DATE: November 6, 2023
TO: Council Economic Development Committee
FROM: Development Services Director
SUBJECT: Commercial Cannabis Program: Status Update on Existing Cannabis Businesses and Discussion on a Possible Restorative Justice Component Tied to Program Enforcement
RECOMMENDATION
That the Council Economic Development Committee (CEDC) reviews the report and provides feedback and direction to staff regarding the challenges to opening a cannabis business in Hayward.
SUMMARY
In 2017, Council adopted a new regulatory and land use ordinance to establish guidelines for personal cultivation and establish land use guidelines and development standards to allow for commercial cannabis cultivation, distribution, delivery, manufacturing, testing, and retail dispensary activities in the City. In 2021, amendments were made to the City’s commercial cannabis regulatory framework to address several issues and inconsistencies with recent changes in State law and create a streamlined process to evaluate and select commercial cannabis operators, consistent with industry best practices.
Despite the most recent program and regulatory updates to the Commercial Cannabis Program, eight of the thirteen permitted cannabis businesses have not opened and are in varying stages of the process (Attachment II). Based on feedback from various applicants, staff identified three possible explanations that may be impacting the opening of those cannabis businesses, which are summarized in this report.
In February 2023, Council adopted additional amendments to the fees and penalties portion of the Commercial Cannabis Program to help clarify when fees and penalties are assessed and to curtail the number of illegal cannabis operations in Hayward. At that time, Council also recommended a restorative justice component be considered as an enforcement alternative for those subject to fines and penalties. Staff is currently evaluating other City programs where a restorative justice component may be applied and once completed, will return to City Council at a future date with additional details and recommendations.
BACKGROUND
The Control, Regulate and Tax Adult Use of Cannabis Act (AUMA) was approved by a majority of California voters on November 8, 2016. The AUMA legalized the possession, use, and cultivation of non-medical cannabis for those who are 21 years of age or older and established a state system to regulate commercial cannabis activity. On June 27, 2017, Governor Jerry Brown signed into law Senate Bill 94 which repealed the Medical Cannabis Regulation and Safety Act (MCRSA) and created a single regulatory scheme for both medical and non-medical cannabis known as the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA).
The MAUCRSA retains the provisions in the MCRSA and the AUMA that granted local jurisdictions the authority to adopt and enforce local ordinances, including zoning and land use requirements, to regulate and/or prohibit cannabis-related activities. Furthermore, the MAUCRSA provides that a state licensing authority shall not approve an application for a state license for a cannabis business if approval of the state license will violate the provisions of any local ordinance or regulation.
In November 2017, Council adopted new regulatory and land use ordinances to establish guidelines for personal cultivation and provide a set of land use guidelines and development standards to allow the commercial cultivation, distribution, delivery, manufacturing, testing, and retail dispensaries of cannabis activities. As part of that initial process, commercial cannabis operators were reviewed and selected through a Request for Proposals (RFP) process. The RFP process covered all commercial cannabis business types, including commercial cannabis dispensaries, testing/research laboratories, distribution centers, and grow facilities.
Since the ordinance became effective, 13 operators have been subject to the RFP review and selection process. To date, four of those 13 operators have successfully secured their Planning entitlement and are fully operational while eight operators have secured their planning entitlement and are at various stages of the building permit or state licensing process.
In July 2021, Council amended the cannabis regulatory framework to address several issues and inconsistencies with local processes and regulations, to update the City’s ordinance to reflect best practices and to streamline review and selection of commercial cannabis operators. Specifically, the amendments included the following changes: replacing the previous RFP process with a more frequent, bi-annual Preliminary Determination of Eligibility screening process; updating the evaluation criteria to provide more detailed guidance on the disclosure of local hire, labor, and employment practices; establishing a more explicit and robust system for cannabis auditing, inspection, and compliance reporting; allowing applicants to modify an existing commercial cannabis permit without being required to undergo the Preliminary Determination of Eligibility process again; and, updating the required tracking and inventory protocols for cannabis businesses, consistent with state guidelines. As part of this update, staff also modified the fees and penalties section of the Master Fee Schedule to replace the deposit-based permit fee with a more equitable, flat rate fee approach to cover administrative and enforcement costs and include a series of fines and penalties intended to deter illegal operators from competing with legal operators.
In February 2023, Council approved an updated fees and penalties section of the Master Fee Schedule, which clarified how these new fees and penalties would be assessed. The revisions entailed clarifying that existing administrative enforcement provisions of the Hayward Municipal Code are applicable to violations of the commercial cannabis regulations and authorizing the City Attorney to institute civil actions for injunctive relief and imposition of specified amounts of civil penalties against violators. During the discussion of the revised ordinance, Council suggested that staff explore restorative justice programs with respect to enforcement.
DISCUSSION
Status of Existing Commercial Cannabis Business Permits As discussed above, of the 13 businesses that have undergone the RFP and commercial cannabis business permit processes, only four have completed the process and are operational. Of the nine remaining businesses that were subject to the RFP process, three have not yet applied for a building permit, two are awaiting issuance of a State license, and two will need to revise their Conditional Use Permit applications due to previous locations not working out, and one application remains incomplete.
Based on conversations with cannabis operators and understanding the local and state regulatory framework that cannabis operators are subject to, staff believes there are three primary factors that impede operators from conducting business in Hayward: lack of financing, the existing tax rate for cannabis operators, and the ongoing pressure from the illicit cannabis market, which continues to operate without the regulatory framework in place. The three factors are discussed in greater detail below.
Lack of Securing Financing. Cannabis operators still face challenges in securing financing to operate legally. Traditionally, small businesses are eligible to obtain Small Business Administration loans to help finance their operations. Cannabis businesses, however, are not eligible for Small Business Administration loans because cannabis is not legal on a federal level. As a result, cannabis businesses do not have access to one of the primary sources of capital and financing that typically is offered to other small businesses, making it challenging to cover the upfront costs associated with local and state licensing and start-up operations.
High Tax Rate. In March 2018, Council adopted a new tax rate for all commercial cannabis businesses in the City. The tax was intended to aid in the alleviation of the City of Hayward's ongoing General Fund operating deficit and would be used for any valid municipal purpose, including police and fire services, paramedic services, youth and anti-gang programs, education, disaster preparedness, economic development, street repairs and maintenance, graffiti removal, and code enforcement. The local Hayward tax rate is 7% of all gross sales and applies to all cannabis activities, regardless of size or land use type.
In addition to the 7% local tax rate, the State of California imposes a tax of $9.65/dry weight ounce for flowers, $2.87/dry weight ounce for leaves, and an excise tax of 15%, which is applied to all cannabis products sold. Lowering the local tax rate could help lower the overall operating costs for cannabis business operators and make Hayward a more attractive market for cannabis operators. In addition, lowering prices for legal cannabis could make prices more competitive with the cannabis products sold in the illicit market, as detailed below.
Illicit Market. It is estimated that California’s illicit cannabis market is valued at approximately $8 billion annually and that the high taxes and operating costs of a legal cannabis business are allowing the illicit market to thrive. The illicit market is in direct competition with the legal market, which passes down the regulatory and operating costs to consumers, resulting in a more expensive product.
Despite the factors that have prevented these operators from opening in Hayward, staff acknowledges the licenses that were issued in 2018/2019 do not have an expiration date for which applicants are required to vest their Commercial Cannabis Permit. For some land-use cannabis activities, this may not be an issue as applicants can always reapply for a new license during the open Preliminary Determination of Eligibility period, which occurs twice annually. However, for cannabis retail dispensaries which are currently capped at three permits citywide, the City has not achieved the projected sales tax revenues that were originally anticipated as two of the three dispensaries that received their Commercial Cannabis Permit in 2018 (Aunty Honey’s and Jiva Life) remain inactive with no estimated timeframe to open. For these and other operators, staff is requesting feedback from CEDC on the following:
Does the CEDC support adding a sunset provision to the current Commercial Cannabis Ordinance that establishes a timeframe to vest their Commercial Cannabis Permit? Does the CEDC recommend staff explore a lower tax rate for cannabis businesses to make Hayward more attractive for cannabis operators? Restorative Justice
Generally, the term “Restorative Justice” is defined as “[a] response to wrongdoing that prioritizes repairing harm, to the extent possible, caused or revealed by wrongful behavior. The stakeholders impacted most by the wrongdoing cooperatively decide how to repair victim harm, hold offenders accountable, and strengthen the community’s relational health and safety.” As previously mentioned, the efforts to create and support a restorative justice program for the City may extend beyond just cannabis activities so staff is currently collaborating with the City Attorney’s Office and other Departments to determine how this program could be consistently and equitably applied.
NEXT STEPS
Following direction and feedback from the CEDC, staff will continue to evaluate the City’s commercial cannabis program and make any changes as needed per CEDC direction.
Prepared by: Rozalynne Thompson, AICP, Senior Planner Jeremy Lochirco, Planning Manager
Recommended by: Sara Buizer, Development Services Director Paul Nguyen, Chief Economic Development Officer
Approved by:
________________________________
Kelly McAdoo, City Manager
http://hayward.legistar.com/gateway.aspx?m=l&id=/matter.aspx?key=3453 http://hayward.legistar.com/gateway.aspx?m=l&id=/matter.aspx?key=7479 http://hayward.legistar.com/gateway.aspx?m=l&id=/matter.aspx?key=8649 https://www.politico.com/news/2021/10/23/california-legal-illicit-weed-market-516868 Commercial Cannabis Permit: https://library.municode.com/ca/hayward/codes/municipal_code?nodeId=HAYWARD_MUNICIPAL_CODE_CH6BUPRTR_ART14COCABU https://restorativejustice.org/why-restorative-justice/the-issue/