person holding green canabis

Equity applicants “locked out” of retail cannabis industry, shared-use manufacturing may help

When Long Beach residents get accepted to the City’s Cannabis Social Equity program, they receive a myriad of resources— application workshops, application fee waivers, direct grants, plan check fee waivers and incubation support.

But when it comes down to licensing, equity candidates can only receive licenses for cultivation, manufacturing or distribution, all of which have hefty startup costs that ultimately prevent them from opening a cannabis business.

“As it turns out, those incentives have not been enough to push the vast majority of equity applicants through the licensing process,” said Ajay Kolluri, who manages the City’s Office of Cannabis Oversight.

At their Tuesday, Jan. 5 meeting, the Long Beach City Council will discuss adding another offering to their list of licenses for equity candidates: shared-use cannabis manufacturing.

Shared-use cannabis manufacturing: A ‘viable pathway’ for cannabis equity applicants

Shared-use cannabis manufacturing facilities are similar to shared commercial kitchens where multiple businesses can operate out of a single space. 

If the ordinance is eventually passed, shared-use manufacturing facilities would allow businesses to infuse cannabis concentrates directly into a product, package and label cannabis products and extract essential oils from cannabis using butter or food-grade oil.

In December, the Economic Development and Finance Committee received a report on options for strengthening the City’s cannabis equity program. Shared-use manufacturing was at the top of the list.

From an equity standpoint, shared-use facilities would cut down operational costs for new and existing cannabis businesses. 

The startup cost for a cannabis manufacturing facility can reach well over $700,000, Kolluri said during the presentation.

“We believe that these costs are at the lower end of the spectrum for what it would take to build a manufacturing business,” Kolluri said. “It could easily grow into the millions of dollars depending on the scale of the operation.”

The City offers incentives as candidates move through the license application process, amounting to a potential $215,000 toward their business costs.

From one standpoint is the opportunity to correct wrongs of the past and create business opportunities, opportunities to build wealth in our community.

Long Beach Vice Mayor Rex Richardson

The City’s feasibility analysis states that, for small businesses, “the amount of time and capital necessary to design and construct a cannabis facility can be cost-prohibitive.” 

The high cost of creating and maintaining a facility is compounded by the fact that the City’s equity applicants must have a net worth below $250,000 to qualify for the program. 

In addition, equity applicants must have a family income below 80% of the Area Median Income of their neighborhood.

As of December 1, only one cannabis license was issued to an equity-owned business. Six license applications from equity applicants were pending. By comparison, the City had 79 residents qualify for the program.

Kolluri said the discrepancy is due to the significant barriers to entering the cannabis industry.

Business applicants must have access to capital, green zone real estate, banking, professional services, construction and equipment. On top of those barriers, he said, the licenses operate “within a saturated and highly competitive marketplace” that is ruled by highly restrictive state regulations. 

Edgar Cruz is an equity applicant and founder of the nonprofit Cannabis Commerce Council of Long Beach. During public comment at the December meeting, he said he had been “caught up in red tape for years.”

“Equity applicants require fiscal assistance beyond the initial $10,000 [offered by the City],” he said, recommending the City offer free rent “to further a leg up in a system that has long been built against them.”

Carlos Zepeda, another social equity applicant who spoke at the committee meeting, said that the licensing opportunities currently available—cultivation, manufacturing and distribution— were too costly.

“Cultivation and manufacturing are two of the most expensive licenses to build out and fully complete,” Zepeda said. “For social equity candidates to have a chance of success in an already crowded market, it is essential to allow them to sell directly to consumers.”

If the City allows shared-use manufacturing, cannabis businesses could share the start-up costs for a facility or rent space within existing facilities.

“The advantage of this license type is that it provides small start-up businesses with the opportunity to manufacture products, without having to invest significant up-front capital to construct a facility,” the agenda item states.

Equity candidates ‘locked out’ from limited retail cannabis licenses

The City’s Cannabis Social Equity Program began in 2018 when the council authorized the use of recreational commercial cannabis in Long Beach. It was meant to provide opportunities in the cannabis industry for those negatively impacted by the prior criminalization of cannabis.

According to an analysis by the American Civil Liberties Union, marijuana arrests account for over half of all drug arrests in the United States. Of the 8.2 million marijuana arrests between 2001 and 2010, 88% were for possession. 

Nationwide, data revealed that Black people are 3.73 times more likely than white people to be arrested for marijuana possession, despite similar levels in usage. 

At a December meeting of the ED&F Committee, Vice Mayor Rex Richardson voiced support for diversifying the city’s cannabis licenses. 

Infographic by Emma DiMaggio | Signal Tribune

“From one standpoint is the opportunity to correct wrongs of the past and create business opportunities, opportunities to build wealth in our community,” Richardson said. “Particularly our communities that have been impacted by the War on Drugs for many years.”

Though the City created its equity program in 2018, two years prior voters passed Measure MM, which allowed for 32 licensed cannabis retail spaces citywide. When recreational cannabis was legalized in 2018, the City maintained the cap of 32 licenses established by the measure.

These licenses, initially meant for medical marijuana businesses only, were given out via lottery. According to a city report from August, “equity applicants were effectively locked out of the cannabis retail market” since licenses had already been given to other applicants by the time the equity program was created.

Now, the city council is looking towards shared-use manufacturing as a way to both diversify the city’s license offerings and create a pathway for more equity applicants to enter the industry.

Shared-use manufacturing would create a new tax revenue stream for the City

Shared-use manufacturing would allow the city to net a potential $6,638 in General Fund tax revenue funds per licensed facility, the agenda item states.

“We’ve seen that, during the pandemic, while many revenue sources, oil, sales tax, property tax, you’ll see [they’re] declined or you’ll see that they’re stagnant, this is one revenue source that’s increasing in this moment,” Richardson said during the committee meeting. 

The tax revenue would contribute to a fund that faced a $40 million deficit during this past budget season. City staff, including most city councilmembers, took furloughs to help plug this deficit

As the COVID-19 pandemic continues to push struggling businesses to their brink, the economic recession is expected to continue as cases surge in states like California. As a result, tax revenue streams may continue to stagnate.

“As someone who cares about the fiscal bottom line of the city, we have to simply be more entrepreneurial, given that we have demands in our budget with less resources,” Richardson said. 

If passed, the council will direct the city manager and city attorney to prepare an ordinance to allow shared-use manufacturing in Long Beach. 

The city council will also discuss the creation of a feasibility analysis for delivery-only retail cannabis businesses in Long Beach. 

The Long Beach City Council meeting will take place Tuesday, Jan. 5 at 5 p.m. via teleconference.

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