TO: HONORABLE MAYOR FROM: Anthony Mata
AND CITY COUNCIL
SUBJECT: REVIEW OF CANNABIS LAND USE DATE: February 3, 2022
AND REGULATORY PROVISIONS
Approved Date
2/4/2022
RECOMMENDATION
Approve an ordinance amending Chapter 6.88 of Title 6 (Business Licenses and Regulations) of the San José Municipal Code to:
(1) Add delivery-only to the categories of regulated cannabis businesses; (2) Allow up to ten (10) new cannabis retail businesses with equity business owners to register (only 5 of which may be storefront dispensaries); (3) Allow currently registered cannabis dispensary businesses to dispense cannabis from a total of two (2) storefront locations;
(4) Approve other changes to update the San José Municipal Code to align with State regulations; and
(5) Make other technical, non-substantive, or formatting changes.
OUTCOME
If adopted by the City Council, the resulting changes to the Municipal Code will allow for delivery-only cannabis retailers in San José. The registration of businesses would expand with up to 10 new cannabis retail businesses operated by equity owners (no more than 5 would be storefronts) and up to 16 second dispensary locations operated by currently registered cannabis businesses. If the City Council approves the zoning changes recommended by the Planning Commission, these dispensaries could be located in certain commercial zoning districts, rather than the current industrial districts. The Cannabis Equity Program is addressed in a separate memorandum from the Administration. Additionally, if adopted, the changes recommended by staff will update and make technical changes to the Municipal Code.
COUNCIL AGENDA: 02/15/2022
FILE: 22-152
ITEM: 10.2 (c)
HONORABLE MAYOR AND CITY COUNCIL
February 3, 2022
Subject: Review of Cannabis Land Use and Regulatory Provisions
BACKGROUND
Existing Regulatory Program
On June 17, 2014, the City Council approved a Medical Marijuana Regulatory Program (“Program”) to regulate the cultivation, manufacturing, and dispensing of medical marijuana in the City of San José (City) which went into effect on July 18, 2014. Additionally, the City Manager has promulgated regulations for administering the Program. December 18, 2015 marked the City’s deadline for San José collectives to obtain Registration. By the deadline, 16 medical marijuana collectives were registered in San José. Since that time, the City has not accepted new applications for retail storefront, retail non-storefront (delivery-only), and cultivation, and only Council action can re-open the registration period. The City’s 16 registered cannabis businesses can conduct medical and non-medical cannabis activities.
Title 6 of the San José Municipal Code limits the number of locations at which a cannabis business may operate. Title 20 of the San José Municipal Code (the Zoning Code) limits where cannabis-related uses may locate. City Council established a set of location criteria that were used in the initial registration process through which the existing 16 businesses were approved.
On January 15, 2019, the City Council approved changes to the regulatory program allowing new businesses to apply for registration for cannabis manufacturing, distribution, and testing, including a new set of location criteria.
Prior to receiving a Notice of Completed Registration, cannabis businesses are required to obtain a Zoning Code Verification Certificate (“Certificate”) from the Department of Planning, Building and Code Enforcement. The Certificate is non-transferable to a different location; each location needs its own Certificate to determine the site met the Zoning Code provisions at the time of issuance.
City Council Direction
On January 15, 2019, the City Council considered an item regarding the establishment of manufacturing, distribution, and laboratory testing categories of regulated cannabis businesses.
Multiple councilmembers issued memoranda for this item recommending additional work on cannabis regulation, including memoranda from Councilmembers Peralez and Carrasco, Councilmember Esparza, and Councilmember Diep.
1 The City Council approved some of the
recommendations in these memos and referred others to the 2019 Council priority setting session.
1 January 15, 2019 City Council Meeting, Agenda Item 4.1 https://sanjose.legistar.com/LegislationDetail.aspx?ID=3787065&GUID=5CA18B4F-65EA-4F7D-820A- E57EBBC18561&Options=&Search=
HONORABLE MAYOR AND CITY COUNCIL
February 3, 2022
Subject: Review of Cannabis Land Use and Regulatory Provisions
The City Council conducted priority setting on March 5, 2019.2 At this meeting, the City Council prioritized two items related to cannabis: Priority #11: Review of Cannabis Land Use and Regulatory Provisions and Priority #13: Cannabis Equity Applicant Program. Priority #11 combined direction from the January 15, 2019 City Council memoranda with a separate priority nomination submitted by Councilmember Foley to comprise a comprehensive review of the current cannabis regulatory program.
Community and Economic Development Council Committee Direction
Staff presented land use and regulatory options to the Community and Economic Development (CED) Committee on April 26, 2021.3 At that meeting, staff was directed to return with an analysis of the following items:
1) Assessing current cannabis businesses to open a second retail location; 2) Maintaining a 1,000-foot setback from sensitive areas; 3) Analyzing options for setback from residential housing, including options for the Downtown Core and Urban Villages;
4) Requiring a 1,000-foot separation between new retail storefronts; 5) Prohibiting new cannabis retail storefronts from opening in police beats with crime reports 20% above the average of reported crimes, including options for downtown core; and
6) Assessing five (5) new equity-owned businesses.
Staff presented the analysis requested to the CED Committee on June 28, 2021.4 At that meeting, staff was directed to:
1) Reduce the setback requirement from sensitive uses for Downtown Core and Urban Village areas;
2) Eliminate the setback requirement from residential uses in Downtown Core and Urban Village areas and modify it to be measured by path of travel for sites located outside of Downtown Core and Urban Villages;
2 March 5, 2019 Council Meeting, Item 3.3
https://sanjose.legistar.com/LegislationDetail.aspx?ID=3865380&GUID=FAC8B6D6- B599-47C3-9E17- F28983DA140A&Options=ID|Text|&Search=priority+setting
3 April 26, 2021 Community and Economic Development Committee Meeting, Item (d) 3. https://sanjose.legistar.com/LegislationDetail.aspx?ID=4890665&GUID=94474C5A -A53C-49D4-A6BD- BFA9B54DE268
4 June 28, 2021 Community and Economic Development Committee Meeting, Item (d) 3. https://sanjose.legistar.com/LegislationDetail.aspx?ID=4975752&GUID=4252DF5C -C2F1-4AAE-93F1- D2D9CED78729
HONORABLE MAYOR AND CITY COUNCIL
February 3, 2022
Subject: Review of Cannabis Land Use and Regulatory Provisions
3) Prohibit new cannabis retail storefront (dispensary) use in police beats with crime reports 20% above the City average reported crime rate except for those within Downtown Core5;
4) Allow the 16 existing businesses to open a second retail location, or move their existing dispensary to a new location, under the new zoning criteria; 5) Allow up to 10 new cannabis businesses for equity applicants only, up to five of which may be retail storefronts; and
6) Modify the audit requirement for cannabis businesses.
Items 1 through 3 are covered in the land use and zoning ordinance in Item 10.2 (a) and (b).
Items 4 through 6 are covered in this memorandum.
ANALYSIS
This memorandum provides an update on staff’s analysis on cannabis regulatory provisions based on CED Committee direction from the April 26, 2021 and June 28, 2021 meetings. The land use item and zoning options are discussed in the February 9, 2022 Planning Commission memorandum and are reported out to City Council under items 10.2 (a) and (b).
Delivery-Only (Retail Non-Storefront) – Recommendation 10.2 (c)(1)
Staff recommends “Delivery-Only” be added as a new cannabis business category. Currently, only the City’s 16 Registered Cannabis Businesses may apply to deliver cannabis. Adding a “Delivery-Only” category will allow businesses the ability to deliver cannabis from a retail non- storefront location to persons age 21 or older and would not be open to the public. Each Registered Delivery-Only Business must meet all local requirements (including inspection and security) and obtain local permits/licensure/authorization as well as obtain a State license to operate.
Equity Applicants – Recommendation 10.2 (c)(2)
Staff proposes to allow a maximum of 10 new cannabis retail businesses with equity business owners to register in San José. Of the 10 potential new cannabis retail businesses, staff proposes allowing only a maximum of 5 to have storefront dispensaries. Under this proposal, the number of retail storefront locations could expand from the current 16 to a maximum of 21 with potential for up to 5 delivery-only locations for a maximum total of 26 retail businesses.
5 This method is recommended by the Police Department as a way to control against concentration of Cannabis uses in areas of high crime. This is the same threshold used for determining when a new application for off-sale of alcohol must go through the Determination of Public Convenience or Necessity to receive an ABC license. Unlike the ABC process, though, this ordinance recommendation would prohibit a cannabis use outright within these areas. The exclusion area is subject to change based on annual data and would become part of the verification process for any new application.
HONORABLE MAYOR AND CITY COUNCIL
February 3, 2022
Subject: Review of Cannabis Land Use and Regulatory Provisions
When staff held outreach meetings with the City’s existing 16 cannabis businesses, some of the existing businesses mentioned they are in support of allowing new registrations for true equity business owners; however, they raised a concern San José may experience what they said other California equity programs may have seen. The concern is “big business” non-equity owners financially back and use equity applicants to establish retail locations in cannabis business- friendly cities. Then, those non-equity business owners buy out the equity applicant once the approval process has been completed thus negating the goal to see equity business owners thriving in San José. According to the industry feedback, this buy-out issue has been experienced less in delivery-only businesses; therefore, some of the existing businesses requested the City only allow equity businesses to open retail non-storefront (delivery-only) locations. Staff’s Equity Pilot Program proposal in Item 8.1 (b) will address these concerns.
Second Retail Storefront Location – Recommendation 10.2 (c)(3)
Currently, the existing 16 cannabis businesses are limited to dispensing or delivering cannabis from one retail location. These businesses are also allowed to cultivate, manufacture, and distribute cannabis. Staff recommends allowing the existing 16 businesses to open a second retail location, or relocate their existing retail location, in the proposed expanded commercial zones discussed in Item 10.2 (a) and (b). If recommendations 10.2 (c)(2) and (c)(3) are approved, the number of retail storefront and delivery-only locations could expand from the current 16 to a maximum total of 42 retail business locations.
Municipal Code Updates – Recommendations 10.2 (c)(4) & (c)(5) The draft ordinance contains a number of language changes/technical changes to update the Code with respect to the definitions, registration required, number of locations, and other administrative changes.
Assess changing the audit requirement from mandatory to random audits on varying years or as a punitive action
Staff is not proposing any changes to the audit requirements at this time. Section 6.88.600 of the Municipal Code was already updated in January 2019 allowing cannabis businesses to switch between audits (more in-depth evaluation that provides reasonable assurance) and reviews (provides limited assurance) once they receive (and maintain) an unqualified opinion on their financial operations. This amendment already provides cannabis businesses a less costly option for external audit services while maintaining controls around financial operations.
HONORABLE MAYOR AND CITY COUNCIL
February 3, 2022
Subject: Review of Cannabis Land Use and Regulatory Provisions
Concerns
The Police Department does have concerns with increasing the number of cannabis retail locations.
Youth Access: The Department is concerned youth may be more interested in trying cannabis as retail stores are located in more public-facing areas rather than in industrial areas. The Department is concerned more stores in highly visible areas will contribute to adolescent’s reduced perception of cannabis’ harmfulness.
Driving Under the Influence: The Department has concerns about increased locations and access leading to an increase in drivers operating a vehicle under the influence of cannabis. The State is funding research on this issue statewide. Field sobriety tests can be conducted to determine impairment; the precise level of THC in blood correlating to impairment has not been scientifically established. Staff will monitor development of statewide efforts in this area.
Crime: The Department has concerns related to cannabis businesses being targets of criminal activity. While San José has been fortunate to not have experienced significant violent crime in and around our existing cannabis businesses, other cities with cannabis programs have experienced violent crime involving their dispensaries. Additionally, there have been several recent high-profile retail burglaries in the Bay Area. Increasing the number of cannabis business locations increases the number of potential targets for criminal enterprises and opportunistic thieves. While the crime rate in and around our existing cannabis businesses has been low, an increased number of locations could result in an increased cannabis related crime rate worthy of consideration.
Local Regulatory Capacity: The Police Department’s Division of Cannabis Regulation is currently staffed to provide regulatory oversight for 16 registered cannabis businesses at 18 locations and their daily operations. If any of the above options are approved by City Council, the Department will review the program needs and will return to City Council with an estimate for the costs and associated fees potentially associated with the following:
• Increased staffing to initiate a new registration process and evaluate new cannabis business applications;
• Increased regulatory staffing level to appropriately monitor increased cannabis operations; and,
• Increased enforcement efforts related to illegal cannabis operations.
Non-equity Ownership Businesses: Staff recommends waiting to consider allowing new non- equity retail businesses to register (those not already operating in San José). Staff would like the opportunity to assess problems or respond to community concerns after a smaller number of new locations have been allowed, rather than discovering concerns after many new locations are operating. After an analysis is completed on the effects of any changes to the program resulting from additional retail locations established by the current 16 cannabis businesses and additional
HONORABLE MAYOR AND CITY COUNCIL
February 3, 2022
Subject: Review of Cannabis Land Use and Regulatory Provisions
equity businesses, if adopted by City Council, staff will return to City Council with potential program expansion options.
CONCLUSION
Should the City Council approve changes to cannabis zoning or the regulatory program, the Administration will develop a work plan and budget for implementing the regulatory program changes as well as include the Cannabis Equity Pilot Program as part of the overall program changes.
EVALUATION AND FOLLOW-UP
This report fulfills direction provided at the priority setting on March 5, 2019, when the City Council prioritized two items related to cannabis: then Priority #11: Review of Cannabis Land Use and Regulatory Provisions and then Priority #13: Cannabis Equity Applicant Program.
CLIMATE SMART SAN JOSE
The recommendation in this memorandum aligns with one or more Climate Smart San José energy, water, or mobility goals.
PUBLIC OUTREACH
Staff followed Council Policy 6-30: Public Outreach Policy, in that notices for the public hearings were posted on the City’s website and published in the San José Post-Record and emailed to a list of interested groups and individuals.
On January 27, 2020, staff met with representatives from San José’s 16 existing cannabis businesses for preliminary feedback on the initial draft proposal. Approximately 30 people were in attendance. Feedback from these businesses focused on a desire to open a second retail location under the revised location rules and open a second location in advance of allowing any new non-equity businesses to apply for registration. During the outreach meeting, businesses mentioned the difficulty of relocating from their current locations because they have existing leases and have invested money at their current locations.
In March of 2021, staff released a survey requesting information from the public about Cannabis land use that was available in three different languages. The survey generated approximately 950 responses. A total of 454 respondents provided 1,708 written comments, and staff has reviewed and analyzed these comments. The comments were approximately half in support and half
HONORABLE MAYOR AND CITY COUNCIL
February 3, 2022
Subject: Review of Cannabis Land Use and Regulatory Provisions
opposed to loosening restrictions on Cannabis land use. The following is a summary of the top themes in general order of frequency with the most frequent first:
• Cannabis dispensaries should be treated the same as alcohol sales and allowed anywhere alcohol sales are allowed.
• Cannabis dispensaries should be kept away from anywhere children and teens congregate (including residential areas)/concern about access to children. • Support for cannabis dispensaries in convenient and walkable areas where people shop. • General opposition to cannabis; the City should not facilitate and support its sale unless strictly for medical purposes.
• General support of deregulation of cannabis and treating cannabis like any other business.
• Concerns that cannabis dispensaries will attract crime and/or will negatively impact neighboring businesses.
• Cannabis dispensaries are acceptable in commercial areas as long as they are inconspicuous.
• Concerns about public consumption of cannabis near dispensaries.
Following the survey, staff held a virtual community meeting on April 19, 2021. Staff used all available social media outlets and put the notice on the City’s website and published in the San José Post-Record. Approximately 200 people were emailed about this meeting through the online survey when asked if they would like to receive updates on this ordinance work. A total of 12 people attended this meeting. The primary concerns raised were about taxes and how the funds raised are collected and used, and the impacts taxes had on the consumer and the market at-large. In addition, one attendee wanted to advocate for Type-7 manufacturing, which is a manufacturing process using volatile solvents, and social or public consumption/smoking of cannabis. Another attendee commented the proposed 1,000-foot buffer between Cannabis Storefront Businesses could create a situation where only one such use would be allowed Downtown.
Staff concludes the low turnout for the community meeting was likely either due to the public feeling like their comments were heard through the survey—since roughly a quarter of respondents were emailed directly about this work but few of them showed up to the meeting or emailed about the meeting afterward—or Cannabis land use is less of a concern to San José residents and workers than expected.
After the policy proposal was refined through the CED Committee meetings, staff created an informational video on the proposal, which was posted to the City’s website on September 20, 2021, and was available in four languages. Transcripts for each video were also included for each language. The informational videos were broadcast to all available social media outlets like Nextdoor and was also emailed to the estimated 200 survey respondents.
Questions, concerns, and comments from the public after reviewing the informational video include:
HONORABLE MAYOR AND CITY COUNCIL
February 3, 2022
Subject: Review of Cannabis Land Use and Regulatory Provisions
• Hours of operation for dispensary use Downtown;
• How to apply for an equity license;
• Where to find the map of possible locations;
• Clarification on whether this ordinance was still moving forward; • Concern about overconcentration of this use alongside other similar vice-type uses like alcohol;
• Concern about increases in homeless loitering around these areas; and • Possible increases in litter.
This memorandum will be posted on the City’s Council Agenda website for the February 15, 2022 Council Meeting, and a link will be sent to the Police Department’s cannabis email list.
Staff has been available to respond to questions from the public.
COORDINATION
This memorandum was coordinated with the City Attorney’s Office, Department of Planning, Building, and Code Enforcement, City Manager’s Budget Office, and Finance Department.
COMMISSION RECOMMENDATION/INPUT
On February 9, 2022, the Planning Commission will conduct a public hearing on the proposed amendments to the Zoning Code. Staff will provide a supplemental memorandum providing the recommendations of the Planning Commission meeting.
COST SUMMARY/IMPLICATIONS
Costs
The Division of Cannabis Regulation staffing is based on regulatory and enforcement operations related to 16 Registered Cannabis Businesses. The costs for the program are paid by the Registered Businesses in their annual registration fee and other fees-for-service. There will be additional costs to regulate additional businesses, and staff will monitor and return to Council with recommendations through the budget process.
Revenues
On May 21, 2019,
the City Council approved amending Chapter 4.66 of Title 4 of the San José Municipal Code to reduce the Cannabis Business Tax rate for persons engaged in the cultivation
HONORABLE MAYOR AND CITY COUNCIL
February 3, 2022
Subject: Review of Cannabis Land Use and Regulatory Provisions
(from 10% to 4%), manufacturing (from 10% to 3%), distribution (from 10% to 2%), or laboratory testing (from 10% to 0%) of cannabis. The retail tax rate remains at 10%.6
In 2020-2021, the City received $18.7 million in Cannabis Business Tax. These revenues are expected to increase if Council approves additional equity owned businesses and allows the 16 Registered Businesses to open a second retail location. Staff will monitor actual collections and bring forward recommended budget adjustments, as appropriate through the budget process.
CEQA
Negative Declaration for the San José Cannabis Business Ordinance Update; File Number PP21- 002.
ANTHONY MATA
Chief of Police
For questions, please contact Wendy Sollazzi, Division Manager, Division of Cannabis Regulation, San José Police Department, at [email protected] or (408) 537-9890.
6 May 21, 2019 City Council Meeting, Item 2.13 Amended Agenda (legistar.com)