After Cannabis Control Commission public meetings were shut down by protesters in December and January, the body announced a Jan 23 public listening session to hear the state’s Social Equity and Economic Empowerment applicant’s concerns and frustrations with the current application and licensing process. Two issues battled for first place: a lack of transparency in the application review process, and challenges securing a coveted Host Community Agreement (HCA). The HCA is the first step in the licensing maze.
No HCA, no license. No kidding.
Few issues have been as universally controversial in Massachusetts municipal government as the HCA. In a recent Forbes article that made the rounds two days prior to the public hearing, Kris Kane of 4Front Ventures, an integrated multistate operator, argued that the HCA process is “perhaps Massachusetts’ most fatal mistake” in the license approval scheme. “The law,” he writes, “purposefully made it difficult for towns to ban cannabis businesses, requiring a vote of the town’s residents in most cases. Yet the HCA requirement has served as a de facto ban, with towns simply refusing to grant them as a means to keep cannabis businesses out. When they are willing to grant HCAs, municipalities often go to the highest bidder, disadvantaging smaller and mom-and-pop startups.”
How we got here
The legislature granted the state’s 294 towns and 57 cities material control over the local marijuana approval decision-making process. Many communities, faced with the complex tasks of managing day-to-day municipal government, and lacking the regulatory knowledge of the state’s Cannabis Control Commission, looked at their past exposure to licensing—the state’s 2013 medical marijuana program.
In 2013, a pool of approximately 189 prospective applicants began a nearly 10-month marathon, led by the Department of Public Health (DPH), to complete the application process and secure a license to sell medical cannabis. The process was complex and competitive, and license counts were limited to a minimum of one, and a maximum of five, per county, and only 35 statewide. Like a college professor posting grades, the DPH issued all of its decisions at once—on Jan 31, 2014—approving only 20 licenses.
Under the medical program, competition was limited, licenses were few, all applications were due on the same day, and it made sense under that scheme to have applicants secure a location as the initial step of the municipal approval process. Demanding a location before municipal approval under the unlimited and rolling recreational program, on the other hand, makes far less sense. But without state guidance, most municipalities fell back on what they knew, the 2013 medical process—location first, municipal approval second.
Under the current recreational program, in which the license count is unlimited (though municipalities may limit the number of marijuana retail outlets within their community), requiring a location first places control in the hands of profit-seeking landlords as opposed to citizen-focused community leaders. In a typical community, once zoning is established and the number of HCAs are announced, a mad dash of real estate musical chairs begins. Aspiring licensees uncover every possible location, and landlords, realizing their signature is the gateway to a municipal application, often increase their price and demand nonrefundable deposits to issue a letter of intent—that holy grail of a document needed to apply to the municipal governing body for an HCA.
Case in Point
The town of Natick, as soon as it finalizes its bylaws, will likely be the last community to start accepting marijuana retail applications. Natick has eight Section 15 retail liquor licenses (alcohol sold to be consumed off-premise), which translates to two marijuana retail stores. Natick has zoned marijuana retail primarily to several pockets along the popular Route 9 retail corridor.
By mid-September 2018, 48 parties had approached the town’s economic development director to express interest in a marijuana retail license. Aside from Boston, Cambridge, and Somerville, there are few sizable communities that have not allocated most of their retail marijuana HCAs. There are likely far more than 48 parties interested in those two retail opportunities today. In the state’s social equity training program, 70 participants have indicated a desire to pursue a retail opportunity. That class will complete the program in April 2020.
Cruising Route 9, a trained eye can spot the locations that have been sitting empty for nearly a year even as the landlords indicate the space is off the market. Should Natick require applicants first secure a location, it will be the landlords who have chosen the finalists: candidates with deep pockets who can pay the highest rent and year-long carrying fees to keep other candidates out of the prospective applicant pool. The state’s Social Equity and Economic Empowerment applicants will be locked out of the Natick application process before it even begins; in one example, a property owner was asking $1.5 million for a building in the tightly zoned marijuana overlay district that is otherwise worth $1.1 million.
Simple economic theory of supply and demand dictates that when 48 candidates descend upon six or so landlords, prices will increase—dramatically—and smaller operators will be priced out of the market. Should communities in this situation first screen the applicants (as one city in Western Mass is now considering) before site selection, and then award an HCA, supply and demand come into balance. In the case of Natick, two applicants approved by the town could select a location without the frantic pressure of a competitor desperate to lock up space to stay in the licensing game. Rents will reflect the local market, and not the typical panic pricing associated with retail marijuana space.
Furthermore, empty storefronts aren’t good for a community. Empty storefronts don’t employ staff; there’s no one to purchase coffee, gas, lunch, or snacks from local merchants. When multiple storefronts come off the market while they await a local licensing decision but only two stores are approved, other merchants seeking space will likely go elsewhere—a clear negative for the host community. Meanwhile, landlords collect rent or hold fees, but municipalities don’t collect taxes from an empty business and local residents don’t find jobs.
In Natick, this impact is likely limited. There are only two HCAs to be awarded, and few prospective locations. Overlay this situation onto communities like Boston and Cambridge where zoning is far wider and many more HCAs are in play, and the lock-it-up-and-hold-’em strategy can have an adverse impact.
Putting the pieces back together before the clock runs out
The current dilemma for Social Equity and Economic Empowerment applicants is timing. Massachusetts will ultimately only host a certain number of marijuana retail stores. Ask five informed people what that final number will be, and you will likely walk away with at least seven concrete answers. While no one can know for certain, some factors are known.
As of Jan 17, 2020, there are 35 stores open and operating. Trailing closely behind them, five stores with a final license are getting ready for a certificate to commence operations. Next in line, 75 stores with a provisional license are preparing for the inspections that will lead to a final license. And at the back of the line, 169 applicants anxiously await an answer or an RFI (request for additional information) from commission staff.
Eventually, all of these stores will clear their hurdles and open, and there will be 284 retail outlets. Add in communities like Boston (with only 8 applications in the queue but with 55 retail HCAs available), Cambridge with no applications in the queue (and at least 9 retail HCAs available) and Somerville (only one application in the queue with six HCAs available), and there should be an additional 60-something stores. Massachusetts has numerous communities that might allow retail but don’t have a large enough population count to support one (98 towns allow marijuana but have fewer than 5,000 people each). Time to find suitable host communities with retail availability is slowly slipping away for Social Equity and Economic Empowerment applicants.
The Cannabis Control Commission proposed an additional guidance memo for municipalities that addresses host community agreements. The focus of that guidance is to quash the excessive fees many communities are extracting from marijuana license applicants that exceed the state-limited 3% community impact fee. The guidance is loudly silent as to alerting municipalities that they have the power to approve applicants first and locations second, but this is nevertheless a lynchpin issue that could get many of the frustrated Social Equity and Economic Empowerment applicants into the competition for a municipal HCA.
The commission may eventually respond to the HCA frustrations expressed on Jan 23. Hopefully, it will be before the final HCAs have been awarded. Attorneys like to say that justice delayed is justice denied. Solving a problem when the solution becomes moot, however, is no solution at all. Social Equity and Economic Empowerment applicants will require a fair shot at HCAs if they’re to assemble the pieces of a license application before it’s too late. Hopefully their voices didn’t fall on deaf ears.
David Rabinovitz is a cannabis business consultant in Massachusetts and involved in various cannabis ventures. He is a former Director and Treasurer of MassCann (the Massachusetts Cannabis Reform Coalition), a past Trainer for the Massachusetts Cannabis Control Commission Social Equity training program, and the original host of The Green Rush cannabis business talk show on ProCannabis Media. David speaks at various industry events on creating winning financial presentations that investors love. David’s industry insights and analysis are featured in several media outlets. Connect with David on LinkedIn at https://www.linkedin.com/in/davidrabinovitz/ or reach out to him at firstname.lastname@example.org or DavidR@CannaVentureLabs.com