California Cannabis: MAUCRSA and Mega Farms

The licensed California mega farms are coming.

When it comes to cultivation, one of the biggest developments in California’s new emergency cannabis regulations has to do with something conspicuously missing from the rules: a cap on the amount of land a licensee can cultivate for medicinal or adult-use cannabis.

While 2016’s Adult Use of Marijuana Act (Prop. 64) and subsequent SB 94 made clear that the new cannabis regulatory regime in California would allow for vertical integration of businesses, and that a person could hold more than one type of license, many small and medium sized cultivators and other community stakeholders lobbied hard to limit total cultivation to one acre per licensee, which followed the recommendation in the state-commissioned environmental impact report. One clue that the rule-making process was going to lean further towards business consolidation came with AB 133, which eliminated the requirement that a person holding multiple licenses maintain his or her premises as “separate and distinct” for each licensed operation.

While last month’s emergency regulations do require each license to have its own designated premises, they continue the trend towards integration in that they do not require that premises be “separate and distinct” between licensed operations. The rules further allow for concurrent operation on the same designated premises for medicinal and adult-use operations under certain circumstances. Although the rules prohibit large cultivation licenses (over 22,000 square feet of canopy) until 2023 and limit medium licenses (10,001-22,000 square feet of indoor canopy/up to 1 acre of outdoor canopy) to one per person, they do not limit the amount of specialty licenses (0-5,000 square feet) and small licenses (5,001-10,000 square feet) that any one person can hold and operate at once on the same parcel, or require any distinct separation between those licensed operations. Taken together,  this allows a single cultivator to “stack” specialty or small licenses in any amount, and operate them on the same or adjoining parcels (as long as there are enough licenses for the amount of square feet of canopy being cultivated). Effectively, this allows for the proliferation of cannabis mega-farms beginning January 1.

Understandably, there has been substantial objection over the state’s decision not to limit cultivation to one acre per licensee. Opponents of the decision argue that keeping the big players out of the picture, at least in the beginning, was an essential element behind Prop 64’s passage. One could also argue that the legislative intent behind Prop 64 and SB 94’s restrictions on medium and large cultivation licenses would be frustrated by allowing cultivators to stack small grow licenses. Proponents counter that cities and counties are still free to limit the size of licensed cultivation, as well as the number of local licenses that any one individual can operate under (and under the new rules the state will not issue any license where doing so would violate local law). And in any event, they argue that neither Prop 64 nor SB 94 expressly provide for a one-acre cap on total cultivation.

Realistically, it is unclear how advantageous a one-acre cap would be to smaller industry players in the long run. The one-acre cap theory held that smaller companies would have five years to try to recoup initial investment costs and gain a foothold in a market where there is already a surplus of supply, even as larger companies are otherwise able to pursue vertically integrated operations. But other factors may be just as important to the long-term viability of mom-and-pop operations, like access to banking and investment financing—a prospect that could be significantly improved if the state were to follow through with any of its “green banking” proposals. Until then, the most significant advantage held by larger operations is access to private financing.

It is difficult to predict what effect the new rules will have on an already-established cannabis industry in the largest state economy in the nation, but what we do know is that we have more certainty now with these emergency regulations than we did a month ago. Our California business and real estate lawyers will continue to track the effects of the new rules on California’s cannabis industry, which will continue to evolve rapidly as licensing rolls out in the new year.

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California, Licensing