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HomeMy WebLinkAboutItem 7f. Annual Cannabis Business Program Update Item 7f Department: Community Development Cost Center: 4001 For Agenda of: 5/7/2024 Placement: Consent Estimated Time: N/A FROM: Timmi Tway, Community Development Director Prepared By: Ivana Gomez, Cannabis Business Coordinator SUBJECT: ANNUAL CANNABIS BUSINESS PROGRAM UPDATE RECOMMENDATION Receive an update on the City’s Cannabis Business Program. REPORT-IN-BRIEF The annual report is an opportunity for staff to provide an update to the City Council on the overall progress of the Cannabis Program and to recommend policy and regulatory changes to improve the commercial cannabis application and operational processes. Only one application period has passed since the policy changes implemented in 2023, and no critical amendments to the program have been ident ified as being immediately needed for this program update. Therefore, staff anticipates that at the next annual update there will be recommendations for program amendments based on operational and administrative experiences. This report presents, for Council’s consideration, 1) a review of operator permit changes, 2) cannabis tax and permit fee revenue forecast updates, and 3) future program updates and cannabis industry trends. POLICY CONTEXT At the direction of Council, staff returns annually with an update to the Cannabis Business Program. DISCUSSION Background Effective November 9, 2016, the Adult Use Marijuana Act (AUMA), also known as Proposition 64, legalized the recreational use of cannabis for adults aged 21 and older in California, allowing possession, cultivation, and sale of limited amounts, while establishing regulations and taxation for the cannabis industry. On May 15, 2018, the City Council adopted Ordinance 1647 (2018 Series)1 establishing overall regulations for 1 O-1647 Zoning Amendments for Cannabis Business and Personal Cultivation (slocity.org) Page 247 of 270 Item 7f commercial cannabis activity in the City and identifying zones where various business types are allowed. The regulations established a two-step process that first requires certification of eligible business operators followed by the approval of a l and use permit for the specific site. Those regulations took effect on November 27, 2018, after the residents of San Luis Obispo voted to authorize Measure F-18 establishing cannabis business taxes for all commercial cannabis activity. At the last annual update in March 2023, Council adopted Ordinance No. 1725 (2023 Series)2, amending the Municipal Code to modify specific rules for retail storefront operations including hours of operation, delivery, and medicinal sales. Staff returned to Council in May 2023, and Council approved Resolution No. 11417 (2023 Series)3 updating the Merit Criteria for all permit types to clarify submittal requirements and points awarded to ensure fair evaluation and ranking of commercial cannabis operator permit applications. Council also approved Ordinance No. 1727 (2023 Series)4, expanding the Cannabis Business Overlay Zones to include recently annexed areas such as the Fiero Lane-Clarion Court and East Airport Areas, and Ordinance No. 1728 (2023 Series)5, adding background check requirements for owners that lease real property to cannabis operators. These updates applied to the City’s recent open application period for all permit types beginning July 1,2023, and ending August 15, 2023. Cannabis Operator Permit Changes Table 1 below summarizes current operators and operator permit changes in the City. There are currently two retail storefronts open and operating, and one retail storefront was approved during the last application period. The retail non-storefront (delivery) ceased operations in early January of 2024. Business Business Status Retail Storefronts 1 Megan’s Organic Market Open and operating in City (280 Higuera St) 2 SLOCAL Roots Open and operating in City (3535 S Higuera St) 3 Embarc Pending Planning Commission Use Permit (2410 Broad St) Retail Non-Storefront (Delivery) 4 Pure SL Closed operation (187 Tank Farm Rd) Table 1: Summary of Cannabis Operator Changes in the City 2 O-1725 amending Chapter 17.86 and Chapter 9.10 modifying specific rules for commercial cannabis business retail storefront operations (slocity.org) 3 R-11417 approving updates to the Cannabis Operator Permit Ranking Criteria (slocity.org) 4 O-1727 amending the City’s Zoning Map to expand the Cannabis Business Overlay Zones (RZ -0118- 2023) (slocity.org) 5 O-1728 amending Chapter 9.10 (Cannabis Regulations) adding requirements for owners that lease real property to commercial cannabis operators (CODE-0164-2023) (slocity.org) Page 248 of 270 Item 7f Business Closure Since the last updates in May 2023, several changes have occurred. First, Pure SL, LLC (Pure SL), a retail non-storefront (delivery) operation located at 187 Tank Farm Road in the Service Commercial Zone (CS), ceased all operations as of January 5, 2024. Pure SL was issued an operator permit in May 2021 and opened for operation in December of 2022. Their operator permit will expire on June 30, 2024, and will not be renewed. Staff has provided information to the owners regarding the Department of Cannabis Control (DCC) regulations for the termination of a cannabis business and the City’s Finance team is working on collecting taxes owed to the City. With the closure of Pure SL, the City currently has two commercial cannabis operators in operation, Megan’s Organic Market, LLC, and SLOCAL Roots, LLC, both of which are retail storefronts. As discussed in the next section, the City’s third and final retail storefront has been selected and is pursuing final approvals and authorizations to begin operations. Application Period Opened Last year, the City Manager authorized the opening of an application period for all permit types between July 1, and August 15, 2023. Permit types include retail storefront (limited to three total), cultivation (limited to spaces up to 70,000 sq. feet), retail non -storefront (delivery), manufacturing, testing lab, distribution, and microbusiness. Competitive Permit Types Retail Storefront (limited to three total) Sells cannabis goods to the public on site. Cultivation (limited to spaces up to 70,000 sq. ft.) Any activity involving the planting, growing, harvesting, drying, curing, grading, or trimming of cannabis. Non-Competitive Permit Types Retail Non-storefront (Delivery) Conducts retail sales of cannabis goods exclusively by delivery to a physical address. Manufacturing (non-volatile only) Prepares cannabis products using non-volatile compounds; may also package or repackage and label or relabel cannabis or cannabis products. Distribution The procurement, sale, and transport of cannabis and cannabis products between licensees. Testing Labs Tests cannabis and cannabis products to ensure they meet existing standards. Microbusiness Engage in at least three of the following commercial cannabis activities: cultivation, manufacturing, distribution, and retail sale (storefront or delivery). Table 2: Summary of Cannabis Operator Permit Types Page 249 of 270 Item 7f The City received a total of three (3) applications: two (2) retail storefronts and one (1) microbusiness. Microbusinesses are operations which engage in at least three of the following commercial cannabis activities: cultivation, manufacturing, distribution, and retail sale (storefront or delivery). In this case, the applicant proposed a cultivation, distribution, and retail non-storefront (delivery) microbusiness operation. The microbusiness applicant (SLOCAL Supply Co) was unable to meet the minimum required Merit Criteria points for issuance of a Contingent Operator Permit and was disqualified. Selected Retail Storefront Applicants for a competitive permit submit their application packages to be scored against the City’s adopted Merit Criteria. Upon submission of a complete application, the Cannabis Application Review Team (CART) is assembled to begin the merit criteria evaluation and scoring process pursuant to the Cannabis Business Operat or Permit Scoring Guidelines and Merit Criteria outlined therein. The CART is comprised of representatives from City Departments including Police, Community Development, Code Enforcement, Administration, and City Attorney's Office. The highest -ranking competitive application, as determined by the Council adopted Merit Criteria and as scored by the application review team, qualifies for a Contingent Operator Permit upon approval by the City Manager. Retail storefronts in the City are limited to three total, therefore only one retail storefront application could be selected. The City Manager approved the issuance of a Contingent Operator Permit to Embarc San Luis Obispo (Embarc) on February 23, 2024 . The next steps for Embarc to be able to begin operations include background checks for principals, owners and property owners of record, approval of a use permit by the Planning Commission, and review and issuance of building permits for tenant improvements. This process is expected to be completed before the end of the calendar year, with store opening expected in early to mid-2025. Cannabis Tax and Permit Fee Revenue Figure 1 below shows the Cannabis Tax Revenue actuals and budgeted amounts for FY 2020-2024. The actual revenue shown for FY 2024 is through the end of March 2024, and is on track to meet or exceed the budgeted amount. Figure 2 shows the Cannabis Permit Fee Revenue actuals and budgeted amounts for FY 2020-2024. Fee revenue for the FY 2024 is not expected to change from now until the end of the fiscal year. Page 250 of 270 Item 7f Figure 1: Cannabis Tax Revenue FY 2020-2024 Figure 2: Cannabis Permit Fee Revenue FY 2020-2024 Page 251 of 270 Item 7f Future Updates and Industry Trends Cannabis Business Program Staff will continue its review of the cannabis program, including the City’s cannabis regulations, merit criteria, application procedures, and industry trends, and will return at next year’s program update to recommend policy and regulatory changes to improve the commercial cannabis application and operational processes, as needed. State The DCC has published its first ever Strategic Plan 6 and within that, has committed to working with local jurisdictions to identify mechanisms to “strengthen and streamline local cannabis permitting programs and processes.” Specifically, the state has allocated $20 million in phased funding to support the development of cannabis programs for local jurisdictions7. The City of San Luis Obispo does not qualify for this funding; however, Staff will be looking out for more updates that would impact local jurisdictions as they come. All in all, the industry is seeing a push towards transparency, increased enforcemen t activity and publishing of that activity to the public. Federal At a federal level, there has been discussion of rescheduling cannabis from Schedule I to Schedule III under the Controlled Substances Act. Rescheduling cannabis from Schedule I to Schedule III would mean that it is recognized as having accepted medical uses and potentially lower abuse potential, reflecting a shift in its legal classification and potentially opening avenues for medical research and regulated use. In October of 2022, President Biden issued an executive order directing Cabinet level agencies to reevaluate cannabis status under federal law, and in August 2023, The U.S. Department of Health, and Human Services (HHS) published an unredacted version of its recommendation to the U.S. Drug Enforcement Administration (DEA) to consider rescheduling cannabis, with findings included from researchers at the U.S. Food & Drug Administration (FDA). Many are eagerly anticipating the DEA’s review, however, there is no concrete timel ine on when they may respond.   Rescheduling cannabis to Schedule III would provide immediate tax relief from Section 280E of the federal tax code (26 U.S.C. Section 280E) which prohibits taxpayers engaged in the business of certain controlled substances from deducting typical business expenses. Cannabis businesses engaging in commercial cannabis activity would be able to deduct business expenses on federal tax filings and use traditional banks to deposit their earnings. These implications would be impactful for the legal cannabis industry, and it is expected that the City’s current and future operators benefit from this action. Staff will be following state and federal level changes closely and pursue any changes necessary to the Cannabis Business Program as necessary for its continued administration.  6 DCC Strategic Plan (ca.gov) 7 Local Jurisdiction Retail Access Grant - Department of Cannabis Control Page 252 of 270 Item 7f FISCAL IMPACT Budgeted: Yes Budget Year: 2023-24 Funding Identified: Yes Fiscal Analysis: Funding Sources Total Budget Available Current Funding Request Remaining Balance Annual Ongoing Cost General Fund $0 $0 $0 $0 State Federal Fees Other: Total $N/A $0 $0 $0 There are no fiscal impacts related to the City Council receiving this annual report on the cannabis business program. ALTERNATIVES There are no alternatives associated with the recommendation. Page 253 of 270 Page 254 of 270