City Council
Report
City Council Meeting: June 13, 2023
Agenda Item: 7.A
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To: Mayor and City Council
From: David Martin, Director, Administration
Subject: Adult-Use Cannabis Study Session
Recommended Action
Staff recommends that the City Council:
1. Receive the presentation on key policy considerations for allowing adult-use cannabis businesses and other non-retail cannabis business types within the City of Santa Monica;
2. Discuss options for allowing adult-use cannabis sales and associated regulatory restrictions as may be appropriate; and
3. Provide direction to staff on whether to bring back changes to the Municipal Code to allow for adult-use cannabis retail businesses and non-retail cannabis business types within the City.
Executive Summary
On May 10, 2022, the City Council requested that the City Manager schedule a study session regarding whether to allow for the sale of non-medicinal (hereinafter referred to as “adult-use”) cannabis in the City of Santa Monica. Subsequent to that, in the November 2022 election, the voters approved Measure HMP, which enables the City to levy a business tax on every licensed cannabis business. The study session seeks Council direction on the following key policy topics:
1) Should consumer access to legal adult-use cannabis in Santa Monica be permitted, or should the City maintain the restriction of medicinal-only cannabis? 2) What types of cannabis uses should be allowed?
3) Should the City set a limit to the number of retailers and other uses? 4) Should only the two medicinal cannabis retailers be allowed to expand into the adult-use market, or should the City allow new cannabis retailers? 2 of 25
5) Where in the City should cannabis uses be allowed to operate? 6) Which land uses, if any, should be recognized as sensitive uses requiring a distance buffer from cannabis uses above and beyond state requirements? Background
Cannabis regulations in the State of California have been evolving ever since the passage of Proposition 215, the Compassionate Use Act of 1996 (CUA), which decriminalized the use, possession, and cultivation of cannabis for qualifying patients and their primary caregivers when recommended by a physician. The CUA did not create a state regulatory program, nor did it provide any guidelines for local jurisdictions to establish their own regulations.
The City of Santa Monica first adopted regulations for medical marijuana (medicinal cannabis) in June of 2015 as a part of the City’s comprehensive Zoning Ordinance update (Article 9 of the Santa Monica Municipal Code) which enabled up to two medicinal cannabis retailers within the City subject to a regulatory permit and selection process. All other cannabis-related uses were prohibited. The dispensaries were allowed only along limited sections of Wilshire Boulevard and Santa Monica Boulevard within the Mixed-Use Boulevard Low (MUBL), Mixed-Use Boulevard (MUB) or General Commercial (GC) zones subject to a Conditional Use Permit.
In October of 2015 the State of California passed the Medical Cannabis Regulation and Safety Act (MCRSA) which created a State licensing program for commercial medical cannabis activities while allowing counties and cities to maintain local regulatory authority. MCRSA required that the State would not issue a license without first receiving authorization by the applicable local jurisdiction.
On November 8, 2016, the voters of the State of California approved Proposition 64, the Adult Use of Marijuana Act (AUMA), which allows adults 21 years of age or older to legally grow, possess, and use marijuana for personal, non-medical “adult-use” purposes, with certain restrictions. AUMA also established state taxes on the cultivation and sale of cannabis and specifically allowed local jurisdictions to impose their own 3 of 25
taxes. Proposition 64 was approved by 57% of California voters and by 60% of the voters in Los Angeles County. In Santa Monica support was even higher at 75%.
On March 7, 2017, the City Council directed staff to prohibit adult-use commercial cannabis activities within the City, to draft an ordinance creating a regulatory permit and selection process for medicinal cannabis retailers, to amend the City’s Municipal Code to address changes in State law, and to consider options for allowing non-volatile medicinal cannabis light manufacturing uses.
On June 27, 2017, the Legislature enacted SB 94, which repealed MCRSA and incorporated certain provisions of MCRSA into the licensing provisions of AUMA. These consolidated provisions are now known as the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). MAUCRSA allows that a commercial cannabis business can operate in both the medicinal and adult-use markets from a single location though this allowance is still subject to local land use authority.
On October 24, 2017, the City Council adopted an Interim Zoning Ordinance (the IZO) adding Section 6.200 to the Santa Monica Municipal Code, which established general regulations and definitions for commercial cannabis activities, including a regulatory permit process for medicinal cannabis retailers and light (non-volatile) manufacturing, and making other changes as needed to conform with State law. The ordinance prohibited all adult-use commercial cannabis activities including retail, cultivation, testing, distribution, and manufacturing. The IZO has subsequently expired. After a prolonged selection process, two medicinal cannabis retailers were selected. One of the retailers began operations recently at 925 Wilshire Boulevard. The second retailer located at 1416 Wilshire Boulevard is still in the permitting process.
On May 10, 2022, the City Council requested that the City Manager schedule a study session regarding whether to allow for the sale of adult-use cannabis in the City of Santa Monica. It was requested that the study session include suggested changes to the City’s Municipal Code, as well as options for City Council direction on potential locations, permitting process, social equity provisions, maximum number of allowable 4 of 25
businesses, cannabis special events, and other regulatory restrictions as may be appropriate. The Council further directed staff to prepare a cannabis business tax ordinance to be placed on the November 8, 2022 ballot. Implementation of certain aspects of the cannabis tax would be contingent on future actions to be taken by the Council pursuant to the requested study session.
On July 26, 2022, the City Council voted to place a cannabis business license tax measure (Measure HMP) on the November 2022 ballot. The measure would impose a tax on all commercial cannabis activities at initial rates of 3% of gross receipts for adultuse cannabis retailers, 2% for medicinal cannabis retailers and 1% on other cannabis business types. These rates could be increased up to 10% of gross receipts at the discretion of the City Council.
Measure HMP was approved by the voters on November 8, 2022, by a margin of 66% to 34%. Pursuant to that approval and the Council’s previous direction, staff is now bringing forward this study session to explore whether to allow for the sale of adult-use cannabis in the City of Santa Monica as well as other non-retail cannabis business types. This study session shall include a presentation by staff and HdL Companies, a firm that has worked extensively on regulation, compliance, policy development, taxation, fiscal analysis, and audit issues for local governments, and shall provide the opportunity for Council to give direction to staff on potential locations, permitting processes, social equity provisions, maximum number of allowable businesses, cannabis special events, and other regulatory restrictions as may be appropriate.
Discussion
The City of Santa Monica currently allows medicinal cannabis businesses, which allows sales to individuals over the age of 18 who have a recommendation from a medical professional for the use of cannabis, but does not allow adult-use businesses, which would allow sales to anyone over the age of 21. One of the medicinal cannabis retailers recently began operations while the other is currently in the permitting process. Light (non-volatile) cannabis manufacturing was allowed by the IZO adopted in 2023 with the City receiving one application for a cannabis light manufacturer. That business has 5 of 25
since closed, and cannabis light manufacturing is no longer permitted as the IZO has expired. Medicinal cannabis retailers represent a small subset of the commercial cannabis business types allowed by the State of California which also include cultivation, distribution, laboratory testing, and other types of manufacturing currently not permitted within the City.
To address Council’s request to better understand the decisions needed to enable adultuse business, staff has engaged the services of consultant HdL Companies, who are subject matter experts on the regulation of commercial cannabis businesses by counties and cities in California.
If the Council desires to move forward with revisions to the City’s current commercial cannabis program, staff will require direction on a number of key policy areas. Additional issues for future consideration have also been identified. These additional issues do not require direction from the Council at this time, but they may be informative to the Council’s overall discussion.
Initial Key Policy Discussions
Confirming Adult-Use Cannabis as a Permitted Land Use
1) Should consumer access to legal adult-use cannabis in Santa Monica be permitted, or should the City maintain the restriction of medicinal-only cannabis? California’s cannabis regulations allow that cannabis can be sold commercially for either medicinal or recreational adult-use purposes. Medicinal cannabis is available only to persons 18 years or older who have a valid recommendation from a physician.
Medicinal cannabis patients also have the option of obtaining a State-issued Medical Cannabis Identification Card (MMIC), but this is not required. Both the physician’s recommendation and the identification card are required to be renewed every year. Only 3,199 such cards were issued in all of California in 2022. Adult-use cannabis can be sold to anyone age 21 years or older without a physician’s recommendation. 6 of 25
The State of California’s Department of Cannabis Control (DCC) may issue business licenses for either medicinal (M) or adult-use (A), or for both medicinal and adult-use (M/A) though the M/A designation is not available for cultivation. Initially, California’s cannabis program required that all cannabis and cannabis products had to be designated for either the medicinal or adult-use market through all stages of the supply chain, but later revisions have changed this so that product grown or manufactured for either market can be shifted to the other up until the point of sale. This makes the medicinal or adult-use designation largely meaningless for wholesale cannabis businesses as it does not predetermine how the product will eventually be sold.
Of over 11,000 cannabis business licenses1in California, only 1,360 are for medicinal cannabis only (12%). The rest are for either adult-use or for both medicinal and adultuse. Among the state’s 1,891 retailers (including retailing microbusinesses), only 31 are licensed for just medicinal cannabis sales.
Medicinal cannabis is estimated to make up only around 9% of cannabis retail sales in California. The primary advantage for consumers to purchase cannabis through the medicinal market is an exemption from regular sales tax only for those qualifying patients who present a Medical Marijuana Identification Card at the time of purchase (a savings of 7.25% to 10.25%, depending on the jurisdiction). The small number of patients with valid MMIC cards makes their impact on tax revenues statistically insignificant. Cannabis products labeled for medicinal use only may be packaged in quantities that exceed the 100 milligrams per-package THC limit imposed on adult-use products (1,000 milligrams per package for topical products). Qualified patients may also purchase a greater quantity of cannabis or cannabis products per day, beyond what is permitted for adult-use customers and up to the maximum amount stated on the physician’s recommendation.
Retail and Non-Retail Uses
1 The number of licenses does not reflect the number of individual businesses as a single business may hold multiple licenses.
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2) What types of cannabis uses should be allowed?
The City’s Interim Zoning Ordinance allowed for both medicinal cannabis retailers and light-industrial (non-volatile) cannabis manufacturing. The City approved one manufacturer under the IZO, but that business has since closed. The City no longer permits cannabis light manufacturing. The City allows for two medicinal cannabis retailers with only one recently commencing operation. These and other cannabis business types are discussed below.
• Cannabis Retailers: Cannabis retailers may be licensed to sell medicinal cannabis, adult-use cannabis, or both. Retailers can operate as a storefront serving walk-in customers, as a non-storefront delivery service, or as part of a microbusiness which includes at least three licensed cannabis activities such as cultivation (of up to 10,000 square feet), manufacturing, or distribution. Storefront retailers are allowed to also conduct sales by delivery, though not all do.
Currently there are 1,891 licensed cannabis retailers and retailing microbusinesses in California. Of these, 1,142 are storefront retailers, 490 are non-storefront delivery services, and 259 are microbusinesses. Virtually all cannabis retailers in California are licensed for adult-use sales. There are only 31 retailers in all of California that are only licensed for medicinal sales.
Storefront retailers tend to generate significantly higher gross receipts than nonstorefront retailers. Analysis of a sample set of businesses shows that storefront retailers average around $5 million per year in total sales while non-storefront delivery services average less than $1.5 million. As a result, storefront retailers typically generate more cannabis tax revenue for their host city.
The DCC shows 454 licensed cannabis retailers in Los Angeles County, including storefronts, delivery services, and retailing microbusinesses. We estimate that there are 30 retailers in the immediate vicinity of Santa Monica and another 100 or so within a 30-minute radius of the City. These retailers are shown in Figure 1 below. The high density or retailers in close proximity suggests that cannabis consumers in Santa Monica have options for purchasing either medicinal or adult-use cannabis within a short drive of the City or for having it delivered to 8 of 25
their door. Any cannabis tax revenue being generated by sales to City residents is currently going to the jurisdiction where the retailer is located, primarily the City of Los Angeles.
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Figure 1:Medicinal and Adult Use Cannabis Retailers in the Santa Monica Vicinity Based on the City’s population of roughly 91,000 people, it is estimated that the City of Santa Monica could support four (4) to ten (10) cannabis retailers. This assumes a very general benchmark of one retailer for every 10,000 to 20,000 people for considering an area as being ‘served’. Individual cities may have a fargreater or far-lower retail density. The number of employees and visitors to Santa Monica could also affect the demand for additional retailers. • Cannabis Manufacturing
Cannabis manufacturers produce an ever-increasing variety of products, including concentrates, edibles, tinctures, topicals, and infused (non-alcoholic) drinks. Manufacturers may produce their own raw extract on site, or they may buy extract from other licensees. Much like any other industry, cannabis manufacturers often depend upon other businesses to supply them with the various materials or components that go into their final product.
Cannabis manufacturing is a broad category that can include a wide range of different activities. Manufacturers may use a variety of methods to extract THC 10 of 25
and/or CBD, the primary compounds found in cannabis, from the raw product.
These methods may include volatile solvents such as butane, hexane, or propane (Type 7), non-volatile solvents such as carbon dioxide, ethanol, cooking oils or butter, or mechanical extraction using heat, cold, or pressure (Type 6). The extract may be processed and sold as raw concentrate such as oil, wax, shatter, or rosin, or it may be infused into edibles, topicals, tinctures, or other products.
Cannabis oil may also be loaded into vape cartridges. Both Type 6 and Type 7 licenses also allow for infusion, packaging, and labeling of cannabis products.
Many manufacturers do not make their own extract and instead buy extract from other suppliers. The Type N license allows for making infused products using extract purchased from other licensed manufacturers, as well as packaging and labeling. The Type P license allows for packaging and labeling of “white label” products, where a product purchased from another supplier is rebranded under a new name. Lastly, the Type S license allows for manufacturers to operate in a shared-use facility using non-volatile extraction and infusion, along with packaging and labeling.
Some manufacturers may handle all steps from extraction to packaging the end product in the form of vape pens or other such devices. Others may handle only discrete steps, such as making the raw cannabis concentrate, which is then sold either directly to retailers or to a Type N manufacturer who will package it into vapor cartridges or other end consumer products.
Light-industrial (non-volatile) cannabis manufacturing was initially allowed under the Interim Zoning Ordinance, but the only manufacturer to open its doors has since closed. The City no longer permits this business type as the IZO has since expired.
• Cannabis Cultivation
Cannabis cultivation can be conducted outdoors, in mixed-light greenhouses, or in fully-enclosed indoor warehouse facilities. Cultivation activities can also 11 of 25
include cannabis nurseries and processing facilities. Cultivation in urban areas is almost always limited to indoor facilities due to available properties and other land use considerations.
Indoor cannabis cultivation must be conducted using entirely artificial light.
Facilities must be designed so that no cannabis or cultivation lighting is visible from outside. Cultivation facilities are also required to install odor control equipment so that cannabis odors cannot be detected from outside the building.
Indoor cultivation facilities tend to be discreet with little or no signage to draw attention to them.
As of January 2023, data from the DCC shows 7,651 active cultivation licenses statewide, held by 3,359 distinct businesses. These licenses cover over 1,800 acres of canopy and are capable of producing over 16 million pounds of cannabis per year. The 20 largest cultivation companies hold 2,232 licenses between them, totaling 515 acres and capable of producing over 2.6 million pounds of flower per year, or enough to supply the entire statewide market.
The cannabis cultivation market in California has far exceeded its saturation point, which greatly limits new entrants into the market. More than any other part of the cannabis industry, entry into the highly competitive cultivation sector can be filled with risk and requires ample capitalization and a clear strategy to win shelf space. It is not uncommon for cannabis producers and manufacturers to have to pay for retail shelf space just to get their product in front of consumers. • Cannabis Distribution
The DCC provides two separate license types for cannabis distributors. Type 11 distributors can move cannabis products and branded merchandise between other wholesale cannabis businesses, provide warehousing and storage, arrange for laboratory testing, provide packaging and labeling of products, and can distribute finished cannabis goods to retailers. Type 13 transport-only distributors can move product between other wholesale businesses but are not allowed to 12 of 25
distribute to retailers. The DCC also allows a reduced fee for cannabis cultivators or manufacturers that only wish to transport their own product.
Perhaps more than any other part of the cannabis supply chain, distributors are greatly dependent upon the number and variety of other cannabis business types within their service area. Essentially, distributors need a certain “critical mass” of other cannabis businesses for them to serve. As a very general figure, the number of cannabis distributors statewide is roughly 25% of the number of all cannabis businesses, combined, or 1 distributor for every 3 other cannabis businesses. In addition, almost all (391 out of 392) licensed microbusinesses in California include distribution as one of their licensed activities. It is common for other cannabis businesses (cultivators, manufacturers, or retailers) to also hold a distribution license as an ancillary activity.
The business model for distributors is commonly based on a percentage markup on the price paid to their suppliers. This markup commonly averages 20% to 30%, though this can vary greatly depending upon the actual services being provided. A distributor that is only buying and reselling cannabis at wholesale may make as little as 10% or less on a transaction, while a distributor that is purchasing raw flower and packaging it as pre-rolls for retail sale may make 50% or more on such a value-added transaction.
Distributors may have annual revenues ranging from less than $1 million to over $70 million. The vast majority of distributors would fall at the lower end of that range, with those at the high end qualifying as outliers. While there is not yet an abundance of data to determine the average gross receipts for distributors, HdL has reviewed a number of pro-formas for distributors seeking licenses in other jurisdictions. These indicate anticipated gross receipts commonly in the range of $2 million to $3 million per year, with an average of $2.5 million. Though, again, this is an average based upon a very wide range.
• Cannabis Testing Laboratories
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Testing is a semi-regulatory function mandated by the State to protect consumer health and safety. State law requires that all dried cannabis flower or leaf must be tested for tetrahydrocannabinol (THC) and cannabidiol (CBD) content, contaminants, impurities and other factors before it can be sold to a manufacturer, distributor, dispensary or end user.
State law requires that testing laboratories be completely independent from any other cannabis business, and prevents them from benefitting from, or having any interest in, the results of the test or the value of the product. A person who holds an ownership interest in a cannabis testing business is not allowed to hold any financial interest in any other cannabis business types.
The DCC has so far only issued 45 licenses for cannabis testing laboratories in California. These laboratories tend to be located in areas with a large amount of commercial cannabis activity.
• Cannabis Events
Cannabis events allow an opportunity for cannabis consumers to meet and engage with a variety of cannabis retailers, cultivators, and manufacturers all in one place, similar to a farmers’ market, craft fair, or trade show. These events may or may not also allow for on-site consumption of cannabis under permitted conditions similar to a homebrew festival or wine tasting event. While growers and manufacturers can be on hand to display their products and talk with attendees, cannabis and cannabis products can only be sold at the event by licensed cannabis retailers.
The application for a temporary cannabis event must include the location where the event will be held, the dates and hours that cannabis will be sold or displayed, a list of all licensed vendors who will be participating, and a diagram showing the specific locations assigned to each cannabis vendor and all areas where participants will be allowed to purchase or consume cannabis. All cannabis events require approval by the local jurisdiction, and local law enforcement has the authority to stop the event if it is necessary to protect public 14 of 25
health and safety.
If on-site consumption of cannabis is to be allowed, the consumption must not be visible from any public place or non-age-restricted area. No alcohol or tobacco shall be allowed on the premises and smoking of cannabis shall not be allowed in any areas where smoking is otherwise prohibited by law. The local jurisdiction can choose whether or not to allow on-site consumption (or to allow cannabis events at all) and can impose additional requirements as it sees fit.
A temporary cannabis event license may only be issued for a location expressly approved for such purposes by the local jurisdiction and shall not be issued for a premises that is licensed for the sale of alcohol or tobacco. A cannabis event may not last longer than 4 days. No person under the age of 21 shall be allowed in any area designated for cannabis sales or consumption, regardless of whether that person is a qualified medical marijuana patient.
• Consumption Lounges
A small but growing number of cities have chosen to allow for on-site consumption of cannabis products at retailers or associated businesses. Such facilities are generally referred to as “consumption lounges,” though the model for their operations can vary dramatically. DCC regulations do not directly address consumption lounges as either a use or a permit type, leaving the authority and responsibility for permitting and regulating on-site consumption up to the local jurisdiction.
The DCC’s regulations for on-site consumption at organized cannabis events indicate some areas of concern that are generally applicable for local regulations.
These regulations prohibit access to persons 21 years of age or younger, require that cannabis consumption not be visible from any public place or non-agerestricted area, prohibit sale or consumption of alcohol or tobacco on the licensed premises, and prohibit the smoking of cannabis goods in any areas where smoking is otherwise prohibited by law. California’s smoke-free workplace law 15 of 25
prohibits the smoking of tobacco products in any enclosed space at a place of employment which prevents smoking in restaurants and conversely prevents preparing or serving food in a consumption lounge.
There is no defined model for consumption lounges, nor is there a clear business model for generating income or related cannabis tax revenue. Some such businesses only offer a place for retail customers to sample what they’ve purchased. These lounges appear to generate revenue only from the retail side of the operation, which in most cases is a separate space from the lounge area.
Some other consumption lounges operate as clubs where customers must pay a cover charge to get in.
Number of Retailers
3) Should the City set a limit to the number of retailers and other uses? It is common for cities and counties to apply a cap to the number of cannabis retailers within their jurisdiction. This can have the effect of limiting the concentration of such businesses within any one area while simultaneously creating significant competition to secure the limited number of available permits. Setting a cap requires that the City adopt a competitive selection process to determine which applicants can move forward for permits. Applicants who are not selected through this process may challenge the results by appeal and/or lawsuit, creating significant risk to the local licensing agency and delays in the permitting process.
A low cap on the number of retailers may have the effect of increasing the size and neighborhood presence of each store. If a single store serves a large market, that store may be bigger and may have a higher profile within the area, drawing more customers and traffic. Conversely, a higher cap (or no cap) may have the effect of reducing the impact of any one store as the same volume of customer traffic is distributed over more stores in more locations. A higher cap may also spread the economic benefits of owning and/or working within a cannabis facility more broadly within the local community.
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Caps are somewhat less common for wholesale businesses, as the statewide market is oversaturated. Allowing a higher number of wholesale businesses does not necessarily mean the City is likely to attract more (or any) of those businesses.
Existing Businesses
4) Should only the two medicinal cannabis retailers be allowed to expand into the adultuse market, or should the City allow new cannabis retailers? The City currently allows for two medicinal cannabis retailers. Were the City to allow adult-use sales, it should be assumed that these existing retailers would want to be allowed an opportunity to modify their permits to conduct both medicinal and adult-use sales.
Allowing for additional retailers would presumably mean allowing for additional (and potentially more preferable) locations that may not have been allowed previously.
Existing retailers may also want an opportunity to move their operations to these alternate locations.
The City may also hear concerns from nearby businesses and residents who were perhaps accepting of medicinal cannabis retailers but object to now allowing adult-use cannabis sales at the same locations. While all security and operational requirements are the same for both medicinal and adult-use retailers, it is reasonable to assume that allowing adult-use sales could increase the amount of customers and foot traffic.
Allowable Locations
5) Where in the City should cannabis uses be allowed to operate? Cities and counties have taken a variety of approaches in determining allowable locations for cannabis businesses. Many apply standard zoning requirements with each of the various cannabis business types being allowed within certain land use designations where other, similar activities are allowed. This approach assumes that cannabis retailers are consistent with other retail uses, that cannabis manufacturers are consistent with other light manufacturing uses, and so on. 17 of 25
Generally, storefront retailers are allowed in commercial zones while manufacturers, distributors, testing, and non-storefront delivery services are allowed in industrial zones.
Cannabis cultivation is commonly allowed in either industrial or agricultural zones, depending upon whether it is indoor, mixed-light, or outdoor. The various cannabis business types may be either principally permitted within these zones or allowed with a conditional use permit. Zoning for cannabis microbusinesses may be more problematic as retail uses are typically not allowed in industrial zones, and cultivation or manufacturing uses are typically not allowed in commercial/retail zones.
Some jurisdictions take a more prescriptive approach where cannabis activities are allowed only within a defined overlay zone created for that specific purpose. The City has specified that medicinal cannabis retailers are currently allowed subject to a Conditional Use Permit in a subset of the MUB (Mixed-Use Boulevard), MUBL (MixedUse Boulevard Low), or GC (General Commercial) zones as described below:
• Mixed-Use Boulevard District along Wilshire Boulevard between Lincoln Boulevard and Centinela Avenue;
• General Commercial District along Santa Monica Boulevard between Lincoln Boulevard and 20th Street; and
• Mixed-Use Boulevard Low District along Santa Monica Boulevard between 23rd Street and Centinela Avenue.
Light (non-volatile) manufacturing was previously allowed under the Interim Zoning Ordinance within the Industrial Conservation (IC) zone, or with an approved Conditional Use Permit (CUP) within the Office Campus (OC) zone, consistent with other similar activities such as canners, roasters, breweries, wholesale bakeries, and frozen food manufacturers. One such manufacturer opened but has since closed, and the City no longer permits cannabis light manufacturing uses as the IZO has expired Buffer Requirements
6) Which land uses, if any, should be recognized as sensitive uses requiring a distance buffer from cannabis uses above and beyond state requirements? 18 of 25
The State of California prohibits locating any cannabis businesses within 600 feet of any K-12 schools, daycare facilities, or youth centers. These sensitive-use buffers are provided as a default, but local jurisdictions are allowed to increase or decrease the minimum distance. Additionally, local jurisdictions have the authority to recognize additional types of buffers, such as parks, libraries, drug rehabilitation centers, and playgrounds.
Some jurisdictions have chosen to increase the buffer distance to as much as 1,000 feet in some instances or to reduce them to as low as zero. Other local jurisdictions have chosen to vary the buffer distances for different sensitive uses or for different cannabis use types or apply targeted buffers for specific locations such as a particular plaza or downtown area.
Setting overly restrictive sensitive use buffers can greatly limit the allowable locations for a cannabis business and can result in a de-facto ban or, conversely, in a high concentration of cannabis businesses in a handful of areas. Restricting the allowable locations can also have the effect of increasing the perceived value of those parcels to where property owners demand an unrealistic premium for leasing or buying the property.
Zoning and sensitive use buffers are not the only tools available to the City for resolving neighborhood concerns with cannabis businesses. The City may also impose requirements relating to signage, lighting, hours of operation, façade design, on-site security, parking, or other physical or operational details.
Future Policy Considerations
Social Equity
Social equity in cannabis seeks to recognize the long-term negative impact that the criminalization of cannabis has had on minority communities resulting from the enforcement of federal and state laws related to cannabis use and possession.
Research from communities across the United States has consistently demonstrated the disproportionate impact of cannabis enforcement on minority groups despite similar 19 of 25
cannabis usage rates. In particular, African Americans have been negatively affected by higher rates of arrest and incarceration for cannabis-related activities.
The consequences of a criminal conviction and incarceration include the permanent loss of property, disqualification from employment opportunities, reduced earnings potential, exclusion from public benefits such as housing assistance or student financial aid, and other life-altering impacts. The goal of cannabis social equity is to help ensure that the communities most impacted by federal and state cannabis enforcement policies are provided an opportunity to benefit from the newly legalized industry.
Many cities and counties have sought to develop cannabis social equity programs as a means for reducing barriers to entry into the commercial cannabis industry for communities and individuals most impacted by the war on drugs. For social equity programs to be meaningful, however, they must be based upon data to identify those communities within each jurisdiction that have historically been most adversely impacted.
For this reason, it is common for development of a social equity program to be preceded by a detailed study or report that analyze factors such as disproportionate contact by law enforcement, incarceration rates, or other metrics. Cannabis equity studies are commonly conducted by local community foundations, universities, or other research organizations, with significant outreach to local community members. The State of California through the Governor’s Office of Business and Economic Development (GOBiz) has historically provided annual funding to local jurisdictions to assist with development of cannabis equity studies.
Once the local jurisdiction has identified affected communities, there are numerous policy options for promoting equity. Policy options may include application criteria specific to equity applicants, fee waivers, business development assistance, workforce training, assistance with accessing startup capital, business mentorship, assistance with expunging cannabis-related criminal records, and utilizing cannabis tax revenues to fund community reinvestment. Regardless of what benefits the City offers, it is important 20 of 25
to recognize the challenges that other cities have faced in implementing local cannabis equity programs. These challenges can include manipulative behavior by non-qualifying individuals taking advantage of the program, sunk costs for applicants who are ultimately unable to obtain a license, and limited staff resources to develop and implement a comprehensive program.
In addition, there are unique barriers to entry into the cannabis market that make the push for equity in the industry particularly challenging relative to other business types.
These barriers include startup costs that can approach or exceed one million dollars, intense competition for a finite number of licenses, and limited availability of real estate within eligible zones of the city. Although significant, these challenges should not act as a deterrent to creating a cannabis equity program. They simply point to the need for policymakers to carefully think through the parameters of an equity program which starts with development of a cannabis equity study.
Selection Process
Cities have taken a variety of approaches to the selection and permitting process for cannabis businesses should the community cap the number of outlets in the jurisdiction.
Application processes may be tailored to provide merit-based ranking or a lottery where appropriate for awarding a specified number of permits, or to provide a quality assurance standard for those business types where there is no such limit. The process may include specific evaluation criteria to ensure that applicants have addressed all requirements before being allowed to move forward to the permitting process. The application process can be designed to accommodate a variety of selection methods:
• Merit based: Applicants are ranked according to their score. Top-ranked applicants are selected to move forward to the permitting process, consistent with the number of permits available.
• Equity: Priority is given to individuals who qualify for the cannabis equity program, as defined by the equity study.
• Lottery: All applications scoring above a minimum baseline are entered into a drawing from which applications will be selected at random, consistent with the 21 of 25
number of permits available. Those applications selected will be allowed to move forward to the permitting process.
• First come / first served: Applications are reviewed and scored in the order they are received. All applications scoring above a minimum baseline will be allowed to move forward to the permitting process, until the maximum number of permits available has been reached.
Determining the most appropriate process depends upon the number of permits available and the anticipated demand for those permits. Development of the application process is commonly done administratively and is subsequent to development of the regulatory ordinance.
Affected City Departments
Administering and regulating cannabis businesses involves a variety of common local government functions. In Santa Monica it is likely that the business licensing and payment of any cannabis business taxes may be assigned to the Finance Department.
Location-specific criteria, permitting, land use entitlements, and tenant improvements would be addressed by Planning and Building and Safety. The Fire Department and Code Enforcement may conduct occasional inspections. Some jurisdictions choose to place certain regulatory roles within law enforcement, which may include POST certified officers; this can greatly increase the cost for these regulatory services.
Cities and counties have a variety of options for how they administer cannabis regulatory programs. Some jurisdictions assign each aspect of regulatory oversight to the appropriate department as described above. Others place primary oversight with a single department or division. Still others choose to develop a dedicated Cannabis Division that has responsibility for all aspects of oversight.
The decision of how to administer the cannabis program could depend on the number of cannabis businesses and the desired level of regulatory oversight. Creation of a dedicated Cannabis Division would depend on the number of businesses and whether it would justify the number of staff positions and resources required. 22 of 25
Other agencies may also have a regulatory role. Additional inspections may be conducted by Los Angeles County Department of Public Health or County Agricultural Commissioner.
In developing a cannabis regulatory program, the City should anticipate the impacts to staff time and other departmental costs associated with the permitting, regulation and enforcement of those businesses. Cities commonly develop cost recovery fees adequate to cover all direct costs, which may include any or all of the following:
• Costs associated with the development of a commercial cannabis regulatory program.
• Costs associated with the review and permitting of individual cannabis businesses.
• Costs associated with inspections, audits, monitoring, and permit renewals. • Costs associated with mitigating external impacts to the community or the environment.
• Costs associated with enforcement and appeals.
Summary of Key Policy Questions
1) Should consumer access to legal adult-use cannabis in Santa Monica be permitted, or should the City maintain the restriction of medicinal-only cannabis? 2) What types of cannabis uses should be allowed?
3) Should the City set a limit to the number of retailers and other uses? 4) Should only the two medicinal cannabis retailers be allowed to expand into the adult-use market, or should the City allow new cannabis retailers? 5) Where in the City should cannabis uses be allowed to operate? 6) Which land uses, if any, should be recognized as sensitive uses requiring a distance buffer from cannabis uses above and beyond state requirements? Past Council Actions
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Meeting Date Description
6/23/15 Ordinance Repealing the Existing Zoning Ordinance, Chapter 9.04 of Article 9 of the Santa Monica Municipal Code, and Adding a New Zoning Ordinance, Chapter 9.01
Through Chapter 9.52, to Article 9 of the Santa Monica
Municipal Code to Adopt a Comprehensive Zoning
Ordinance; Repealing Chapters 9.08 Through 9.72 of Article 9 of the Santa Monica Municipal Code and Adding New
Chapters 9.53 Through 9.68 to Article 9 of the Santa Monica Municipal Code to Establish Land Use and Zoning Related Provisions; and Implementing the New Zoning Ordinance By Repealing the Existing Official Districting Map and Adopting a New Final Official Districting Map.
3/7/17 Study Session on Cannabis Regulations.
10/24/17 Second Reading and Adoption of Interim Ordinance Replacing the Term "Medical Marijuana Dispensary" with
"Medicinal Cannabis Retailer" Throughout the City's Zoning Ordinance, Chapter 9.01 Through Chapter 9.52 of Article 9 of the Santa Monica Municipal Code; Creating a Definition for "Medicinal Cannabis Retailer" to Replace the Definition for "Medical Marijuana Dispensary" to Conform With State Law; Removing Certain Requirements for Medicinal
Cannabis Retailers for Consistency with State Law and to Allow for Separate Regulation and Rulemaking; and
Modifying the Definition of "Industry, Limited" to Allow for Medicinal Cannabis Light Manufacturing.
5/10/22 Request of Councilmembers Negrete, de la Torre, and Brock that the City Manager schedule a study session as soon as practicable regarding whether to allow for the sale of
nonmedicinal cannabis in the City of Santa Monica, as the City currently allows for the sale of medicinal cannabis. The study session shall include suggested Municipal Code
changes, as well as options for City Council direction on potential locations, permitting process, social equity
provisions to make legal cannabis business ownership and employment opportunities more accessible to low-income
individuals and communities most impacted by the
criminalization of cannabis, and any other regulatory
restrictions as may be appropriate, including the maximum number of medicinal and nonmedicinal cannabis
establishments in the City that are recommended. Finally, the study session shall also include municipal code changes that are necessary to allow for Cannabis-themed special events in specified locations in the City.
7/26/22 Ballot measure for business license tax on the sale, distribution, delivery, and consumption of cannabis.
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Environmental Review
No environmental review under CEQA is required at this time because this study session will not result in direct or indirect physical changes in the environment.
Financial Impacts and Budget Actions
There is no immediate financial impact or budget request as a result of the recommended action today. Staff has not included tax revenue projections associated with Measure HMP in the FY 2023-25 Biennial Budget or five-year forecasting and has not included projected fee revenue or resource needs associated with the implementation of a cannabis retail presence. A review of activity in other jurisdictions suggests that gross receipts may be in the range of $2 million to $3 million per year, with an average of $2.5 million, resulting in new tax revenues of $75,000-$250,000 a year per licensee. Staff will return to Council if specific budget actions are required in the future.
Prepared By: Tony Kim, Principal Planner
Approved Forwarded to Council
Attachments:
A. June 23, 2015 Council Meeting Zoning Update Adoption Council Report (Web Link)
B. March 7, 2017 Council Meeting Study Session on Cannabis Regulations (Web Link)
C. October 24, 2017 Council Meeting Medical Cannabis Retailer Interim Ordinance (Web Link)
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D. May 10, 2022 Council Meeting Councilmember Request for Study Session (Web Link)
E. July 26, 2022 Council Meeting Ballot Measure for Business License Tax on the Sale, Distribution, Delivery, and Consumption of Cannabis (Web Link) F. Written Comments