Santa Ana’s ‘Merit-Based’ Cannabis Licensing Scheme Draws Fire

(Charlie Nguyen/Flickr Creative Commons)

Since California’s state-regulated cannabis market launched this year, Santa Ana has emerged as the epicenter of Orange County’s legal marijuana trade. That’s because it’s the only one of 34 cities in the county—the state’s third most populous—to expressly permit adult-use sales.

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It’s also a prime location for cannabis. The city occupies the central, urban heart of Orange County, only minutes from neighboring Los Angeles County. To the west, its boundaries extend to include the gilded South Coast Plaza shopping center and John Wayne Airport, the third-busiest in Southern California. On clear days, the skyline of Downtown LA looms above the 5 freeway’s ribbon of concrete.

In fact, as adult-use cannabis sales kicked off in the Golden State on Jan. 1, Santa Ana was the only place between LA and the San Diego County line where customers 21 and older could buy it.

The city’s second, merit-based round of licensing was supposed to improve on the first.

The prime location has made for fierce competition as the city gears up to issue a second round of licenses. Critics say the process is so poorly designed that would-be marijuana magnates are gaming the system.

City Hall, which is scheduled to weigh a proposal at Tuesday’s council meeting to “modify” application and registration for retailers, has already allowed 20 retailers to exist. Officials are now poised to open the door to 10 more “using a merit-based criteria scoring method,” Deputy City Manager Robert Cortez told Leafly. The city was expected to grant the final licenses in spring, but the ongoing controversy could cause delays.

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In an email, Cortez expressed confidence in the fairness of the process. “Throughout the application process, the city has maintained informational web pages that are updated regularly and held a public information session in mid-January, during which applicants were invited to learn more about the application process and pose questions to city staff,” he said.

But even the deputy city manager acknowledged a procedural wrinkle that critics have called unfair: In cases where the city receives multiple applications from the same address, the property’s landlord would get to choose the winning operator. “A property owner that authorized multiple applications will have the ability to select one applicant that may proceed with demonstrating control of the site to the city through title or a lease,” Cortez said.

“People on the list sell their interest in the list, and it ends up being a thing where people are buying that merit.”
Chris Francy, CannEdge

Putting so much power in the hands of landlords has, in some cases, has sparked a scheme in which applicants allegedly ply property owners with cash, essentially bidding for first dibs. “Due to a loophole in the ordinance, greedy property owners have been selling affidavits to multiple would-be dispensary applicants for as much as $50,000 a piece, knowing that at in the best case, only one of the applicants they provided the affidavit to can succeed,” said Aaron Herzberg, managing partner at the Puzzle Group law firm, which assists Southern California cannabis businesses with licensing.

The city’s second, merit-based round of licensing was supposed to improve on the first, which operated on a lottery system. Some allege that process was tainted by would-be operators purchasing multiple bids at $1,490 apiece, basically paying extra for multiple lottery tickets. The current round awards merit-based points on certain criteria, such as whether or not an unsuccessful first-round applicant was on a waiting list.

“Unfortunately, people game the system,” said Chris Francy, chief operating officer at Santa Ana–based cannabis real estate and licensing firm CannEdge. “People on the list sell their interest in the list, and it ends up being a thing where people are buying that merit.”

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Herzberg, the Puzzle Group attorney, sent a letter this week to the Santa Ana city attorney pointing out that among 53 applications for the second round of licenses, only 35 addresses are listed. That means “there are approximately 21 duplicative applications submitted,” the letter says.

“For example,” it continues, “one entity has submitted 5 duplicative applications for the property located at [redacted by Leafly], while another entity has submitted 4 duplicative applications for [address redacted by Leafly]. It has also come to our attention that some applicants have attempted to game the selection process and by submitting duplicative applications for the same property, utilizing different entrance points to the same property. … This technique has the unfair effect of disqualifying many more neighboring competitive business applicants.”

Clearly, stakeholders want the city to adjust the process as it gives 10 lucky operators the golden ticket to cannabis sales. “The city should issue rules and guidelines to address these problems,” Herzberg writes.

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One license applicant, Cesar McGuire, said the process in its current form privileges investor-backed ventures over small businesses.

“I’m a small-business owner trying to go through all the obstacles that the city is asking for,” he told Leafly. “However, being able to send multiple applications on the same property with people who have an endless amount of financial resources makes it extremely difficult for the average Joe to try and land a license.”