QUARTERLY NEWSLETTER — JUNE 2022
Welcome to the second edition of the Selna Partners Quarterly Newsletter. In this issue, we highlight legislation, lawsuits and licensing related to our three practice specialties—cannabis, real estate and litigation. Enjoy!
CANNABIS
CALIFORNIA GOVERNOR’S CANNABIS TAX REDUCTION/REFORM PROPOSAL
In May, California Governor Gavin Newsom submitted a revision to his 2022-2023 State Budget proposal to the legislature and expanded on his goal of reforming the cannabis tax framework. Newsom proposed a temporary suspension of the state’s cannabis cultivation tax, currently assessed on every ounce of cannabis produced by licensed growers, to support shifting consumers to the legal cannabis market. He noted that the current structure disproportionately burdens growers. The governor further proposed to stabilize the industry with policies that are more transparent and adjustable to changes in the market.
Newsom’s proposal reflects a reality of the current marketplace, namely, that wholesale prices for many forms of cannabis have plummeted in the past year, to as low as $300.00 a pound for some outdoor growers. Under the current tax structure, less than half of that wholesale price represents potential profit. After factoring in labor, compliance and licensing costs, there is zero profit.
The proposal is intended to address the current “cost pressures” related to the tax structure as well as persistent issues, including the black market. The governor noted that his revisions are “the beginning of a process” and that taking on the black market will be a multiyear endeavor.
We are closely following this story and will report on developments.
MARKETS TO WATCH: CALIFORNIA CITY CANNABIS BALLOT INITIATIVES IN 2022
A number of California cities have advanced ballot initiatives in 2022:
SOUTHERN CALIFORNIA:
Beach Cities Leading the Way
Four beach cities have citizen-led ballot measures set to be voted on, either in November or early next year. They are: El Segundo, Manhattan Beach, Redondo Beach and Hermosa Beach. These city governments are separately considering ordinances to manage where cannabis businesses may be allowed to operate.
In El Segundo, the City Council voted unanimously to place a residents’ initiative on the November 8 ballot, seeking to repeal El Segundo’s ban on commercial cannabis. Currently, El Segundo only allows at-home cannabis cultivation. The El Segundo council is pursuing its own initiative.
El Segundo is the latest among the beach cities to pursue ballot measures. Hermosa Beach and Manhattan Beach voters will also decide on November 8 whether to allow cannabis sales in their individual cities. Redondo Beach will place an initiative on its March 7, 2023, general election ballot asking voters whether the city should repeal its existing ban on cannabis and potentially allow 3 dispensaries in town.
The June 6 election produced an interesting result out of Orange County’s Huntington Beach. Like almost all cities in Orange County, Huntington Beach prohibits the sale of medical and recreational cannabis. Ballot Measure A sought to impose a special tax on gross receipts of potential cannabis retailers and was seen as a way to gauge local interest in eventually legalizing cannabis. Under Measure A, the taxes would be earmarked to fund police, homeless prevention, behavioral health services and intervention programs. However, Measure A required a two-thirds (66.67%) super-majority. While the election results have not been certified, it appears as of this writing that the measure may have fallen short, garnering 64.84%.
NEW YORK RECREATIONAL MARKET CLOSER TO TAKING OFF
In the Spring of 2021, New York became the 15th state to legalize recreational use, positioning itself to become one of the largest legal cannabis markets in the nation. The legislation was noteworthy for its direct tie-in to economic and racial equity. Forty percent of the tax revenue from cannabis sales are earmarked for Black and Latino communities, and people convicted of cannabis-related offenses are elgibile to have their records automatically expunged.
The legislation initially legalized personal cannabis use, to be followed by the establishment of a regulatory framework for the new market. New York cannabis regulators have since approved more than 160 conditional use cannabis cultivation licenses, which enable holders to cultivate outdoors or in a greenhouse with up to 20 artificial lights. In addition, earlier this month, the New York State Cannabis Control Board approved regulations for child-resistant packaging, clear labeling of contents and limiting marketing to adult-only audiences. The establishment of these regulations is identified as another major step forward for this nascent state industry.
New York’s recreational retail cannabis market is expected to kick off later this year or in early 2023.
REAL ESTATE AND LAND USE
COURT UPHOLDS DENSITY BONUS LAW EASING DEVELOPMENT RESTRICTIONS
In May, the California Supreme Court denied the last of several requests to de-publish a San Diego case affirming the state’s Density Bonus Law. In doing so, the court added heft to the law that is intended to reward developers for including affordable housing in market-rate projects.
Under the law, projects with five or more units are eligible for more height and density than is allowed in local zoning ordinances, and waivers of development standards (such setbacks), if the projects feature affordable housing.
Local governments can disapprove an eligible bonus project if they determine that the project presents a threat to public safety, harm to a historic resource, or a conflict with state or federal laws. But, the California legislature amended the law in recent years to eliminate other reasons for denial after local governments failed to consistently enforce it.
In the recent San Diego case (Banker Hill 150 v. City of San Diego), an appellate court upheld the approval of the Greystar project, proposed for construction near San Diego’s Balboa Park. The project obtained a density bonus resulting in a 223-foot building with 204 units (18 of which were affordable) even though the building did not specifically comply with local design standards. The state Supreme Court’s denial of de-publication requests means that the case can serve as precedent in similar future disputes between developers and opponents.
OAKLAND VOTERS WILL WEIGH IN ON CITY-DEVELOPED AFFORDABLE HOUSING
The Oakland City Council recently voted to place a November ballot measure before voters that would allow them to decide whether City government can develop 13,000 affordable rental housing units.
California Constitution Article 34 prohibits cities and counties from developing or buying “low-rent” housing funded with public dollars, absent a majority vote of taxpayers. Approved by voters in 1950, Article 34 defines low rent as a subsidized affordable rental housing project that a local government builds, buys or finances.
In recent years, critics have identified Article 34 as an impediment to building low-income housing statewide. The urban planning group SPUR, and others, including the L.A. Times, have dubbed Article 34 as a vestige of the state’s discriminatory land use history.
The L.A. Times Editorial Board noted that Article 34 was approved right after the federal Housing Act of 1949 banned explicit racial segregation in public housing. “The initiative was framed as a way for residents to preserve ‘local control,’” the Times’ Editorial Board wrote in March 2022. “But… [it] was really just a sneaky way to let the mostly white voters bar low-income and minority residents from their communities.”
Voters in cities such as Los Angeles and San Francisco have approved piecemeal Article 34 authorizations in past years and the state Legislature is currently working on a Constitutional Amendment.
LITIGATION
SELNA PARTNERS LITIGATES TWO CASES OF FIRST IMPRESSION
Selna Partners currently represents several clients in real estate and cannabis-related lawsuits. Two of those cases involve legal issues not previously reviewed by any court. The questions they raise are complex, unique and could make new law. They are as follows:
Alameda County voters approved a 2000 measure requiring future voter review of new land uses in rural parts of the County that are not similar to uses already allowed. The County approved large-scale solar projects in 2008, 2012, and solar with battery storage in 2021, without going to voters, arguing that industrial solar is similar to wind electric generators, utility corridors and “quasi-public uses.” Should the voters have been allowed to decide whether to allow the new land uses? And, can the previous solar approvals—absent voter consent—have the effect of legislation, allowing for future approvals?
Federal law prohibits the use, processing, distribution and sale of cannabis, but California law allows it. Is a financial services contract between a California cannabis business and a Washington financial services provider enforceable in federal court, even though cannabis is illegal under federal law?
We will update the information on our cases and report on new litigation and other real estate, and cannabis matters in future editions of our quarterly newsletter.
Please don’t hesitate to contact us to discuss your business operations and legal needs.
Thank you for your interest,
Selna Partners LLP