City Council Agenda Report
TO: Mayor Clauzel and Members of the City Council
FROM: Ken Irwin, City Manager
BY: Nubia Goldstein, City Attorney
MEETING DATE: September 19, 2023
ITEM NO: 6.1
SUBJECT: (Public Hearing Continued from August 15, 2023 Regular Council Meeting) Consideration of Appeal No. 23-01, By Central Valley-Sierra Associates Regarding (1) Resolution No. 2023-07 of the Patterson Planning Commission Revoking Conditional Use Permit No. 17-21 For Failure to Comply with Conditions of Approval; and (2) Resolution No. 2023-06 of the Patterson Planning Commission Recommending that the Patterson City Council Adopt an Ordinance Confirming the Termination of the Development Agreement By and Between the City of Patterson and Central Valley-Sierra Associates and Authorizing the Recording of a Notice of Termination.
RECOMMENDATION
Consideration of Appeal No. 23-01, By Central Valley-Sierra Associates Regarding (1) Resolution No. 2023-07 of the Patterson Planning Commission Revoking Conditional Use Permit No. 17-21 For Failure to Comply with Conditions of Approval; and (2) Resolution No. 2023-06 of the Patterson Planning Commission Recommending that the Patterson City Council Adopt an Ordinance Confirming the Termination of the Development Agreement By and Between the City of Patterson and Central Valley-Sierra Associates and Authorizing the Recording of a Notice of Termination.
BACKGROUND
I. SUMMARY OF APPEAL
Central Valley-Sierra Associates (“CVSA”) is company that operates a cannabis business in the City of Patterson (“City”) pursuant to a Development Agreement (“DA”) CVSA entered into with the City in 2017. After struggling to make the Public Benefit payments to the City for the first few years of its operations, as required by the DA, and working with the City initially to defer some of those amounts, CVSA has since made some payments but continues to accrue a large delinquent Public Benefit amount. CVSA has not made any payments on the delinquent amount since June 2021 and currently owes a total of $1,374,250 to the City, which is the subject of this dispute.
A. Planning Commission Resolutions Passed July 13, 2023 Following a public hearing held on July 13, 2023, the City of Patterson Planning Commission (“Planning Commission”) passed Resolution No. 2023-07 revoking CVSA’s Conditional Use Permit (“CUP”) No. 17-21. The Planning Commission’s decision was based on the following reasons: (1) CVSA’s continued failure to make Public Benefit Amount payments to the City as they become due and payable, pursuant to Section 4.3 of the DA By and Between the City and CVSA, constitutes “full and sufficient grounds” for revocation; (2) upon termination of the DA by its own terms on or about July 4, 2022, CVSA was no longer in compliance with City requirements for the continued operation of the cannabis business (PMC section 6.56.030); and (3) the terminated DA and uncured Public Benefit default violates the CUP’s Conditions of Approval, including Conditions No. 1, No. 3, and No. 5.
Also, on July 13, 2023, following a public hearing, the Planning Commission passed Resolution No. 2023-06 recommending that the City Council adopt an Ordinance to confirm the termination of the DA as described above. Section 9.1. of the DA provides that upon termination of the DA, the City shall record a notice of such termination (“Notice of Termination”), and the DA shall be of no force or effect.
B. CVSA’s Appeal
On July 14, 2023, CVSA timely submitted its Application for Appeal, No. 23-01, and the required fee to the Community Development Department. (Exhibit A.) The Application states that CVSA intends to appeal the above two Planning Commission decisions to the City Council, and CVSA requests the City Council to take action to: (1) “reverse the Planning Commission’s decision to revoke the CUP”; (2) “ignore the recommendation to adopt an ordinance confirming termination” of the DA; and (3) “Instruct City Staff to engage in good faith talks with Appellant to (i) settle any outstanding issues, and (ii) amend the DA to replace the onerous financial obligations of Section 4.2 with the requirement to pay taxes solely with respect to the gross receipts of the cannabis business in accordance with the voter-passed initiative, Measure Y.” CVSA’s application states that the grounds for its appeal are “(1) The Planning Commission’s decision to revoke the CUP hinges on the finding of breach of the DA, which must be determined by the City Council; (2) “the breach in question relates to [] Section 4.2 of the DA, which is unenforceable by reason of being: an unconstitutional tax, an unconstitutional taking in violation of the Fifth Amendment, and against public policy against predatory and unconscionable terms; and (3) because Section 4.2 is an unenforceable provision of the DA, the City Council cannot find that the Appellant is in breach of its obligations for failing to abide by such provision.”
II. BACKGROUND
CVSA has long struggled with its Public Benefit payments and negotiated various agreements with the City. The full history of the negotiations, agreements, and payment history between the City and CVSA is as follows.
2017:
On December 5, 2017 the City adopted Ordinance No. 812 approving the DA for the operation of a cannabis dispensary business located at 100 West Las Palmas Avenue, Suite H, Patterson CA 95363, Assessor’s Parcel Number 131-003-012 (the “Site”). On December 21, 2017, the Planning Commission voted to adopt Resolution 2017-14, approving CUP No. 17-21, associated with CVSA’s application for a cannabis dispensary (the “Project”) to be located at the Site.
Section 4.2 of the DA requires CVSA to pay to the City certain amounts to offset the impacts to City infrastructure, services, and neighborhoods, commensurate with the private benefits conferred on CVSA (the “Public Benefit Amount”). CVSA failed to make the required Public Benefit Amount payments (the “Delinquent Public Benefit Amount”) by the agreed-upon terms, resulting in a default pursuant to Sections 4.3 and 8.1(a). 2018:
CVSA was scheduled to make its first Public Benedit payment on February 1, 2018 in the amount of $10,000. However, CVSA at the time was unable to open its business to the public and sought a deferral from the City for a portion of the Public Benefit Amount until CVSA could open its business to the public.
On August 18, 2018, the City sent CVSA a side letter (“First Side Letter”) agreeing to a deferral for a portion of the Public Benefit Amount until CVSA could open the Project (“Deferred Benefit Fee”) (Exhibit __ [First Side Letter].) At this point, CVSA owed $70,000 to the City in Public Benefit payments. Under the terms of the First Side Letter, as approved by the City Council, CVSA agreed to pay $35,000 (50% of that amount) in full by September 28, 2018, and pay the remaining amount in monthly payments over 12 months once the business opens to the public. CVSA agreed to the terms of the First Side Letter and executed it on November 29, 2018. 2019:
As of April 23, 2019, CVSA still had not opened the Project or made any payment on the Deferred Benefit Fee. As of that date, CVSA owed a total of $195,000 with a resulting Deferred Benefit Fee of $97,500. CVSA requested a deferral for a portion of that Deferred Benefit Fee.
The City Council agreed to the deferral, and on May 30, 2019, the City and CVSA entered into a second side letter (“Second Side Letter”) wherein CVSA agreed to pay 50% of the Deferred Benefit Fee ($48,750), within 60 days of opening the Project. CVSA further agreed and acknowledged that the Deferred Benefit Fee in the Initial Side Letter and the Public Benefit Amount shall be paid in full. CVSA accepted the terms and executed the Second Side Letter on May 30, 2019. (Exhibit __ [Second Side Letter].)
2020:
On June 7, 2020, the business opened to the public. (See Exhibit __ [July 31, 2013 letter from A.
Almaz].)
On October 28, 2020, the City Attorney sent a default notice to CVSA, explaining that the City has calculated the Developer’s outstanding Public Benefit Amount to be at $645,000. (Exhibit __ [October 28, 2020 letter].) By that date, CVSA had paid a total of $70,750 of the Public Benefit Amount. Based on CVSA’s partial payments and non-payments, the total Public Benefit Amount due by that date was $574,250. This is despite Developer’s license renewal documents showing Developer’s annual income at that time to be $700,000. The letter stated that CVSA’s failure to remit the required payments of the Public Benefit Amount to the City constitutes a default of the Agreement pursuant to section 8.1(a), subjecting CVSA to potentially substantial penalties for nonperformance under the DA.
The letter gave CVSA 10 days from the date of the letter to cure its default, after which the City would institute proceedings to terminate the DA and revoke the CUP, pursuant to the terms of the DA. CVSA did not cure the default as required.
2021:
On June 29, 2021, CVSA paid $25,000 to the City, and to date has made no further payments.
On October 21, 2021, the City wrote to CVSA and stated that CVSA was currently in default of the DA. (Exhibit __ [October 21, 2021 letter].) At this point, the total Public Benefit Amount owed was $799,250, and CVSA had paid a total of $95,750 toward the total Public Benefit Amount due. The City offered to settle the delinquent Public Benefit Amount for $79,925, or 10% of the total owed, as a full and complete satisfaction of the debt, together with CVSA’s agreement to be subject to the City’s cannabis tax on an ongoing basis, to establish a new Public Benefit schedule and to amend the DA to reflect these terms. CVSA never accepted this offer, remained in default of the DA, and made no further payments toward the Delinquent Public Benefit amount.
2022:
On June 17, 2022, following discussions between the City and CVSA in an attempt to the resolve the default and bring the Project current, City wrote a letter to CVSA and offered (a second time) to settle the entire Delinquent Public Benefit Amount for $79,925 and cure CVSA’s default, and provided 10 days’ notice that if the default was not cured during that period, the City would commence proceedings to revoke the CUP and terminate the DA. (Exhibit __ [June 17, 2022 letter].) CVSA did not accept the City’s offer but proposed a counteroffer with additional terms.
Thus, the City and CVSA did not reach an agreement to resolve the Delinquent Public Benefit Amount or to extend the term of the DA, and CVSA failed to cure the default. The DA, by its own terms, expired on or about July 4, 2022.
2023:
In or around January 2023, CVSA engaged a new company, Catalyst Cannabis Company (“Catalyst”) to assist with operation and management of the Project. Catalyst and the City engaged in further discussions but did not reach an agreement to resolve the Delinquent Public Benefit Amount, cure the default, or extend the term of the DA. On March 29, 2023, City sent notice to CVSA of its intent to revoke the CUP, pursuant to Section 8.1(b) of the DA, and received no response within the required 10 days. (Exhibit __ [March 29, 2023 letter].) III. AMOUNTS DUE
As of today’s date, the total accounting of the Delinquent Public Benefit is as follows:
$1,470,000: Total Public Benefit Amounts due as of July 31, 2023. ($95,750): Total Amount CVSA has paid to date as of July 31, 2023. $1,374,250: Public Benefit Amount currently due from CVSA.
IV. ALTERNATIVE ACTIONS
The City Council’s options are:
Affirm Planning Commission Resolutions 2023-07, revoking the CUP issued to CVSA, and 2023-06, Recommending that City Council Adopt an Ordinance Confirming Termination of the DA and Authorizing the Recording of a Notice of Termination; Reverse Planning Commission Resolutions 2023-07, revoking the CUP issued to CVSA, and 2023-06, Recommending that City Council Adopt an Ordinance Confirming Termination of the DA and Authorizing the Recording of a Notice of Termination; Continue the Appeal to a later date, with direction to staff for further action, if any.
ATTACHMENTS
1. Application for Appeal, No. 23-01, from CVSA, dated July 14, 2023
2. First Side Letter, from K. Irwin, dated August 10, 2018
3. Second Side Letter, from K. Irwin, dated April 23, 2019
4. Letter from CVSA attorney A. Almaz, dated July 13, 2023
5. Default Notice to CVSA, from N. Goldstein, dated October 28, 2020
6. Letter and Offer to Settle, from K. Irwin, dated October 21, 2021
7. Letter and Second Offer to Settle, from K. Irwin, dated June 17, 2022
8. Letter re Intent to Revoke CUP and Terminate DA, from N. Goldstein, March 29, 2023 V. FISCAL IMPACT
The City would lose potential tax revenue due to the closing of the cannabis dispensary at the Site, which would result from termination of the Development Agreement with CVSA.