Los Angeles Licensing Delays Hit Minority Applicants Hard

los angeles social equity cannabis licensing header
(Gary Kavanagh/iStock)

Los Angeles cannabis businesses owned by minorities and other victims of the drug war are in the midst of a very expensive waiting game.

More than five months after city officials began licensing some cannabis businesses, applicants who applied through the LA’s social equity program, designed largely in an effort to counteract the racist consequences of the drug war, will finally get their shot at joining the commercial cannabis industry.

“Basically (we’re) just waiting and hoping they don’t change anything drastically that would change the building’s qualification.”
Esteban Araya, prospective licensee

At the first meeting of the Los Angeles Cannabis Regulation Commission earlier this month, Cat Packer, executive director of the city’s Department of Cannabis Regulation, announced Phase 2 of Los Angeles’ licensing process will begin on August 1. This phase—the second of three licensing rounds for the city’s newly legal industry—is open to non-retail businesses, such as manufacturers, distributors, and other portions of the supply chain, that have been operating in the city since before January 2016 and plan to participate in some capacity in the social equity program. The phase was slated to have wrapped up months ago, but delays due to staffing shortages and other factors have slowed the plan’s rollout.

The delays have made for financial and logistical headaches for equity applicants seeking to obtain a city permit, which is required to enter the state-regulated industry.

“It’s just having to sit on something, pay interest on buildings, do build-out and construction, without really knowing what’s going to happen,” said Esteban Araya, whom Leafly first spoke with in November of last year, as he was beginning the application process to open a retail store in northeast Los Angeles. “Basically [we’re] just waiting and hoping they don’t change anything drastically that would change the building’s qualification.”

The city’s social equity program was put in place at the same time LA officials adopted a new set of cannabis regulations for the city. By giving licensing priority to applicants most affected by the war on drugs—such as those who have been arrested for a cannabis-related offense or who live in a neighborhood with high cannabis arrest rates—it aims to address the decades of disproportionate impacts that the war on drugs has had on minority communities,

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But as the rest of the city’s cannabis plans went forward, the equity program has floundered. City officials claim the long delay was impossible to predict, but critics call it an avoidable flub caused by foreseeable funding issues.

The slow rollout has had the perverse effect of disadvantaging the very people it was designed to help: communities hit hardest by the war on drugs, including people of color and individuals convicted of nonviolent drug crimes. Rather than giving these groups a leg up, LA’s social equity program has effectively given a head start to the competition.

Betting Big on Social Equity

Since Araya first learned of LA’s equity program, he’s been working with attorneys and accountants, working diligently to build an above-board business. He even bought a property that he’s begun to transform into a retail shop. He’s eager to capitalize on the equity program, which he qualifies for because his mother was arrested on a felony drug charge for transporting cannabis when Araya was in the third grade. She went to jail as a result, and Araya and his sister were sent to foster care for nearly a year and a half.

Araya purchased the space in El Sereno, a neighborhood in northeast LA, in early 2017, with plans to transform the space into a dispensary. Since then, he’s shelled out more than $20,000 in interest alone, he said. He recouped some of those costs by temporarily leasing the space, but he asked the tenant to leave as 2018 approached, as city officials had indicated the social-equity licensing phase would begin in March or April.

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It’s been nerve-wracking, said Araya, crossing his fingers while watching applications roll in from the existing medical marijuana dispensaries, which got first dibs on licenses. He’s been waiting to see if these shops might move into his neighborhood or compromise his buffer zone, the 700-foot distance the city requires between commercial cannabis facilities. If that were to happen, it would mean he’d need to find a new location. The resulting costs could force him to abandon his business altogether.

“All my money is basically invested in this,” he said.

Rather than giving these groups a leg up, LA’s social equity program has effectively given a head start to the competition.

Araya decided to hedge his bets by purchasing two buildings (the other is in South LA) in order to have a better chance of at least one application crossing the finish line. Success at one location, he said, should be able to cover the costs of the other. Further delays by the city, however, risk draining his resources even faster.

Others haven’t been so patient. While Araya and his team have been intent on doing things legally, waiting for the city to begin licensing, they’ve also watched unlicensed shops pop up in and around the neighborhood. While authorities have taken some action to shut down unlicensed stores, many across the city still operate.

He isn’t the only one who’s hung his hopes on the success of the social equity program.

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Gabriel Guzman is the founder of Latinos for Cannabis, a nonprofit aimed at educating and incorporating more Latinos into the cannabis industry. While many Latinos already work in the industry as employees at dispensaries, gardens, and manufacturing facilities, very few hold ownership roles, Guzman said.

“We [Latinos] represent 51 percent of Los Angeles, yet unfortunately it doesn’t reflect in the percentage of [cannabis business] ownership,” said Guzman.

Guzman himself qualifies for the social equity program under the city’s residency and income requirements, and he plans to apply for a manufacturing license as soon as the process opens up. Although city officials have done an effective job at determining who should qualify for the social equity program, Guzman said major barriers to entry remain. For one, the program requires applicants secure a property before getting a license—a steep requirement for many Latinos, said Guzman. “Some of our white counterparts, they have so much more capital than we do. We don’t have access to property,” he said.

The Program’s Future—and Funding

Officials attribute some of the licensing delays to a significant understaffing problem at the city’s Department of Cannabis Regulation, which has been run by a total of three people since its inception, and the overall unprecedented nature of this regulatory process.

Leafly reached out to Packer and the office of Los Angeles Mayor Eric Garcetti with questions about the ongoing delays. While specific questions related to funding mechanisms and staffing shortfalls went unaddressed, Alex Comisar, a spokesperson for both the mayor and Packer, said that officials overall have been “very pleased with how things have gone so far” and that they have been focused on “doing this right and doing this with all the information available.”

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City Council President Herb Wesson also declined to respond to many of Leafly’s questions about what caused the delays. Through an email from a spokesperson, Vanessa Rodriguez, he pointed to hiccups with computer software and the need to keep up with “technical adjustments with state legislation.”

Asked to elaborate on those factors, Rodriguez replied: “Unfortunately, yes, there were unforeseen delays, but the Council President is confident the city is on track and moving forward as expeditiously as possible.”

Critics counter that many of the delays could have been anticipated—and avoided. Lynne Lyman, a former California director for the Drug Policy Alliance who helped draft California’s legalization law and now works as a consultant, said part of the problem was the city’s funding mechanism.

“I believe LA may be the only city who’s trying to have its cake and eat it, too.”
Lynne Lyman, former California director, Drug Policy Alliance

A provision in the city’s cannabis law dictates that all revenue from cannabis would flow to the city’s general fund, where it can be spent on all sorts of things. By comparison, the state of California and a number of municipalities, such as Oakland, Santa Ana, and West Hollywood, structured their systems to steer revenue first to cover the cost of regulation and enforcement, said Lyman. As a result, she said, LA failed to adequately bankroll its Department of Cannabis Regulation.

“Over the last six months I think it’s becoming clearer and clearer that that office was never funded,” she said. “Licensing itself has been 100% stalled for weeks now.”

Recently, the City Council approved a new local initiative for placement on November’s ballot ballot. If passed by LA voters, the measure would levy additional taxes and surcharges on local businesses. The plan, dubbed the Cannabis Reinvestment Act, includes a 1% tax on gross receipts, of which 25% would go to a trust fund, where it would then be spent on public education, equity-related programs, and expungement clinics. Proceeds from additional designated surcharges, such as fees levied against tickets for cannabis events, may also be used in part for these health and community reinvestment efforts. The money could not be used for license processing or enforcement, according to the ordinance.

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Lyman said she doubted that the revenue from the additional fees would be enough to fund the social equity program and argued the city shouldn’t have to roll out new taxes, as it’s already raking in cannabis revenue that goes to its general fund. City officials estimate between $30 million and $40 million in total cannabis revenue during the first year of legal sales, according to budget projections.

“I believe LA may be the only city who’s trying to have its cake and eat it, too,” said Lyman.

To pass, the measure will require two-thirds majority support from voters. Even if it’s successful, it would likely be next summer before the funding comes through, said Lyman. Los Angeles has essentially “abdicated its responsibility to regulate cannabis,” she said, questioning whether city officials are really serious about “reasonable, comprehensive licensing and social equity.”

“Phase 2 is for social equity applicants only,” she said. The problem, she added, is that as things currently stand, “there’s no social equity applicant program.”