Delays Slow Growth in California’s Adult-Use Cannabis Retail Industry

A review of California’s adult-use cannabis retail industry reveals that 30% of California cities and counties have approved 600 brick-and-mortar stores. Many of the 600 cannabis retail stores may not yet be operational. As the second anniversary of adult-use market approaches, the impact of the municipal-level permitting process on applicants, cities, and counties is becoming more apparent.

What is the impact of the current process?

The regulatory permitting process, construction build-out, and the final city site approvals are causing significant delays in the opening of new stores. The lack of revenue drains capital and other resources. Some license holders are selling before the businesses become operational due to capital constraints or just to turn a profit.

Cities and counties are also hurting from the lack of tax revenues. The question is how to speed up the permitting process while ensuring that cities and counties choose quality businesses that will maximize revenues in a compliant manner.

Cities must also allocate cannabis licenses in a fair manner. The risk of litigation increases as the process becomes more competitive. More populous cities tend to engage stakeholders, such as local residents and social equity candidates, to establish an equitable outcome. This process takes time. It also pushes revenues and tax dollars down the road.

This cycle is now impacting the industry. Profits and revenues are lower than expected. Industry participants are becoming disillusioned as the promise of a green rush is contingent upon government approvals and delays. Local municipalities are now wondering how they can improve permitting processes to make sure that those businesses that receive cannabis permits start operating in a reasonable amount of time.

What is the current status of the adult-use retail industry in California?

The adult-use retail industry continues to grow. According to our OBEDIO data, there are nine (9) cities and counties that are accepting applications with another 55 cities and counties that have adopted, proposed or discussed allowing adult-use retail stores. Common challenges in obtaining a license in the cities and counties include qualifying for social equity permits and locating real estate that complies with the zoning requirements.

Cities and counties that are considering adult-use retail businesses fall into four buckets.

1. Cities that are seeking to expand the total number of available retail store permits’;

2. Cities that issued the first round of permits but are opening up a second-round because the recipients are not operational;

3. Cities that currently do not permit retail operations and are seeking tax revenues; and

4. Cities that want to get rid of Illegal cannabis businesses.

The process of adopting a commercial cannabis regulatory program can be a long road. There is no beaten path or established timeline.

What will stop faster growth of the retail industry in California:

The following issues may stall a faster build-out of the retail cannabis industry due to the impact on city budgets, business profits and public safety concerns:

• Taxes: Counties and cities are starting to compete for cannabis businesses by lowering tax rates. This may decrease incentives for cities to enter the commercial cannabis markets. Cannabis businesses should educate the market about the other incentives including local hiring opportunities and reducing the black market.

• Litigation: The competitive atmosphere for cannabis licenses has increased the amount of litigation that cities face. Many cities such as Pasadena are enduring litigation over the permitting process. The industry should address as this issue will persuade cities not to enter the market.

• Simplified Permitting Process: The current permitting process is tedious and resource-intensive. Cities need to recoup the cost of these resources. The industry can help to shape ways that this can happen.

• Organized Anti-Cannabis Opponents: Organized efforts are increasing and achieving success. The not-in-my-backyard contingent will continue to grow.

• THC Vaping Illnesses: The public safety issues associated with the thc vaping illnesses must be addressed or it will be used to impede the industry’s growth. Regulatory scrutiny is increasing and counties and cities propose to ban vape products.

The growth of the cannabis retail industry is in the beginning stages. It is important for the state and the industry to take a breather and assess improvements that can be made. A collaborative approach can help ensure that businesses can start operating in the fastest timeframe possible.