Marijuana

'Cannabis' Emptor: Due Diligence Is Key To 'Buying' L.A. Dispensaries

California will be combining its regulatory oversight of medical and adult use cannabis.

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With California’s recent passage of the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA“), we finally know California will be combining its regulatory oversight of medical and adult use cannabis. We also know potential licensees no longer need to prove prior compliance with local laws to receive a state cannabis license — which was the case under MCRSA, which has been repealed. This does not mean state licensees get to violate local laws. Instead, MAUCRSA lays out a sort of local vigilance program where the state notifies local governments of incoming licensees and the local governments then must let the state know whether those licensees are complying with local cannabis laws. Local law is still king in California.

If you’ve been following the situation in Los Angeles, you know LA has an embattled history with its medical marijuana dispensaries. In addition to other enforcement measures, one of the City’s biggest battles has been enforcing Proposition D (a mere immunity-from-prosecution ordinance), which was essentially replaced this past March with ballot initiative Measure M that will finally regulate cannabis businesses within the City’s borders. Among other directives, Measure M ensured that Proposition D-compliant dispensary collectives would receive “priority” status for whatever local approval mechanism the City would design under Measure M. Despite passage of Measure M, the question remained as to whether the City would increase the number of dispensaries and how exactly the City would regulate its cannabis operators.

Last month, Los Angeles released proposed Measure M regulations. Under those regulations (which are in a 60-day comment period), dispensaries that can prove “substantial” compliance with Proposition D will receive priority processing in the first round of the City’s issuance of “certificates of approval.” Though there has already been a fair amount of stakeholder dissent surrounding the use of certificates of approval and backlash against the proposal of a non-retail registry for cultivators and manufacturers, what has not been discussed as much is whether Proposition D-compliant dispensaries can essentially “flip,” or partner with third parties on one or more of their certificates of approval (which include delivery and cultivation).

Even before institution of Measure M, folks were looking to “buy” Proposition D-compliant dispensaries, but ever more so now that such dispensaries get priority processing from the City and because L.A. may not actually increase its number of dispensaries based on some restrictions in the proposed Measure M regulations.

If you are looking to get in on a Los Angeles cannabis dispensary you need to be thinking about due diligence. Due diligence on Los Angeles dispensaries is difficult because California’s existing MMJ laws under Prop. 215 do not require much operational or corporate accountability or tracking on either the state or local level. Also, because most of these entities are non-profits, there’s no equity to buy or sell. So you need to check the entity’s bylaws to make sure you can either take over the entity by paying a membership fee or you can do some kind of director swap with an attendant asset purchase and the entity will not need to give notice to thousands of patient members for you to do so. Given the unregulated nature of existing operators on a state level, you also need to make sure the dispensary has been paying its taxes to the IRS (under 280e) and paying the Board of Equalization. Lastly, many Los Angeles dispensaries are not compliant with Proposition D and this too could cause you all sorts of problems. What makes for a compliant Proposition D dispensary? This is not entirely clear. Some believe that being on the 2013 City-issued list (which shows 134 dispensaries) proves compliance. Others believe the June 2017 map of dispensaries issued by the City Controller (which shows 139 dispensaries) is the proof you need. Proposition D says that to prove compliance, a Los Angeles dispensary must show the following:

  1. Was operating as a medical marijuana dispensary in the City by September 14, 2007;
  2. Had a business tax registration certificate (“BTCR”) or tax exemption from the City by September 13, 2007;
  3. Was registered as a medical marijuana dispensary with the City Clerk by November 13, 2007, pursuant to the then existing pre-interim control ordinance number 179027;
  4. Notified the City Clerk by February 18, 2011 of its intention to register under the city’s Medical Marijuana Ordinance 181068, as amended by temporary urgency ordinance 181530;
  5. Has not ceased operations at its identified location for any of the following reasons: (1) court or government enforcement order to shut down or (2) lack of a lease or utilities (in the name of the dispensary or one of the managers/directors of the dispensary for the benefit of the dispensary) to the property. There are exceptions to this requirement if the dispensary ever relocated (which they were allowed to do) or if it temporarily closed down because of a shutdown letter from the Feds or the City prior to the temporary urgency ordinance 181530 but then re-opened;
  6. Obtained its BTRCs for 2011 and 2012 (and has continued to renew those BTRCs with the City);
  7. Has no outstanding or unpaid tax liability with or to the City (including any fines, penalties, etc.). There are some exceptions here on payments during the 2011 and 2012 tax years, and settlement agreements with the City are also exempt;
  8. Has continuously complied with the various operational requirements in Proposition D;
  9. Have had all dispensary managers over the years submit livescan checks to the City; and
  10. From property line to property line, is at least 1,000 feet from any school and at least 600 feet from any park, church, child care facility,library, youth center, rehab facility, or other dispensary.

Under Measure M proposed regulations, the City will allow dispensaries to explain any mitigating factors for non-compliance with Proposition D, but that’s not a guarantee the dispensary will receive a certificate of approval.

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Proposition D compliant-dispensaries are valuable as they may end up being the only dispensaries in Los Angeles for many years. But don’t get sucked into investing in a Los Angeles dispensary that will not be able to prove its immunity under Proposition D — avoid this problem by doing proper due diligence.

Hilary Bricken bio photoHilary Bricken is an attorney at Harris Bricken in Los Angeles, and she chairs the firm’s Canna Law Group. Her practice consists of representing marijuana businesses of all sizes in multiple states on matters relating to licensing, corporate formation and contracts, commercial litigation, and intellectual property. Named one of the 100 most influential people in the cannabis industry in 2014, Hilary is also lead editor of the Canna Law Blog. You can reach her by email at hilary@harrisbricken.com.

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