More than 2,000 California cannabis licensees, some that have been operating for decades, are struggling to hurdle numerous state and local regulatory requirements to convert their provisional licenses to annual licenses by 2026 or otherwise shut their doors.
Most provisional licensees have until Jan. 1, 2025, to renew their provisional license for another year. Jan. 1, 2026, is the last day provisional licenses will be in effect, except for certain social equity retailers.
About 20% of the remaining provisionals are cultivators in Mendocino County, the second-largest cultivator county in the Golden State’s storied Emerald Triangle. They recently got a boost after the California Department of Cannabis Control (DCC) on Oct. 17 certified a county-wide Environmental Impact Report (EIR) to help move the approval process along.
“Our goal has always been clear: to support those who helped build California’s cannabis industry through a licensing program that is environmentally conscious and legally sound,” said DCC Director Nicole Elliott in an Oct. 17 news release. “With the EIR certified, we’re one step closer to keeping Mendocino’s pioneering cannabis spirit alive.”
Capital has been a primary challenge for businesses as meeting the onerous requirements of state and local jurisdictions can easily cost in the six figures. However, a $100 million grant program authorized by the state legislature in 2021 to assist with the effort was largely bungled by the DCC, according to the state’s auditor in a critical August report.
“Although DCC took steps to improve its administration of the Grant Program after we communicated concerns to its leadership in July 2023, some shortcomings in DCC’s grant management practices remain unresolved,” said Auditor Grant Parks in the Aug. 29 report. “For example, DCC cannot accurately measure whether the 17 [local jurisdiction] grantees are on track to accomplish the purpose of the Grant Program because DCC did not ensure that they provided clear goals or measurable benchmarks.”
A long road to compliance
When adult-use was legalized in 2016, existing medical use businesses were issued provisional licenses until they could comply with new regulatory requirements. Among the requirements is the California Environmental Quality Act (CEQA), which is often used by local residents to kill any development project they don’t like. Other major state compliance requirements for cultivators fall under the Department of Fish and Wildlife and the state Water Quality Control Board.
At the time, three separate agencies regulated cannabis businesses. In 2021, the Division of Cannabis Control was created and has been working to merge licensing oversight of these businesses and get them to convert to annual licenses. Over the years, the provisional licenses have been extended.
Attorney Hillary Bricken, who has helped clients through the conversion process, said provisional licenses may have been a good idea at the time, but they ended up being a “detrimental crutch” as many businesses waited until the final hour to begin the conversion process.
Industry experts said CEQA is the most difficult regulation to get through, especially for smaller cultivators who had been in business for decades.
Bricken warned clients to get through the local approvals first. She said it could cost at least $100,000 to get all the approvals, and then businesses should have a “war chest of at least six figures” to fight potential litigation.
“Someone comes out of the woodwork to oppose it. It happens every time,” she said.
The 2021 Budget Act appropriated $100 million to the Local Jurisdiction Assistance Grant Program to help 17 counties and cities with the costs of converting provisional licenses to annuals. The money needs to be spent or earmarked by June 30, 2025.
However, the DCC had spent only $350,000 of the $5 million it was allocated to administer the grant program, while the local governments spent just over $2 million of the $94.5 million they received in 2022, in most cases in large lump sums. Some of that money was misspent, the auditor said.
The DCC stopped issuing most provisional licenses in October 2022. While the 17 grantees had converted approximately 530 licenses, they still had more than 4,600 licenses to convert as of Jan. 1, 2023.
The auditor sent a letter to the DCC in July 2023 outlining five primary concerns:
- Approval of questionable grantee spending plans
- Advances of grant funds to grantees not prepared to receive them
- Lack of scrutiny over grantee spending and progress
- Misspending of administrative funds
- Lack of staff with necessary expertise to oversee the grant program
In the DCC’s response to the auditor’s report, Elliot said the agency has made progress in clearing provisional licenses in the last year. In fiscal year 2023-24 (July 1 through June 30), 1,237 licenses were converted, and between July 1 and Aug. 1 this year, another 48 were converted.
“Local jurisdictions eligible to receive grant funding represent those with significant numbers of provisional licenses who are legacy and equity applicants, and provisional licensees that are more likely to have arduous environmental compliance requirements associated with CEQA,” she said in the report.
For example, the City of Los Angeles represented 21.6% of all 4,667 provisional licenses. It received the most grant funds, $22.3 million, of which almost none of it was spent in 2022. Humboldt County received the second-largest grant of $18.6 million. But the auditor couldn’t determine how much was spent because the county’s financial system did not contain all of its grant expenditures.
Elliott said the reasons why grantees didn’t spend funding the first year varied, including needing to sign contractual agreements, hire staff or purchase field equipment, “all of which take time to process prior to showing up on expenditures,” she wrote.
Other jurisdictions, such as Los Angeles and Mendocino County, experienced delays because of administration turnover and revised local codes, she said.
“Throughout the grant program’s operations, the Department has actively worked to implement changes to address CSA concerns and address opportunities for improvement,” the DCC said in an emailed statement. “Prior to the audit report’s publication, many of the issues highlighted in the report had been addressed, including hiring dedicated grant management staff, consolidating licensing systems, and adopting CSA-recommended best practices for administering similar grant programs. DCC looks forward to continuing its work to implement recommendations and build upon existing improvements.”
According to the CRB Monitor licensing database, as of Nov. 7, there were still 2,255 provisional-active licenses. This is a drop of 53 since Oct. 23, but it’s unknown whether they were all approved. A business may hold more than one type of license.
Nearly half of the remaining, 1,103, were cultivator. There were 341 retail/dispensary, 314 wholesale/distribution, 277 manufacturer/processor, 171 vertically integrated, 31 delivery and 18 labs.
Special assistance for Mendocino County
In Mendocino County, there are currently about 460 provisionally licensed cultivators seeking to get their annual license, according to Sara McBurney, senior program manager for the Mendocino County Cannabis Department.
Mendocino County received the third highest Local Jurisdiction grant award at $17.6 million. Of that, only $330,000 was spent in 2022, according to the audit report. Last year, $5 million was spent on a consulting firm to prepare the EIR, McBurney said in an interview. The county also allocated over $5 million for a direct grant program to help licensees with the CEQA requirements. McBurney said about $25,000 is still available and must be spent by March 31.
Additionally, the California Department of Fish and Wildlife announced Sept. 11 that 200 Mendocino County cultivators will receive a total $3.1 million to meet compliance requirements to avoid impacts to sensitive species and natural communities.
Mendocino became a special case because years ago county officials, in an effort to streamline licensing of these agricultural sites, set up a “ministerial” approval program that did not require site-specific EIRs. However, CEQA did, known as Appendix G, McMurney explained.
Cultivators were frustrated with how long it was taking the county to process annual license applications and CEQA approvals. Processing conversions took approximately 1,000 hours per license, according to the auditor’s report.
In February 2023, the Mendocino Cannabis Alliance sent a lengthy letter to Gov. Gavin Newsom detailing the challenges and frustration with the county board of supervisors as a permitting deadline loomed that July. The DCC started working with the county in April and by the end of June, it had taken over as lead agency under CEQA to work with the consultant and prepare a “programmatic” EIR to allow for streamlined site review. It was the first time the DCC had developed an EIR to help swiftly transition licenses.
The EIR’s objectives were to ensure that cultivators operated in accordance with applicable state and local environmental laws, protect natural and built resources in Mendocino County, and minimize adverse effects on the environment.
McBurney started at the department the same day the DCC took over the EIR process. She said many of businessowners were frustrated because they had spent a lot of money to comply with Appendix G, and now those materials wouldn’t be necessary. But the documentation will still be useful for the consultant to do the streamlined site reviews.
“The finalization of the EIR is such a huge win,” McBurney said. With the certification of the programmatic EIR, she understood the DCC could transition licenses pretty rapidly.
DCC said in a Nov. 6 email that it expected to begin issuing annual licenses over the next few weeks. It will prioritize licensees by their provisional license expiration date.
In addition to state approval, the cultivators need local approval. McBurney said the county has a big backlog, but they have been working to get the licenses approved.
The county has another 120 cultivator applicants that don’t have provisional licenses and still have to be completed by their Dec. 1 deadline. These businesses will also fall under the new EIR.
As of the end of September, the county had 71 licenses to review, including approximately 20 provisional holders, she said, and more have been approved since then.
“I’m excited for this time next year,” said McBurney. “By then, we should be a well-oiled machine.”
Impact on the cannabis market
At the end of the day, the costs to comply with the hefty regulations will likely result in some businesses closing.
“I would say easily more than half” of the remaining businesses will drop out, Bricken believes, especially those that waited until the last minute to convert. She said it takes usually six to nine months for state approvals, plus another six to nine months for local approvals.
Christina Dempsey, founder of the Cannabis Policy Lab, said the processes in some local governments have been “kind of messy,” and Mendocino County was the “worst case scenario.”
She hopes the DCC will especially help the legacy businesses that have really been trying to stay in compliance.
“This is being closely watched,” Dempsey said. “I think we’ll come down to a couple hundred businesses that haven’t been able to convert.”
Amy O’Gorman Jenkins, legislative advocate for the California Cannabis Industry Association, said the process has exacerbated the challenges for licensees. Many well-funded companies have been going out of business.
“The costs of compliance and the cost to do what it takes to participate in the licensed industry is certainly a challenge,” O’Gorman Jenkins said. “Many businesses are making tough decisions on whether to operate in California.”
