LA Licensing: Buying and Selling Retail Licenses

LA licensing
What are the most recent updates to Los Angeles licensing process, specifically regarding buying and selling retail licenses? 
LA cannabis licenses are being rolled out in a series of phases. Phase 1 licensed a group of “pre-ICO” dispensaries that had been operating as nonprofit collectives since 2007, Phase 2 licensed cultivators, distributors, and non-volatile manufacturers that had previously supplied the pre-ICO dispensaries, and Phase 3 licenses all new commercial cannabis businesses, including new storefront and delivery retail licenses, and new distribution and manufacturing licenses. In Phase 3, Round 1, LA issued 200 new storefront licenses to applicants who applied in 2019. Also as part of Phase 3, the City plans to issue 150 more storefront licenses later this year, plus an indeterminate number of additional storefront licenses which may be approved by the City Council upon a finding that they serve “public convenience or necessity.” All storefront licenses issued in Phase 3 are required to have a qualified social equity applicant as one of their owners (defined based upon income, prior cannabis arrests or conviction, and residency in areas with the most cannabis arrests).
 
None of the 200 new retail businesses has opened yet.  Some are ready to begin operations but some are looking for investors or new storefront locations. There is now a market for these licenses for people that want to buy or sell them, as applicants are trying to decide what to do with their newly obtained licenses and how they will fund their startup costs. This is a golden opportunity for people to get into storefront retail.  
 
LA also recently started issuing delivery-only retail licenses, which, like storefront licenses, require a qualified social equity applicant to be a co-owner. For both delivery and storefront licenses, social equity applicants are now teaming up with investors and looking for capital. 
 
The City is also now accepting applications for distribution and non-volatile manufacturing licenses, which do not require social equity applicants to be involved. Anyone with property in one of the correct zones and not located within 600 feet of a school may apply for those licenses.
 
If there’s someone out there who would like to be verified as a social equity applicant, is there still a chance to do so? 
People were previously able to be verified as social equity applicants during a window of time in 2019, and there will be a new window to be verified as a social equity applicant later this year. Once someone is verified, that allows him or her to be eligible to obtain a retail cannabis license (delivery or storefront). There will be a new two-month period where people can submit evidence that may qualify them as a social equity applicant. People seeking to become qualified will need to provide evidence (any of various government documents) proving that they fall under two out of the following three categories: (1) Low-Income; (2) a prior California Cannabis Arrest or Conviction; (3) ten years’ cumulative residency in a Disproportionately Impacted Area (designated areas which have had the most cannabis arrests). 
If someone doesn’t meet the standards to qualify as a social equity applicant, how does one go about finding a social equity applicant to be partnered up with?
People who want to own a retail license who are not themselves qualified social equity applicants may reach out to and partner with someone who has already been verified as a social equity applicant and received one of the 200 storefront licenses that have been issued.  Alternatively, they may partner with an existing social equity applicant to apply for a new storefront or delivery license this year. As a firm, we have worked with a number of social equity applicants and coordinated a matchmaking process to link up investors with the social equity applicants.
 
The city recently opened up the licensing process to allow for a changes in location, ownership, and business entities, which gives potential investors flexibility to negotiate all types of arrangements with social equity applicants. The limitation on the number of storefront licenses being issued has driven up their market value. 
What are the other requirements needed in order to purchase or invest in a cannabis retail license in Los Angeles? 
Investors seeking to partner with a social equity applicant who received one of the first 200 Phase 3 storefront licenses may move the license anywhere within the same community plan area where the license was issued, provided that the new location meets the zoning and sensitive use requirements. Local, state, and federal cannabis laws may all affect property leases and purchase agreements, and special terms should be included to account for these legal considerations. Investors also commonly enter into management agreements, shareholder agreements, and/or operating agreements with social equity applicants, laying out the details of who will manage the operation, and how management compensation will be determined. The unique social equity laws and share requirements require the parties to pay special attention to these management and compensation issues, and management agreements can have a major impact on whether a cannabis business is ultimately successful.
Before we let you go, are there any other updates from the DCR worth mentioning? 
As we move forward with the Phase 3 Round 1 into Round 2, the next step of the DCR is to issue an additional 150 new retail licenses, so there will be new opportunities for people to enter the market after the 200 that have already been issued. There is also the “public convenience or necessity” process for people to get retail storefront licenses approved in community plan areas that have already reached “undue concentration” (one storefront license per 10,000 residents).  The City is expected to hold a lottery for the next 150 storefront licenses and also begin accepting new PCN license applications later this year.

Author: Raza Lawrence Esq. (Dark Matters)

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