anticipated and many, many applicants will fight for the first 100 licenses. A combination of organization, preparation, and speed at the computer will rule the day for Round 1 in Los Angeles. So, prepare now!