Big Changes for Medical Cannabis in California

The legal framework for medical marijuana in California changed dramatically in January 2016 with action from the state. Being phased out is the quasi-commercial, non-profit collective and cooperative model with the associated management company to run the operations that has become common since the passage of Proposition 215, also known as the Compassionate Use Act of 1996. Proposition 215 allows patients with a valid doctor's recommendation, and the patient's' designated Primary Caregivers, to possess and cultivate marijuana for personal medical use, and has been expanded to protect a growing system of collective and cooperative distribution. In October 2015, California’s governor signed into place a trio of bills, AB 266, AB 243 and SB 643, together known as the Medical Marijuana Regulation and Safety Act (MMRSA). California must now shift towards a two-tier permit and license model in which cities and counties are required to regulate and permit local land use for commercial cannabis businesses. Then, starting in 2018, the state will begin issuing licenses to local permit holders who will be allowed to operate for profit businesses, not-for-profit businesses, or any combination thereof.

The current licensing climate is extremely desperate primarily due to an error in the original legislation; the inclusion of a March 1st deadline after which cities and counties would lose local control over commercial cannabis cultivation. This prompted a wave of bans on all cannabis activities, not just commercial activities. This error has since been fixed with the approval of AB 21, but the effects are still being felt. In addition the new bills also included another error which exempted small cultivation by patients and caregivers but permitted cities and counties to regulate or ban those activities as well. This led some cities and counties to go so far as to ban personal cultivation for your own use and in your own home pointing to indoor air quality control ordinances that did not include exceptions for medical marijuana. Protections that patients have enjoyed for nearly 20 years are being rolled back in favor of the old failed policies of marijuana prohibitions. However it is important to keep in mind that this isn't criminal prohibitions, these are nuisance ordinances that can be abated with due process.

None the less several criminal prohibitions remain that are still in conflict with the new legislation. For example, manufacturing cannabis oils and extracts are considered to be drug manufacturing and are still prohibited. Most of these conflicts should be resolved by cleanup legislation that should be passed this year and go into effect in 2017. Between now and then, there is a scramble by the industry to secure local permits from cities and counties willing to amend their land use ordinances to permit medical cannabis business activities including cultivation, manufacturing, distribution, dispensaries and testing facilities. At this time, the number of cities and counties that have moved forward with affirmative regulations permitting commercial cannabis businesses to operate can be counted on both hands.

Those cities and counties moving forward with affirmative regulations include the usual suspects like Humboldt County​, Mendocino County​, and Trinity County​. However the cities of San Francisco, Oakland​, Monterey County, and Santa Cruz County are also undertaking the process of establishing regulations and land use policies while a handful of small cities in both those Further south San Luis Obispo County is considering what it will do while the City of Atascadero reversed an earlier ban and is moving forward with regulations and permitting. Santa Barbara will be adopting a ban but is exempting legal non-conforming uses that were legal under state law. They will undertake a process over the next year to come up with their program. Calaveras County is also moving forward while the Yuba County and Yolo County ​struggle to overcome a still divisive political climate where competing factions fight for position. By far the leader in regulating and licensing commercial cannabis businesses is the City of Desert Hot Springs ​in Riverside County. They began their process prior to the passage of MMRSA and have some very large projects underway including a 1M plus sqft grow facility that will house over a dozen grow operations. Overall it seems most municipalities are taking a go-slow approach explicitly limiting the number of local permits that they are going to issue. This means that this first round of local permits will likely go to locally connected insiders or those who know how to broker access and secure the property and permits necessary to be established locally as a permitted commercial cannabis business. From there it will likely be an uphill battle to overturn local restrictions and increase the number of municipalities offering these permits.

Regulatory compliance is the new name of the game. Cultivation is the first set of licenses to be addressed. Many communities are limiting the number, size and location of the cultivators. This may lead to an increase in enforcement and possible shortage of supply this Fall. Distribution is a new bottleneck, but there is plenty of expertise just waiting to come to bear on that challenge as soon as those licenses become available. Unique licensing opportunities like cannabis analytical testing are exciting, but until testing becomes mandatory this will be a tough business to capitalize on. Today, testing cannabis is the only business where the better your results are, the less business you will get because today's consumers are sold on high THC levels, not on accuracy and reproducibility. In the future standards will be imposed and results will be consistent, but for now, testing will be ancillary to manufacturing where it will continue to guide product development.

The simple truth is that real innovation hasn't even begun to impact the legal cannabis industry. Real innovation will only come when other industries begin to leverage their technologies to better understand the science of the cannabis plant. We have not seen this interest take off due to the perceived legal risk, high cost and relative scarcity of marijuana in legal markets. All that will change when the 7th largest economy, California, establishes a legal market for medical marijuana. And it will all change again when California legalizes Marijuana for Adult Use which could happen as soon as November 2016, should the Sean Parker backed initiative, the Adult Use of Marijuana Act, or any of the other legalization initiatives being proposed, be passed by the voters.

For now, it is all about licensing. Taking advantage of communities that are ahead of the curve by leveraging the local political process to secure the necessary local permits to operate. In addition it is essential that we continue to lobby the undecided municipalities to draft sensible regulations and work to reverse the bans the have been passed by many municipalities. From there the path should become more clear as the state establishes a new regulatory agency and enacts its regulations and licensing requirements. Since the passing the passing of Prop 215 the cannabis industry has been pushing to protect patient rights and develop an industry. One can expect these same people to continue fighting for sensible regulations for at least the next 20 years.

Tyler Strause Founder,

Randy’s Club President,

G. Randall & Sons, Inc.

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