CITY OF COMMERCE AGENDA REPORT
Item No.
TO: Honorable City Council
FROM: City Manager
SUBJECT: Adoption and Second Reading of an Ordinance to Approve an Amended and Restated Development Agreement No. ### Related to Commercial Cannabis Permit Application No. 18-026 for commercial cannabis testing.
MEETING DATE: October 22, 2024
APPLICANT REQUEST(S):
Consideration of an Ordinance to approve an amended and restated Development Agreement for Commercial Cannabis Permit (CCP) Application No. 18-026 for the reasons outlined in the Analysis section of this report.
RECOMMENDATION:
Staff recommends that the City Council:
Waive Full Reading and Approve for Second Reading by Title only a proposed Uncodified Ordinance related to application No. 18-026 approving a development agreement for the operation of commercial cannabis activities, which was recommended for City Council approval by the Planning Commission, which would replace Development Agreement No. 788; and Approval and Second Reading of Uncodified Ordinance finding the development agreement is exempt from further CEQA review pursuant to Administrative Code, Title 14, Chapter 3, Section 15301(a), Class 1, Existing Facilities because the development agreement includes a project that consists of small additions, expansions or alterations to existing structures where there will be negligible or no expansion of the existing structures and/or uses; and pursuant to said findings, direct staff to prepare and file corresponding Notice of Exemption; and Approval and Second Reading of an Uncodified Ordinance approving the findings consistent with, and pursuant to, Government Code Section 65867.5; and Approve the Conditions of Approval (as also incorporated into the Development Agreement); and Direct staff to assign a number for the adopted Ordinance and Development Agreement.
PUBLIC HEARING NOTICE:
A notice related to this action was published in Los Cerritos News on September 12, 2024. Notices were also mailed out to property owners located within 500 feet of the subject properties, in accordance with the City of Commerce Municipal Code.
BACKGROUND
Pursuant to Ordinance 700, which established Commercial Cannabis regulations for the City of Commerce, the City commenced the development agreement process at the beginning of October 2018. Ordinance 700 included a process for operators to amend their respective development agreements.
City Council approved the authorization of testing laboratory licenses (testing licenses) that test cannabis goods before sale at a retailer. A testing laboratory, facility, or entity in Commerce may perform tests of cannabis or cannabis products that are accredited by an accrediting body independent of all other persons involved in commercial cannabis activity in the state and licensed by the State of California. The City currently has two active applicants who applied for a testing license, one being VK Labs LLC.
CCP Application #
Applicant
Address and Zone
Uses
18-026
VK Labs
5608 E. Washington; C/M-1
Testing
VK Labs, LLC currently holds a legal or equitable interest in real property considered in the amended and restated development agreement, located at 5608 East Washington Boulevard, in the City of Commerce. The existing building is approximately 4,000 square feet on an approximate 5,103 square foot lot. VK Labs received its CCP and Business License on August 15, 2022, to legally operate a testing laboratory for commercial cannabis in the City of Commerce.
ANALYSIS
The Commerce Cannabis program requires all operators who have an approved ordinance and who have an executed development agreement to pay a set of fees, which include non-operating, minimum operating, licensing, and community benefit fees. These fees were incorporated within each development agreement to enable the City to promote, protect, and enhance the health, safety, and welfare of the community and its residents and its quality of life, the fees also supported the administration and management of the program.
Pursuant to the terms of their respective development agreements, testing lab license holders are required to pay 1.5% of their total gross receipts upon receiving a business license for cannabis operations on a quarterly basis. In addition, a testing laboratory must provide the minimum payment for their annual community benefit and annual operating fees.
Through internal research and analysis of daily operations regarding laboratory testing cannabis commercial licensing in the City and discussing concerns with VK Labs, a current laboratory testing licensed operator, CCP staff has determined that the City’s current laboratory testing license fees for commercial cannabis are nonviable and can potentially hinder the success of the business and the City due to current fee rates.
Testing Laboratories
Testing laboratories are responsible for ensuring that cannabis goods are safe for consumption and labeled with accurate amounts of cannabinoids and terpenes. Cannabis goods must be free of contaminants and are tested for residual solvents and processing chemicals, residual pesticides, heavy metals, microbial impurities, mycotoxins, moisture content and water activity, and foreign material. Once the cannabis goods pass the testing and quality assurance review, distributors can transport these cannabis goods to retailers. Testing laboratories typically test a small dose of the cannabis good, therefore the quantity they review is far less than what is found in cultivation, manufacturing, or retail distribution sites.
Following the execution of a development agreement for commercial cannabis, the timeline to obtain a commercial cannabis license to operate in the City of Commerce can range from six to twenty-four months or more. It is not until a commercial cannabis operator receives agency approvals and obtains their license to conduct commercial cannabis operations can they begin to generate revenue. Once the operator obtains their business license operating fees begin to accrue.
The development agreement outlines a standard fee schedule and contractual obligations for all commercial cannabis operators. Upon receiving approval from the City Council, an operator may begin working toward obtaining local and state agency approvals to begin operating. The operator is required to pay $21,000, 50% of the first year of their Community Benefit Fees owed, 30 days after their development agreement becomes effective. Once the operator receives local and state agency approvals and receives their business license to conduct legal cannabis operations, the operator is required to pay the second half of the Community Benefit Fees.
If the operator has not been able to obtain a business license 180 days after the effective date, the operator is required to pay $10,250 in non-operating fees every month until they receive their business license.
Following the first year of receiving a business license from the City, an operator will be required to pay a minimum of $100,810 for their first year, $109,090 for their second year, $118,000 for their third year, and $127,000 for the fourth and the same amount in their fifth final year in operation fees.
An operator is also required to pay $42,000 in Community Benefit Fees for their first year, which is broken down into two payments. In the second year of operations, the operator is obligated to pay $52,000, $62,000 in their third year and the same amount each year thereafter until they reach their fifth and final year in Community Benefit fees.
In summary, once a cannabis operator begins legal operations, they are required to pay the City a minimum of $142,810 for their first year, including minimum annual and community benefit fees, and in their final year a minimum of $189,000 to meet their contractual obligations regardless of their license.
In the City, VK Labs is the only operator with a testing license that has gone through all agency approvals to receive its business license. VK Labs has expressed that testing does not generate the same revenue as other licenses that have been approved by the City Council. On July 5, 2023, VK Labs LLC submitted an application requesting an amendment to their development agreement to amend the fee structure.
Below are the fees found in all current development agreements approved by the City Council, the recommendation VK Labs is proposing, and the staff’s recommendation:
Original Development Agreement
Community Benefit Fee - The operator is required to pay a minimum sum of $42,000 for the first year, $52,000 for the second year, and $62,000 for the third year and the same amount each year thereafter until they reach their fifth and final year in Community Benefit fees.
Quarterly Gross Receipts Fee – Report quarterly gross receipts at 1.5% for Testing.
Annual Minimum Operating Fee - Following the First Year of operations, each operator must pay a minimum of $100,810, Second Year: $109,090,
Third Year: $118,000,
Fourth Year: $127,000,
Fifth Year: $127,000.
Monthly Non-Operating Fee - A monthly fee of $10,250 shall be payable to the City if, after one hundred eighty (180) days from the effective date of a development agreement, the owner has not secured a City of Commerce Cannabis Commercial Permit. Due and payable to the City every 10th day of each month.
VK Labs Recommendation
Community Benefits Fee - Establish an annual flat fee of $10,000.
Annual Minimum Operating Fee – Establish annual operating fees at $20,000.
Monthly Non-Operating Fee - Eliminate Monthly Non-Operating Fee.
Quarterly Gross Receipts Fee - Increase the percentage of gross receipts for testing laboratory operations from 1.5% to 2.5% to be paid every quarter.
Staff’s Recommendation
Community Benefits Fee - Establish an annual flat fee of $32,000.
Require the operator to pay 50% of their annual community benefit fee 30 days after the effective date of the development agreement and pay the remaining 50% 180 days after the date of execution of the development agreement. The development agreement's effective date is defined as 30 days after the date of the Second Reading authorizing an ordinance for a commercial cannabis testing operator.
Annual Minimum Operating Fee – Establish minimum annual operating fees at $50,000.
Monthly Non-Operating Fee - Eliminate Monthly Non-Operating Fee.
Quarterly Gross Receipts Fee - Report quarterly gross receipts and reduce the percentage of gross receipts for cannabis operations from 1.5% to 0.5% to be paid every quarter.
Formal permit fees were established by the City Council at the beginning of the City’s cannabis program. However, the information analyzed by CCP staff regarding cannabis testing fees adopted by other jurisdictions indicates that reducing cannabis testing fees may benefit both the business and the City.
City staff believes lowering the annual operating fees for testing labs may improve the viability of a testing laboratory cannabis program in the City of Commerce Analysis for Medical/Adult-Use Cannabis Lab Testing in Comparable Cities City
Testing Fee Rates
City of Long Beach
1% Gross Receipts
City of El Monte
2% of Gross Receipts
City of Bellflower
10% of Gross Receipts
City of Montebello
5%
City of Los Angeles
$10 for each $1,000.00 of Gross Receipts
City of Oakland
$3,482.00 for less than $500,000 in gross sales
$6,412.00 for gross sales between $500,000 and $999,999.00 $12,833.00 for gross sales greater than $999,999.00
Based on the analysis conducted by City staff, costs incurred to date by City staff are related to the preparation of ordinances, daily staff coordination with local and state agencies and the financial component of the program, and other CCP-related fees. Additionally, Cities such as the City of Los Angeles, Long Beach, and El Monte have taken their previously approved fee structure and reevaluated it to compete with the current overall market.
In staff’s assessment, the proposed fee adjustment will not impact the total cost of service required to continue to support compliance with current state law and local city policies. Since testing laboratories do not contribute to generating more cannabis products, these businesses only test existing products to ensure compliance with California law. Cannabis testing labs typically do not create impacts on the community and would, however, generate additional revenue for the City.
City staff believes its recommended new fee structure for testing labs will generate sufficient funds to cover the City’s costs for staff time in reviewing and processing business permits, conducting quarterly regulatory inspections, and audits, and the dedicated time spent on each operator.
Since testing laboratories do not generate the same level of revenue as Cultivation, Manufacturing, and Non-Storefront Delivery businesses, this proposed fee structure would help support the success of laboratory testing businesses in the City of Commerce.
CCP staff recommends that the City Council amend the list of fees for VK Labs and also uniformly apply them to all new and current operators who request to obtain a cannabis testing laboratory license and no other additional license types. Staff recommends that all future and current testing laboratory licenses include the following changes: (1) eliminating monthly non-operating fees from any future and previously approved development agreements, (2) reducing annual Community Benefits Program fees to a flat fee of $32,000.00, (3) reducing minimum operating fees to an annual flat fee of $50,000.00, and reducing the percentage of gross receipts from 1.5% to 0.5% to be paid quarterly.
Additionally, CCP staff is recommending that the development agreement be updated to require the operator to pay 50% of their annual community benefit fee 30 days after the effective date of the agreement and pay the remaining half 180 days after the date of execution. Furthermore, the development agreement's effective date is defined as 30 days after the date of the Second Reading authorizing an ordinance for a commercial cannabis testing operator.
If the proposed amendment is approved by City Council, VK Labs will have 30 days from the effective date to sign their amended and restated development agreement (See Attachment B). The applicant will also be required to comply fully with the terms of the amended and restated development agreement as well as conditions of approval which include, but are not limited to, façade improvements, and compliance with all state and local ordinances CCP staff believes the new recommended fee structure for cannabis testing operators is sufficient for the City to recuperate administrative costs of reviewing, issuing licenses, and management for cannabis testing uses. Additionally, the current ongoing services and programs for the community that are funded directly by the Community Benefits program will not be impacted due to this change.
Planning Commission Meeting on August 16, 2023
During the City’s Planning Commission meeting held on August 16, 2023, the Planning Commissioners asked City staff to provide additional clarification on the item and inquired about the history of the CCP licensing fees in the City of Commerce. The item was first presented to the Planning Commission on July 19, 2023, and presented on August 16, 2023. The item was denied by the Commission, and it was requested that staff re-notice and republish the item to allow VK Labs to attend the meeting and allow staff to respond to some of the inquiries from the Commission for the following meeting. Staff have included the list of questions and responses to this report.
Do other cities have less than 0.5%? How did the staff come up with the percentage? City/County
Testing Tax Fees
Additional Fees
City of Los Angeles
$10 for each $1,000 of Gross Receipts
$8,486
LA County
1%
Bellflower
5%-10%
$35,229 annual permit and annual education fee
Long Beach
1%
$2,840
Pasadena
1%
How did this testing laboratory come to an agreement on the current fee structure with the City? The City and a consultant created a standard development agreement for all Commercial Cannabis operators which included fees for Distribution, Cultivation, Non-Store Front Retail Delivery, Manufacturing, Microbusiness, Testing, and other contractual obligations that the operators must abide by. The potential operator was made aware of their potential contractual obligations in their development agreement before being presented to the Planning Commission and the City Council.
How many laboratories are in the neighboring cities?
City
Testing Laboratory
City of Commerce
1 City of Los Angeles
1 City of Long Beach
3 City of Pasadena
1 City of Monrovia
2 City of Montebello
0 City of Huntington Park
0 City of Maywood
0 City of Bell Gardens
0 Will this restated development agreement restart the five-year lifespan? Yes, this restated development agreement will restart the five-year lifespan due to the agreement being reinstated.
Will all the same fee structures be applied to testing laboratories? Yes, all who have Testing as their one and only license.
Will an additional use be able to be added?
No, this report is only for operators who have and/or will apply for testing laboratory as their only use.
How did staff come up with setting $32,000 as the new flat fee for the annual community benefit fee? First, staff assessed the reoccurring expenses from the Community Benefit Fees fund. Second, to remain fair and consistent with the other operators who possess licenses other than Testing that also have the same fee structure in their development agreement, staff saw that should Council elect to lower the community benefit fee to $32,000 for all standing operators, the reoccurring expenses and potential future reoccurring expenses will remain fully funded.
Is there a formula being utilized where the gross receipts are taken into consideration? No formula was utilized where gross receipts at the time of the revision were taken into consideration by staff, though, staff acknowledged the operator's concerns, and their gross receipts reflected said concerns.
What market analysis was used when the structure was first presented, was a consultant hired to develop that? When the fee structure was first presented to the City Council, a consultant was hired to conduct the analysis of the current market and what would be an appropriate estimate for potential fees for future commercial cannabis operators. Since the legal cannabis market was new for the state of California, many municipalities were venturing into new territory on how to apply taxes or fees for this new business, therefore, much of the analysis overestimated the revenue. Since the community benefit fees and operating fees were applied uniformly, the analysis may not have accounted for the difference in potential revenue different licenses may report.
Does the City have a methodology for how the City assesses the community benefits program? No standard methodology.
Does the City have a methodology for all development agreements outside of cannabis that have a community benefit program built in? No standard methodology has been put in place, it is dependent on what revenue the business may potentially bring and the type of market. Each community benefit program aside from what is stated in a cannabis development agreement differs.
Planning Commission Meeting on November 15, 2023
On November 15, 2023, City staff presented the updated report and included responses to the questions made by the Commissioners on August 16, 2023. The Commissioners voted to recommend for the City Council to approve the amendment change for applicant No. 18-026 and to approve the request for the proposed amendments to all new and current operators who obtain cannabis testing laboratory license and no other additional license types. A commissioner commented that the testing tax fee should be in line with the neighboring cities, from the recommended limit of 0.5% to 1% of their total gross receipts.
CEQA COMPLIANCE AND CATEGORICAL EXEMPTIONS:
A Notice of Exemption from CEQA for the development agreement will be prepared pursuant to CEQA (Public Resources Code §21000 et seq.) and the State CEQA Guidelines (Title 14, California Code of Regulations, Division 6, Chapter 3, §15000 et seq.) prior to the City Council’s consideration for approval. The subject development agreement is a “project” that is subject to environmental review.
City staff anticipates that the Notice of Exemption will find that the project contemplated by the development agreement is exempt from environmental review pursuant to the guidelines of the California Environmental Quality Act (Public Resources Code § 21080(b)(9); Administrative Code, Title 14, Chapter 3, § 15301(a), Class 1, Existing Facilities). This section specifically applies to small additions, expansions, or alterations to existing structures where there is negligible or no expansion of the use. For this project, the applicant will limit the construction to interior tenant improvements, electrical, plumbing, and façade improvements.
CONCLUSION:
After independent review, consideration, and analysis of staff’s report, the information presented by all parties and persons of the public, and the record as a whole, staff recommends that the City Council approve the following:
Waive Full Reading and Introduce for First Reading by Title only a proposed Uncodified Ordinance related to application No. 18-026 approving a development agreement for the operation of commercial cannabis activities, which was recommended for City Council approval by the Planning Commission, which would replace Development Agreement No. 788.
Approval by Introduction and First Reading of Uncodified Ordinance finding the development agreement is exempt from further CEQA review pursuant to Administrative Code, Title 14, Chapter 3, Section 15301(a), Class 1, Existing Facilities because the Development Agreement includes a project that consists of small additions, expansions or alterations to existing structures where there will be negligible or no expansion of the existing structures and/or uses; and pursuant to said findings, direct staff to prepare and file corresponding Notice of Exemption; and Approval by Introduction and First Reading of an Uncodified Ordinance approving the findings consistent with, and pursuant to, Government Code Section 65867.5; and Approve the Conditions of Approval (as also incorporated into the Development Agreement); and Direct staff to assign a number for the adopted Ordinance and Development Agreement.
ATTACHMENTS:
Planning Commission Approved Resolution
Development Agreement No. ###
Proposed Ordinance
Prepared by: CCP Staff
Submitted by: Louis Morales, Interim Director of Planning and Economic Development Reviewed by: Ernie Hernandez, City Manager
Approved as to form by: Noel Tapia, City Attorney