On July 25, 2018 we presented all of the information you will need to get your Los Angeles Cannabis Business licensed and started.
If you have any specific questions, you can contact us to get started.
You can watch the full webinar here:
Full Webinar Transcript:
To get started with your cannabis business, please visit greengrowthcpas.com and click the get started button or give us a call at 1-800-674-9054. We look forward to helping you start and grow your cannabis business.
So welcome to our first of many webinars series that we’ll be covering as it relates to licensing, business structuring, fundraising. Pretty much everything as it relates to starting your cannabis business. I’m Derek Davis. I’m a CPA at Green Growth CPAS and I’m also joined here with Chris Russell.
Hey everyone. Chris Russell here, finance manager at Green Growth CPAS. Pleasure to have everyone today excited to share some information with you about the new aspects of the Los Angeles Licensing Package, and we’ve been fortunate to support a large number of clients through the licensing process here in California and other states as well. We’d love to help you get a business started here in Los Angeles. For anyone looking to connect with us directly after this Webinar, please visit the Green Growth CPAs website (GreenGrowthCPAs.com). You’ll find the Get Started form there, complete that form, and our team will be in touch with you directly to learn more about your situation, how we can help support your business.
Thank you for that, Chris. So with that, we will get started. I see that there’s a lot of questions as it relates to phase two versus phase three, for those of you that are completely new to the industry, phase two, maybe more relevant to you if you have no cannabis experience. But what I would say is that what you’ll learn during this process, you can definitely apply to future phases as they open up. So while this may not directly relate to you, if you have not been in business prior to January, first 2016 in the city of Los Angeles, what I would say is that all the information that you gather from here, it will help you start your business once phase three opens up in the city. So with that, I will get started. So our agenda, we’ll briefly go over who we are as a CPA firm that specializes in the cannabis industry.
We’ll talk about the department of Cannabis Regulation, also known as the DCR and cannabis related issues in the city of Los Angeles. We’ll cover getting a cannabis license in Los Angeles, the approvals and timelines, the different types of licenses that are available, the application requirements, timeline and updates. We’ll briefly cover fees, zoning violations and penalties as well as the social equity program.
So yesterday there was a phase two workshop that was being held by the DCR for those of you that attended, it was a great information and for those of you that were unable to attend, we’ll cover all of those aspects today so you will be completely in the know.
So a little bit about us. We are a CPA firm. I personally been licensed to practice accountancy in California since 2012. I have a half a decade of experience at the big four public accounting firms, testified on Capitol Hill in 2015 regarding tax policy reform.
And I’ve been involved in the cannabis industry since 2010 when he first came out and it was a big issue. This was also in conjunction with California trying to legalize cannabis and become the first state in the nation to legalize cannabis, but unfortunately that proposition failed. And so, here we are today as a finally legalized market.
So let’s talk about cannabis in Los Angeles. Measure M, which was the most comprehensive overview regulation that passed. It was passed in March of 2017 and it pretty much gave the city council before authority to regulate cannabis within the city of Los Angeles as a result of measure and passing. They also established the Department of cannabis regulations and it’s a five member committee that’s responsible for the, cannabis regulatory framework as well as implementations, licensing and all that good stuff.
What’s slightly funny is that they mentioned last night that they’re up to a staff of 10 now, but when you think about it, you have 10 people managing a market that’s roughly the size of Washington or Colorado. While 10 people may seem like a lot in relation to other states, it’s really small.
So some key aspects of Los Angeles DCR is that they are responsible for the business application process, a determination of the applicants administering as well as coordinating the auditing and inspection for licensed cannabis related businesses and enforcing compliance. Compliance is really, really important not only in Los Angeles but across the nation as more states begin to pick up some form of regulatory framework. So it’s really important that you fully understand the rules and requirements because those companies that are set up with a compliance focus, minds are those companies that will win.
Here’s a broad overview on the process of getting cannabis license, you first have to determine where you fit in the three phases. Phase one was for pre-ICO companies, or dispensary’s as they’re commonly referred to as.
So what’s that mean? That means that you were generally in business prior to 2007, you paid all the taxes, so as under the Pro215 regulations. So you had this collective model and you’ve been in business and at least in good standing for quite awhile.
Phase two, however, is for those operators that have been in business prior to January, 1 2016, so many of you would say, “hey, you know, if you’re illegal operator and you’ve been in business when you clearly weren’t in compliance, why are you getting priority?” And that’s a very common concern. But I believe the DCR was trying to reward those companies that had been in for awhile and make sure that they can continue operations and continue to thrive.
Phase three will be for those that are completely new to cannabis, no experience, but they want to get involved in the industry.
So the process for getting the license is you have to figure out at the very forefront where along the phases do you fit? Have you been in the industry for awhile or are you brand new? If you’re brand new, phase three might be your best avenue.
If you’ve been in the business for a few years, then phase two might be for you. So once you figure out where you fit on the phases, then you can determine, okay, let’s go for a license. So look this Webinar will be specifically for phase two applicants for those individuals who’ve been in the business prior to January1, 2016 and naturally once phase three comes online, we’ll see. We’ll do a Webinar to cover that as well. So if you are going to apply for a license, they will become available July 31, 2018 at 5:00 PM. That’s the latest news that we have as of last night. Of course this can change, but that’s what the DCR had stated. So we’re going to rely on their back on their statements to apply for license.
Once the applications go live, you can apply there to apply for a cannabis related licensed in the city of Los Angeles retail commercial Cannabis activity or micro business cannabis activity. The application period, as they stated yesterday, will be open for about 60 days. So they are targeting from August 1st is when the first day that they will accept licenses until the end of September. That being said, however, I think they’re gonna really push out the deadline. One of the things that we’re going to cover in this Webinar is the social equity component. They weren’t very clear yesterday on who can apply for the social equity, you know, they were saying things such as, you know, you could provide your school’s transcripts to show residency requirements. So you know, there’s a lot of different things along the way to show that you’ve been operating in Los Angeles that aren’t very clear. And I think the less clear it is, the more or the harder it is for the city to approve or deny applications. But assuming that they have this process streamlined, you’re looking at about a 60 day open period for phase two.
This is really important, which is how large is your facility. If your facility is going to be over 30,000 square feet, you’re going to have to go through a lot more processes and you’re going to have to get a lot more approval than if your building’s under 30,000 square feet. So if you’re looking at a couple of buildings and you see something that’s 28,000 square feet or 32.000 square feet, you have to really ask yourself do you need that extra 4,000 square feet? Because if you don’t, it’s going to be a lot easier to push your application through without hitting that $30,000 threshold. So these are generally the types of licenses that are available. So you have the type A, which is the adult use of the Type M, which is the medical use for those of you that are teetering back and forth. What I would probably recommend is you look at other legalized states, let’s say Colorado for example, to see how sales have have worked out after they’ve implemented full scale legalization.
What you’ll generally find is adult sales will soon surpass by a factor of two to three x medical sales. Why is that? Even though it’s more expensive, is because it’s easier. People are lazy. What we find is that people will generally not care to pay the additional taxes, because it’s just, they don’t want to have to go and get a medical marijuana license and one of the most important things to remember now is that oftentimes to get out of the sales and use tax, you need to get the county issued medical marijuana id card. So you have to go down to the county, you have to apply, you have to give them a headshot. It’s a huge and drawn out process that over 90, let’s say 98 percent of people will not do because it’s just too much work. So broadly speaking, I think it’s generally safe from a sales and growth perspective to go after the adult market and potentially stay away from the medical market.
So the types of commercial activity, you have the type 10, which is the retail, you have the type 9, which is non-storefront retail. And then you also have the type 1 through type 5 licenses. The one thing that makes sure that you’re aware of is that the city of Los Angeles generally does not allow for mixed use lighting. And if you’re thinking about going for a cultivation license in Los Angeles, I would generally say don’t do it. Why? LA is really expensive. Real estate is very, very expensive here. And what we’re seeing with a lot of our cultivation related clients is that it’s a drive to the bottom in terms of pricing. So you know you’re going to be operationally at a disadvantage and also financially a disadvantage if you have pay high rent, higher electricity costs, you’re using city water, it’s usually more operationally efficient if you go to lower cost jurisdiction, you know, let’s say Humboldt County, Trinity County, Mendocino, generally land is cheaper there and you can get well water, and it’s more efficient.
So it kind of works hand in hand that LA is not the biggest fan of cultivation right now because it’s also not financially secure. So additionally there are some other license types that are available. S the ones to consider is type 6, which is manufacturing, type 7, which is also manufacturing. The main difference is when you think about manufacturing is whether you’re going to do volatile nonvolatile extraction and then type N and type P. So a type N and P licenses are really fascinating. They also kind of fall in line with the type S. Let’s say these are like the coworking model such that you know, you don’t have to, you’re rebranding repackaging, you know, someone else is doing the manufacturing, but you have a strong consumer audience and you just slap your label on it. You’ve pushed the products out.
This is a really great way for people to get up and running without having to spend a tremendous amount on capital assets. Especially when you look at extraction, you know, some of these equipments can run you between half a million, a million dollars. So if you’re on a little bit of a tighter budget, you may want to think about some of these alternative license types to just get your product out on the market approved product market fit. And then from there you can think about going potentially downstream and doing your own manufacturing activities. The other types, of course you have testing and distribution. The quick caveat on testing is that if you have a testing license and you own other license types, you cannot have more than 20 percent ownership in the testing license. The reason why California specifically did this way, or structured licensed types this ways, they wanted to make sure that there was no conflict of interest with the testing as well as the production, right?
Because if you’re doing testing and production, you have a conflict of interest such that if your product fails, you can still say that it’s approved even though it’s not just to make sure that your product goes to market. So for that license types specifically, it has to remain as a separate entity. And so if you’re thinking about, you want to also go into testing as well as manufacturing distribution, branded products, you need to make sure either you don’t have a majority interest in the non testing activities or you have a minority interest and non management responsibilities and the testing company. So there’s a lot of requirements that you have to abide by for the cannabis operate for the phase two licensing and we’ll cover them kind of broad detail, but more specifically after this presentation we’re happy to set up free consultation calls and go over the details with a little bit more description.
We just want to make sure that for today’s discussion, we covered the broad topics so people know where they stand. So for applicants, they obviously have to show that they’ve been in business prior to 2016, that they pay their taxes that were reasonably applicable. They showed due diligence with the required regulations.
So for example, the city of Los Angeles, depending on where you fall on the supply chain, you have to pay either five percent or up to 10 percent tax per thousand dollars of gross receipts. The city of Los Angeles did bump down the rate slightly for medical licenses in terms of the amount of taxes that they have to have to pay. However, it’s important to note that based on where we’ve seen historical sales of other legal states paying a little bit more in taxes, but being able to access a much broader market is generally worthwhile.
So let’s go over some of the, the requirements you have to show where the physical address of both the business premise and the cannabis activity, where we’re located and where it was conducted. One of the most interesting aspects that came out of yesterday’s that you could potentially apply for phase two without a location. Now, this is huge news, right? Because if you look at other cities, let’s say, you know, West Hollywood or Culver City, you oftentimes have to show when you apply for a city license, you have to show that you either own the building or the landlord is okay with you operating cannabis on that facility. You need to have an architectural design layout. You have to have the security plan layout. You pretty much have to show exactly how this company will operate. If it is granted the license.
Now, that’s generally huge barrier to entry. And if you look at cities such as San Diego, the city took forever to roll up their actual licensing almost a year. And so what happened is, you know, there’s a big rush to apply for a license. You secured the lease, you started paying rent, and then the city just dragged its feet on licensing. So you know, as a potential business owner, you’re losing money every single month by paying rent and you don’t know whether or not you’re actually going to get the license. So this is really cool that the city of La will potentially allow for you to apply without a physical presence being established. That being said though, if you do make it further down the application of licensing stages, what will then end up happening? Is you’ll of course have to show where your business will be located, the security plan, fire and safety and all that stuff.
You could potentially delay that a little bit. I personally liked that approach just because I think it provides more flexibility and less risk, but it was slightly unclear if the city will pay preference to those that have a complete application. So, you know, you go in and you apply, you have the building, you have to lay out, you have the architectural plans, you have security plans. It’s not clear if they’re gonna allow preference for those types of above, those that are implying without a license and some other details, you know, you’ll have to have the address for the applicant, telephone number, website, if applicable. Obviously email address everyone who applies all the owners of the business while all of these have to undergo a background check and we’ll cover that in a little bit more. Details relates to the social equity part.
Then you’ll, you’ll have to make sure that there’s not undue concentration in certain neighborhoods. So what that means is, you know, they don’t want to have, let’s say in the warehouse district of downtown LA, they don’t want to have, you know, 15 cannabis operators all lined up. So you’ll want to also obviously have your organizational structure. So are you an LLC, are you an S-Corp? Are you a C-Corp?
Just very broadly speaking to taxes, which is you know CPA, this is what I do day in, day out for tax liability protections. You oftentimes are starting to see a lot of C-Corps in California. The reason being is that if your company goes under or undergoes an IRS audit and there’s a huge adjustment because of tax code 280E, they could potentially levy the tax on the corporation itself.
So, C-COrps are fully enclosed. Whereas if you’re a pass through entity, let’s say an LLC or an S-Corp and you undergo a tax audit, they could potentially assess that liability onto the individual owners. That’s all talk about for taxes today just because it’s a huge other topic and the focus of today is Los Angeles cannabis licensing. But if you have any questions on how to structure your company as it relates to taxes specifically, then please feel free to reach out. We’d be thrilled to help you in any way we can.
So another thing that you’ll want to show is obviously proof of funds or financial viability. You know, if you’re applying during the phase two and you only have $20,000 in the bank, you know that’s probably not going to look in your best interests. And I do understand that a lot of pushback and a lot of feedback we get in the space is that cannabis right now is still a rich man’s game.
So you know, historically it’s the people that own the buildings. I have a couple of million dollars in cash are generally the ones that get licensing. And I think how the DCR is addressing this is by implementing the social equity program.
So one of the key things with regards to phase two is you want to show that you have a business tax certificate, right? And a valid seller’s permit. You know you registered with the city, you know, even though at the time it seems a bit crazy that you’re registering with the city knowing that what you’re doing is potentially federally illegal, but you know, that’s one of the rules of operating in Los Angeles. And so you also want to show the valid seller’s permit and your paying all sales tax for those of you that are not on the retail front.
So let’s say you’re a manufacturer, a branded product, anything that does not sell directly to consumers, you want to always make sure that you provide people with your resale certificate. If you don’t do that then you undergo a sales tax audit, they could potentially say, “hey, you sold all these products to these customers, but where they actually end consumers or are they businesses?” And if you didn’t show compliance with the resale certificate, they could say that, “hey, you owe sales tax on all your sales” and sales tax obviously varies based on city to city, but it could be upwards of 10 percent off your top line. So, you know, it’s really, really important that if you are not a retailer, (ie not selling to consumers) that you always provide your reseller certificate. Obviously, one of the other requirements is you want to show a proof of liability insurance as a summary for your security plan, a description of how you will abide by the track and trace program.
And for those of you that aren’t too familiar with track and trace, it’s a huge beast and you have to use metric that was the company that scored the contract with the state of California. One of the most important things when thinking about a location, if you are going to apply without a location in mind, is that you want to make sure that abides by the zoning, right? And there’s specific zoning maps that are available in Los Angeles County’s website, so it’s just really important before you go into a lease that you make sure that it’s in the zoning areas. Another thing that you also want to think about potentially and putting in your lease as you want, you might want to think about having a contingency clause, right? So you don’t want to put yourself in a one year lease if you don’t get the license, oftentimes the landlord may make you pay more money, right?
So you know, for them to want to hold you hold the building for you, they’re going to double the rent, until you know that your license is secured and then they can drop the rent rate down. But, from a liability perspective and as an operator perspective, the worst thing you can do is stick yourself in a one year lease or even buy a building and not get the license. So that’s really kind of worst case scenario.
Another thing to potentially think about, if you do get the licenses, if the landlord would be open to a lease to purchase option. Someone once told me that if you don’t own the land, you don’t own the business and that’s, that can hold very true in the cannabis space, especially if you’re on the retail front, you know, people know your location, they, it’s super convenient, they know where to go. And then all of a sudden one day the landlord pulls the rug from under your feet. And that can be very unfortunate situation broadly speaking, for specific requirements.
If you’re a retailer, you must have the, provide the retailer plan for delivery. You must provide the delivery plan in summary of how you will meet all of the operational requirements. We’ve gotten a lot of questions that I see coming through. We will send out this deck. It’s also being recorded. So if you have to jump off or for whatever reason you want to watch at a later time you can watch. And our entire deck is also linked to the actual DCRs website and all the applications so you can go through the deck and figure out where you fit and make sure you get the right resources that you need to start your company.
If you are a cultivator, remember they’re not allowing for mixed light. But there are specific plans to operate. I would just think twice about doing cultivation if you are new to Los Angeles, if you already have an existing building, let’s say in the warehouse district of downtown and you know, you’ve been operating there for a number of years and obviously makes sense to stay there. But if you’re thinking about going into Los Angeles market and you’re thinking about doing cultivation, I would just weigh your costs versus benefit on that just because it’s so expensive. And of course, if you’re a manufacturer provided flows manufacturing plant in an operational requirements. If you were a testing lab company, you want to make sure you have a testing plan and the plan for how you will meet all the operational requirements.
It’s also really important that you get ISO certification. And then if you are a distributor, you have to provide specific distribution plans in addition to detailing how you will meet all those requirements. Regardless of which license type you’re going after, you need to make sure that you are subject to the pre licensing and inspection and you check all those boxes off.
And what the pre-licensing inspection includes. It includes that the DCR building, fire safety police department, fire department, that they all come out and they sign off on your building and they sign off on how you’re being structured. There’s a lot of items that do require permits and there’s a lot of items that don’t require permits when you’re thinking about updating your building. So it’s just important to check with the DCR and all the associated regulatory bodies to make sure that if you have to get a permit, let’s say you’re adding extra room, you’re enclosing another room for your extraction facilities, that you’re meeting all the required permitted requirements.
The worst thing that can happen to you is if you don’t get the permits, you’re up and running, the city comes and they do inspection audit and they find that your non-compliant and they make you shut down your business until you fix it. Right? And then of course if you’re a contractor Houdini’s on you and you’re just stuck and you’re nonoperational for a few months.
So as we discussed, phase two will open according to the city on August first and applications will become available on July 30th. So those are key dates to remember, and according to them last night that, they will be open. Phase two will be open from the beginning of August until the end of September, but quite honestly, I think phase two will go until the end of this year. But that’s just an assumption and I have no validation to backup that statement. Okay. So I think we covered all these licensing updates.
So let’s briefly talk about the social equity plan. So there’s specific requirements. So they, according to the city, they’re gonna accept licensing based on tier one through tier three. So tier one is generally you’re low income and you know, you were subject to some sort of cannabis conviction. And, what this means is that if it does not apply to you, you know, you didn’t have any charges, you’re not low income, you don’t live in a certain neighborhood in Los Angeles, then you can always partner with someone. The thing with tier one though is that the social equity applicant has to have 51 percent ownership. So, you know, when thinking about applying to tier one, you have to really trust the person if you want to give them control of your company. Because quite frankly, if you don’t know the person, I don’t think it’s a sound thing to do just because you have no idea what they’re going to do.
And you have no idea how compliance focused they are. Tier two is a little bit more interesting such that they only need to have a 33 and a half percent ownership in the company, but again, it’s a huge chunk of your company, so you have to really vet the person out and determine if you think that they’ll be a good long term fit. Tier three, however, that’s my personal favorite one. You have to show compliance that you’re going to do something good for the community. So say for example, you can run out free office space to cannabis operators. You can host annual compliance summaries. You can do technical training and being a factory, you know, there’s a lot of different things that you could do to give back to the community to show compliance with the social equity program without having to give up control of your company. So based on that, that’s, that’s my personal favorite.
As I stated before, the applications will come due at the end of this month. So be prepared for that. It will be located cannabis.Lacity.org, so, you know, if you’re not too familiar and make sure that you check out those sites because a lot of great information is detailed on there.
So generally the cannabis licensing fees will generally range from anywhere between $8,000-$11,000 based on what that application type you’re going after. So retail licensing is that $9,300 where other licensing fees are set at $8,000 or $11,000. If you don’t get your license, you can do an appeal fee, so you pay 500 bucks to try them, try to go after your license type again. And there are violations for noncompliance. So you have to be mindful of those, you know. If there’s a major violation, I think the city has detailed out what is a minor violation and what’s a major violation.
But I think the city also has a lot of discrepancy on what they can determine at the end of the day is what’s the license type? So the zoning maps, as I previously touched upon, are really important to look at when you’re thinking about where to set up your business. There are 10 specific zones in the city of LA that you should definitely be aware of and how close the businesses have to be from one another.
Some things to take into consideration is how close it is the schools, public parks, recovery centers or data centers. And, of course, if you’re a pre ICO, there’s a lot of grandfather rules that may apply to you. So these are the different types of zoning regulations for the different types of licensing types.
We will be sending this deck out of course. So then you can, you can easily click on the links and it’ll take you right to the different types of licensing types that you need to, to, to have to start your business.
So specifically for manufacturers, whether it be type six, type N, type P, there are four zones that you want to be aware of. If you’re level two manufacturing types. So let’s say type seven, there’s another zone that you have to be aware of and then for indoor cultivation, there’s obviously a different zone that you have to be aware of. So there’s a lot of operational violations and penalties that you have to be aware of. So it’s really important that you either have someone on your team specifically dedicated to compliance or you outsource that function.
What we’re starting to see in Colorado, Washington, Oregon states that had been around for quite a while, is that they’re going back to 2013 slash 2014 to audit these cannabis companies. What’s really sad about that is that if these companies have not been in compliance with their 280E nondeductible allocations, the IRS will assess such a big amount and then tack on penalties and interest on top of that to really push the company out of business. So it’s really important that you make sure that you’re aware of all the applicable taxes that you have to pay and you make sure that you’re making those payments on a timely manner. Otherwise, the potential penalties plus interest could be really detrimental to your business. And of course here are some specific operating procedures and then various other violations and penalties and things that you have to be aware of. Of course, there’s more violations and penalties will send this out in the deck. Here’s some serious offenses. I’m only use the name in businesses stated on the license, you know, make sure that if you do a dba, is that it’s well established that you don’t set up as a certain entity and then you operate as another.
Do not sublet any of the premise without written approval from the DCR. One of the things that’s really important for phase two applicants is that if you apply with your license type and you don’t get it, the city has authority to shut you down, right? So that’s, that’s the kind of a gamble phase two such that, you know, you want to come clean, you want to apply, but all of a sudden, you know, you go for license, you throw yourself out there and they say, “hey, this zone, this is not done correctly.” They have the authority at that time to shut you down. So just make sure when you’re going to apply that whomever you’re working with understands all the rules to make sure that if you don’t get it, it doesn’t financially cripple your business. So specifically, the social equity program is LA’s way of giving back to the community that was disadvantaged by the war on drugs.
One of the key points to remember is that to apply for this, you potentially have a tier one. You’re arrested for a nonviolent cannabis related crime. So let’s say you’re selling cannabis, you’re cultivating it, something that was historically illegal, that’s not illegal, and you also are considered low income. So what does that mean? That means your household income is roughly $41,000 or less. And you’ve lived in Los Angeles between five to 10 years in specific zip codes. So to apply and be eligible for tier one, you have to have at least 51 percent ownership in the company, tier two, at least a third ownership. And then phase three, you don’t have to give out any equity ownership, but you have to have some social good aspects, and all phase two applicants will need to qualify under the social equity program. But if you do not fall within one of the categories, you could be paying potential fees, but I would definitely say that most people can apply as a phase three applicant who just have to figure out how you want to do social.
So with that, here’s our website, we are GreenGrowthCPAs.com. Those of you who’ve been following our content, we were historically called California Cannabis CPA, but, we had to do name rebrand because we started getting a lot of clients and outside of California. So we got a lot of activity from Michigan, Ohio, Florida, and California. Cannabis was kind of doing us a disservice because people always ask us, do you do outside California? So, we’re now called Green Growth CPAS. I know that was a lot of information and I know that there’s a lot of questions. What I would probably say, is to just contact us, go to our website, give us a call, we’d be thrilled to answer any questions and we hope to be doing business with you guys shortly. Thank you for attending our first Webinar and please look out for future ones.
To get started with your cannabis business, please visit greengrowthcpas.com and click the get started button or give us a call at one 1-800-674-9054. We look forward to helping you start and grow your cannabis business.
