On January 9, 2018, the Board approved a three-pronged strategy for the County’s cannabis program. Although complementary and part of an integrated program approach, each strategy will operate on its own timeline. The updated schedule for the comprehensive cannabis program is listed below. The schedule is also included in Attachment A.
- June 2018 Tax Measure (Status: 79% voter approval of Measure K; Board action on resolution creating a Citizen’s Oversight Committee –July 10, 2018);
- Development of the cannabis land use ordinance (CLUO) (Status: Draft of the CLUO presented to the Board, April 24, 2018 - complete; Citizen Advisory Committee, Planning Commission, and public outreach meetings on the draft of the CLUO – complete; Board of Supervisors meeting on CLUO – June 26, 2018.) The schedule for the remainder of the development of the CLUO and CEQA PEIR schedule is included in Attachment A.
- Development Agreements (Status: Letters of Intent deadline April 6, 2018 - complete; Complete Letters of Intent due May 18, 2018 – complete; Application due date for proposals consistent with the Interim Ordinance – 30 days after pre-application meeting. Application deadline for the remaining consistent project - July 11, 2018.); Application due date for proposals inconsistent with Interim Ordinance - July 26, 2018) A timeline for approval of the Development Agreements and the CLUO approval is included in Attachment B.)
This staff report provides updates related to each component of the three-pronged strategy for the County’s cannabis program. The action recommended in this staff report pertains to the early implementation development agreements.
Cannabis Tax Citizen’s Oversight Committee
As part of the June 2018 voter approved cannabis tax measure (Measure K), a citizen’s oversight committee is to be established. As specified in Measure K, the Committee is to act in an advisory role to the Board of Supervisors in reviewing the annual revenue and expenditure of funds from the cannabis tax, including the annual expenditure plan, and reviewing an annual accounting of the previous year’s expenditures.
At the March 6, 2018 Board meeting, the Board directed that the Committee will be composed as follows:
- Each Supervisor will appoint one member, who will be ratified by the Board;
- There will be two at-large members nominated by the Committee members and ratified by the Board;
- Committee members will serve two year terms; and
- There will be no term limits
Staff will work with the Chair and Vice-Chair in developing a high-level framework for developing an expenditure plan and a process for making appointments to the Oversight Committee. Staff will present this information to the Board along with the resolution creating the Committee on July 10, 2018.
California Cannabis Authority
Staff recommends that the County join the California Cannabis Authority (CCA), which is a joint powers authority (JPA) comprised of California counties and sponsored by the California State Association of Counties (CSAC). The purpose of the organization is to develop and manage a statewide data platform that will gather, collect, and analyze information from a myriad of data sources into one resource, to help local governments ensure cannabis regulatory compliance and also provide necessary information to financial institutions that wish to work with the cannabis industry.
The data platform will aggregate data from multiple sources including cultivation sites, point of sale, taxation, and socioeconomic data. By combining all of these data points, the County will be provided with targeted and defensible data, ensuring that what is being reported and what is occurring truly coincide.
The data platform can be used to ensure that adequate tax payments are being made; assist the Sheriff’s Office and code enforcement officers with information updated in “real time” which will help the speed of compliance; provide public health officials with product information, including product origin and product flow; and inform community planning efforts by understanding locations, concentrations and potential past or future land use patterns. In addition, as more jurisdictions use this tool and the data platform is populated with data, CCA members will have a broader picture of cannabis activity throughout the state and access to information outside of their jurisdiction.
In addition to the cannabis and finance tracking aspects of the CCA, the CCA is also intended to help solve another industry problem: banking. Because of the existing federally prohibited status of cannabis, most banking institutions (chartered at the federal level) are unable or unwilling to open accounts for operators in the cannabis industry, despite its legality in the State of California.
To work with the cannabis industry, financial institutions must comply with the rigorous monitoring and reporting requirements needed to potentially utilize banking functions. Institutions must make sure cannabis businesses are not violating state laws or engaging in activities that the federal government considers law enforcement priorities. For each cannabis customer, financial institutions must complete special money laundering and suspicious activities reports. These are onerous requirements that demand extensive staff time.
The CCA hopes to ease this burden by providing detailed information on each interested cannabis business to contracting financial institutions, formatted to fit the institution’s regulatory reporting requirements. Providing financial institutions with comprehensive licensing and regulatory data on cannabis business is the single most important step California can take to increase banking in this industry.
The rate structure developed by CSAC for funding the CCA is for each member agency to pay $3,500 for every $1 million in sales or in the case of Yolo County, gross receipts. Gross receipts information would be provided by cannabis licensees and the California Department of Food and Agriculture (CDFA). The CCA would bill the County at the end of each quarter.
Staff intends to bring the JPA resolution and agreement to the Board on July 10, 2018. In addition, the Board will also be requested to appoint a member and an alternate to serve on the CCA Board of Directors.
Draft Cannabis Land Use Ordinance Public Outreach Efforts
On April 24, 2018 the Board authorized release of the draft cannabis land use ordinance (CLUO) for public outreach efforts. To that end, staff has conducted a total of 14 public meetings during May and June. Staff also met with Sheriff’s Office representatives to discuss the CLUO. A list of the meetings is included in Attachment C.
The outreach meetings on the draft CLUO were not as well attended as the meetings conducted in fall/winter 2017-18 seeking input on the contents of the CLUO. Nevertheless, staff received good input on the CLUO with a range of comments including general input suggesting the draft ordinance is too prescriptive, and specific comments for modified text to make CLUO provisions more acceptable to interested parties.
Staff is in the process of reviewing the comments and considering possible proposed clarifications and modifications to the draft CLUO. If there are proposed changes which would affect the CLUO Environmental Impact Report (EIR) analysis, staff will return to the Board next month with those proposed changes. Otherwise, the proposed changes to the CLUO will be issued once the CEQA process is completed so that identified mitigation measures can be included as part of the staff’s final recommendation to the Planning Commission and the Board.
Early Implementation Development Agreements
The Early Implementation Development Agreement Policy (“DA Policy”) describes the opportunity to obtain a long-term (up to 10 years) right to build and operate an indoor or mixed-light cannabis cultivation facility. It also allows interested parties to propose “[o]ther cannabis-related uses and activities” in addition to cultivation “as part of an integrated project on licensed premises, excepting only retail.” While staff initially expected that licensees would have limited interest in pursuing an entitlement under this policy, 32 timely and complete letters of intent were received, for 30 proposed development agreements (for two proposed co-located sites, each applicant submitted a letter. However, one application for both applicants would be submitted.). Attachment D includes summary information on the proposed Development Agreement projects based on the Letters of Intent and pre-application meetings.
Prospective applicants expressed interest in pursuing projects with the following characteristics, some of which are inconsistent with or simply not anticipated in the DA Policy (as indicated below):
- Large-Scale Cultivation. A substantial mixed-light (greenhouse) cultivation component ranging from less than one acre to more than 10 acres (in a few instances). Specifically, five Letters of Intent were received which propose cultivation in excess of one-acre. Seventeen additional licensees stated in their pre-application meetings a desire to propose cultivation in excess of one acre, if allowed to do so.
The DA Policy does not indicate cultivation on more than an acre (the current limit) would be allowed. It says that cultivation shall adhere to limits in state law regarding size, but also specifically notes that “large” facilities will not be permitted by the state until 2023. The interim ordinance limits cultivation to one acre.
- Vertical Integration. Vertically integrated enterprises include, in addition to onsite cultivation, nursery, processing, and distribution uses. Twenty-two prospective applicants propose vertically integrated projects. Most of the applicants do not intend to operate their nursery, processing and distribution facilities to serve others, but would instead use them only in conjunction with their own onsite cultivation. A few, however, indicated an interest in operating such facilities on a larger scale to serve other regional growers. The largest proposed enterprises—taking cultivation and all other uses into consideration—could exceed 20 acres in size.
The DA Policy does not indicate facilities exceeding one acre would be allowed. Applicants could infer that an overall operation exceeding one acre may be allowed, but the policy itself is silent on this issue aside from indicating that the Interim Ordinance is incorporated except to the degree it conflicts.
- Manufacturing, Including Volatile. Most of the prospective applicants proposing vertical integration include onsite manufacturing, including volatile manufacturing. Specifically, six propose volatile and non-volatile manufacturing, five propose non-volatile manufacturing only, and seven did not specify the specific type of manufacturing proposed. Most of those proposals are not commercial in nature and would serve only the onsite cultivation operation.
The DA Policy does not preclude an applicant from proposing these uses.
- Adult (Recreational) Use. Ability to distribute or otherwise sell to the adult (recreational) market. Virtually all applicants have expressed that changing market dynamics make this essential to the future viability of their enterprises.
The DA Policy does not address this issue.
Based on input provided by the Chair and Vice Chair, staff recommend that the Board authorize the following approach to these issues in processing applications submitted in the coming weeks under the DA Policy. This approach is not intended to foreclose a more permissive or stricter approach to the same issues in the CLUO:
- Maintain the Existing One-Acre Limit on Cultivation. As mentioned above, the DA Policy did not endorse large cultivation operations. While this issue could merit further consideration in the CLUO process, staff have no reason to suggest any change from current practices in connection with the early implementation development agreements. The Board could choose to be more restrictive than the currently allowed one-acre of cultivation. Alternatively, it could choose to be less restrictive, although there could be legal repercussions given state law.
The Medical and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) which codifies Proposition 64, provides for three different sized outdoor cultivation licenses: small (up to 10,000 sq. ft.), medium (up to an acre) and large (over one acre). MAUCRSA does not allow any large licenses to be issued until 2023 and limits medium licenses to one per person. However, the emergency regulations do not limit the number of small cultivation licenses that may be issued per person, enabling cultivators to obtain multiple small licenses, the aggregate cultivation area of which exceeds one acre (i.e., “stacking” licenses). The California Growers Association has filed litigation to contest this practice, the outcome of which is still unknown.
As stated above, five Letters of Intent were received that propose cultivation of over one-acre. If these proponents choose to pursue these proposals, they would need to modify their applications to include only one acre of cultivation. For the seventeen licensees who stated in their pre-application meetings that they would like to grow more than one acre if allowed, it is not known whether maintaining the one-acre cultivation limit would influence these applicants in their decision whether to file a Development Agreement application.
It is also important to note that under the interim ordinance, co-located operations are entitled to two acres of cultivation per parcel – one acre per licensee. One Letter of Intent was received that proposes more than two licensees to be co-located on one site. Five other Letters of Intent were received which each propose two licensees on one site, as allowed under the Interim Ordinance. The Board could choose to be less restrictive and allow more than two licensees on a co-located site. As an alternative, the Board could maintain what is allowed under the interim ordinance. If no changes are made, only one potential applicant could be affected.
- Allow Applications that Propose Vertical Integration with a Compact Footprint, and Allow, in Appropriate Locations, Commercial Operation of Such Facilities. Generally, onsite processing and other cannabis-related uses appear likely (based on discussions with prospective applicants) to occupy a half-acre or less if serving an onsite one-acre cultivation operation. This issue is not addressed in the DA Policy or the interim ordinance. In staff’s judgment, a strict size limit on such uses seems unnecessary so long as they are appropriately sited on a parcel (typically, near the cultivation site) and sized in proportion to the onsite cultivation use occupying up to one acre.
Commercial processing and other facilities could have a larger footprint, but their presence should reduce the need for independent development of facilities serving individual cultivation sites in the County. The availability of commercial processing and other facilities could have other benefits, such as discouraging “inefficient” vertical integration by cultivators that lack expertise in other aspects of the production process. For these reasons, staff do not propose a strict size limit on commercial processing and other facilities. Factors such as location suitability (i.e., unlikely to create a public nuisance, adequate public road access, proximity to emergency services, etc.) would receive substantial weight in the evaluation of whether an application should be recommended for approval and ultimately approved.
- In Appropriate Locations, Allow Applications that Propose Manufacturing (Volatile and Non-Volatile). As noted above, the DA Policy does not preclude an applicant from including manufacturing uses in its application and Letters of Intent were received proposing manufacturing. As stated above, six propose volatile and non-volatile manufacturing, five propose non-volatile manufacturing only, and seven did not specify the specific type of manufacturing proposed. While staff do not propose any additional limitations now, the same factors identified in the discussion of vertical integration—including compact size and location suitability—would be central to staff’s evaluation of proposals that include manufacturing and is advised to be considered carefully by the Board in making a final decision to approve or deny a project.
- Eliminate the Medical/Adult Use Regulatory Distinction. Changing market dynamics appear to be rapidly reducing the volume of cannabis sold for medicinal use. These dynamics are beyond the control of the County and its cultivators. Most licensees who submitted a Letter of Intent indicated in their pre-application meetings that there was little to no existing market for cannabis produced strictly for medicinal use, as distributors have no incentive to purchase and sell cannabis with a restricted end use. The newly revised emergency regulations adopted by CDFA allow cultivators to conduct business with any other licensee, regardless of whether the other licensee holds a medicinal or adult-use license. This has resulted in a blurring of the distinction. Although the County controls the license type to which Yolo County licensees may sell their project, the County cannot control distribution of the product beyond that point.
For these reasons, staff recommends eliminating the medical use restriction in the interim ordinance. If the Board concurs, this change would apply to all cannabis activities (not just to the early implementation development agreements), would be implemented by an amendment to the interim ordinance, and would be included in the draft CLUO as well.
Staff also have the following recommendations regarding encouraging innovation and applicants with prior significant violations:
- Encourage Innovation. Many letters of intent describe projects that are very similar in nature. Staff recommends that applicants be encouraged (but not required) to propose projects with novel, innovative components.
- Prior Significant Violations. Staff recommends that applicants with prior significant violations of State or local law related to cannabis cultivation be precluded from obtaining a development agreement at this time. This would not necessarily preclude them from obtaining a permit under the final CLUO or even a development agreement at a later time. Disqualifying violations would relate to cannabis cultivation-related activities occurring in Yolo County, including pending criminal charges, a civil action and judgment, including by stipulation, initiated by the District Attorney, and involuntary abatement by the Cannabis Task Force or the Yolo County Sheriff’s Office. This provision would preclude four prospective applicants from filing development agreement applications.In addition, for prospective applicants who have received nuisance complaints that have been substantiated and verified by the Cannabis Task Force, staff recommends that these complaints be considered by the Board in making a final decision to approve or deny a project.
Two final issues also require Board direction: the “public benefit” component of development agreements to be negotiated under the DA Policy; and performance standards.
Public Benefits
The Policy indicates applicants should include a public benefit proposal and it suggests a variety of metrics for fee-based proposals. The Policy also indicates that development agreement revenues will be available for Board allocation to the same range of uses described in the tax ordinance. In their Letters of Intent, however, many applicants included very general proposals that did not include any specific amount of funding or other defined benefits.
Staff propose that the Board request that applicants consider a standard public benefit payment equal to 25% of the amount paid by their enterprise under the gross receipts tax. This amount would be paid as consideration for the rights and vesting afforded by a development agreement and would be in addition to the tax. For example, a cultivator paying $32,000 under the gross receipts tax would separately pay an additional $8,000 public benefit payment under its development agreement. The payment amount would increase or decrease proportionally with future adjustments to the tax, and in this regard may be fairer in application than a flat sum payment or other fixed approach.
This approach does not prevent applicants from proposing a lesser or greater public benefit payment or other form of consideration. However, it does provide much-needed guidance to assist prospective applicants in developing applications that are likely to be competitive. In addition, the Board may want to consider placing a priority on the Rural Community Investment Program. The Rural Community Investment Program is a mechanism for assisting rural communities in identifying funding solutions for project needs surrounding economic development or health and safety. Each fiscal year the Yolo County Administrator's Office, working with departments, the rural community, and other stakeholders explores, prioritizes, and presents projects to the Board of Supervisors for funding consideration. Funding the Rural Community Investment Program with DA funds could benefit the communities in which these operations would be located.
Performance Standards.
The DA Policy explains that performance standards will be included in all development agreements to address the potential for significant offsite odor and lighting/aesthetic impacts. It also says that location issues (including siting requirements in the interim ordinance) will be considered, and that the full array of potential environmental and operational issues will be assessed during the application review process.
The potential exists, however, for development agreements to include different (either stricter or more lenient) performance standards than may ultimately apply to competing operations approved under the CLUO. Staff will take every reasonable step to ensure this does not occur and will apprise the Board of any expected differences as projects are presented to the Board for consideration.
Alternatively, the Board could establish a rule that projects must conform to the final CLUO performance standards. This would ensure consistency in regulatory standards for all cultivators and potentially simplify future oversight. |