The city tweaked the rules for cannabis business permits, in hopes of helping smaller businesses get licensed more easily, but also added a loophole that could hasten Big Marijuana buying up smaller shops.
There is an ongoing ‘dad joke’ in the legal marijuana era where lawmakers intentionally introduce or schedule votes for their cannabis legislation on April 20, a.k.a. 4/20. It did not get many headlines that Mayor Breed did the same this year, with a bill that hoped to strengthen the city’s Equity Program — a program that aims to “create business opportunities for those negatively impacted by the War on Drugs” as opposed to the big multi-state chain operators that are generally dominating this nascent legal pot industry. After months of wrangling through committees, Breed’s new cannabis permit tweaks passed the Board of Supervisors unanimously last week.
These changes probably will not affect you, the casual marijuana dispensary shopper (unless you specifically prefer to shop at small, locally owned shops rather than chain retailers). But as the smaller, local operators have tried to compete with the Big Marijuana chains, some local owners have decided that if you can’t beat ‘em, join ‘em. That is, they "partner" with a large chain as the local equity owner, in a partial ownership stake of one shop, allowing the large chain to claim they are a local equity business.
But the locals are sometimes outmaneuvered by their more savvy, vulture capital “partners.” Consider the case of Union Square’s former John Varvatos location dispensary, which after local approval, got sold to big marijuana conglomerate High Times. The local owner got shafted in the deal, telling SF Weekly he was turned into a “straw CEO” and that “I’m the CEO of my company and nothing has come across the desk of my business.” Meanwhile, the High Times deal imploded and the local owner lost his lease.
Breed’s new legislation hopes to avoid similar outcomes. “We’re looking at some fundamental and very strong equity program enhancements,” SF Office of Cannabis director Marisa Rodriguez tells SFist.
These “enhancements” do not just affect cannabis dispensaries. San Francisco has all manner of other, less visible permitted marijuana-handling businesses, like delivery services, testing labs, legal indoor pot grows, and even the event producers who coordinate sales at events like GrassLands at Outside Lands.
But one of the new changes could paradoxically help the big chain brands dominate the local scene. According to a press release from the mayor, the new legislation “Shortens the time period for a transfer of more than a 50% ownership interest in a Cannabis Business from ten years to five years.”
Local lawmakers chose the ten-year rule as a gate to hold back formula retail chains. “Legislators wanted to make sure that these businesses had time to really dig their roots in and establish themselves before Big Canna came and wiped them out,” Rodriguez explains. “They really wanted the businesses to be, in essence, San Francisco businesses.”
But she supports the shortened timeline. “Five years, I think, is a reasonable amount of time,” she tells us. “We’ll see those who want to continue to persist as these unique, smaller cannabis businesses, and then others will grow in different ways. This provides flexibility.”
But part of that is the flexibility to sell out to a big chain more quickly. The legislation takes that into account, and essentially tries to extract a larger pound of flesh from the big-bucks buyer, and then reinvest that larger amount into local interests. If the larger business buys out a stake of larger than 20% from the local equity owner, there are a number of concessions they have to make.
“One of them is that this business can contribute the equivalent of 1% gross revenues to one or more community organizations that've been negatively impacted by the War on Drugs,” Rodriguez says. The legislation itself calls for the buyer “to provide hiring, training, and mentorship and provide other forms of support to cannabis equity businesses or local organizations,” but one wonders if clever attorneys could find ways to minimize that investment.
Some of the other changes will clearly benefit small, local businesses. One new rule puts sole proprietors at the top of the permitting priority stack. “If you’re a sole proprietor, you should be prioritized even more within the equity framework,” according to Rodriguez, “Because you don't have investors to lean on.”
Another change is that smaller operators can get “incubator support” (one of those ‘pound of flesh’ measures forcing larger companies to support smaller businesses) before the smaller operator has actually received their permit. “It used to be you couldn't receive incubation support until you had a permit. This was really to protect against people from taking this money,” she says. “They could vanish.”
Nearly four years into the legal marijuana experiment, it’s clear no one is trying that scam, because the initial investment is larger than any potential ill-gotten reward. Moreover, we’ve learned that getting the permit is far more expensive and time-consuming than we’d anticipated. The proposed Flore Store dispensary across from Cafe Flore, for instance, was approved by the Planning Commission more than two years ago. But they’re still struggling in bureaucratic red tape to get the state and local cannabis retail permits.
“If you’ve gone through the planning phase of your application and now you’re in the build-out phase, you’re committed to this operation,” according to Rodriguez.
It’s important to remember we are the first generation to try this grand undertaking of legal cannabis. And for all its warts, the timing has been fortunate. During the pandemic period, 17 new cannabis businesses have opened (and hired staff!) in San Francisco. It’s not like there’s much competition for those empty storefronts they're taking over, which makes cannabis a rare economic bright spot under COVID-19.
San Francisco is going out its way to try — try — to structure the local cannabis industry as equitably as possible. That means it’s likely we sometimes will get stoned in by unintended consequences. And in those cases, we can hopefully hash out further legislative fixes.
Image: Mikaella D. via Yelp