LOS ANGELES — California’s legal cannabis industry is running into the same problem many other sectors know all too well: bureaucratic headaches.
Complicated local rules, understaffed city departments and slow communication with state regulators have made starting a weed business in California a protracted and risky ordeal. Red tape and paralyzing legal battles are stunting the market’s growth, leaving aspiring entrepreneurs in cities such as Los Angeles, Pasadena and Fresno waiting months or even years for permission to open, often while leasing empty storefronts.
A new group of cities has recently turned to weed to generate revenue and fill empty retail spaces after the pandemic derailed local economies. But experts say it could be years before those policies translate into real businesses.
This disconnect between city councils’ plans and lethargic government operations is hampering what should be a flourishing industry, said Hirsh Jain, founder of cannabis consulting firm Ananda Strategy.
“We will look back and see cities that passed ordinances because of Covid, but whose stores didn’t open for three years,” he said, pointing to the belief that pandemic-related budget deficits pushed cities to accept cannabis. “That’s how poorly California’s bureaucracy operates.”
Such hassles threaten to undermine efforts by states across the country to stand up legal weed markets that can compete with unlicensed businesses. The dysfunction is acute in California, which requires its hundreds of cities to develop their own marijuana ordinances — if they want to open the door to the industry at all. Other states, such as Massachusetts and Michigan, also require local approval for new cannabis businesses.
No city exemplifies California’s bureaucratic snags more than Los Angeles. The city doubled its number of available retail licenses in July 2020 after applicants sued the city following a licensing software snafu. Nearly a year and a half later, less than 15 percent have opened.
Applicants blame the dysfunction on a range of problems, from lawsuits to poor communication between city agencies.
Madison Shockley III, a former actor turned cannabis entrepreneur, is in year three of the waiting game. His investors have spent more than $150,000 in rent and lease deposits since 2019, he said, as he waits for approval to open his business, Off the Charts.
Los Angeles officials rejected the first location Shockley applied for in 2019 because another applicant had secured a storefront too close to his. The city’s cannabis regulators have signed off on his new location, but he is still waiting for clearance from the building and safety departments and state regulators.
He sees the finish line, years later, but knows that not all applicants can hold out as long. “There are people who were selected to get a license and have told me they can’t deal with the emotional stress,” Shockley said. “And so they’ve decided to walk away from this.”
Cat Packer, executive director of Los Angeles’ Department of Cannabis Regulation, has been vocal about the problems — and what she sees as flaws in the city’s ordinance. The city should allow aspiring business owners to resubmit their applications when they run into problems, she said, and to more easily relocate their businesses to other parts of the city.
Packer is also calling on the City Council to fund 21 new positions in her department as part of next year’s budget. Her office is chronically understaffed and underfunded, she said, forcing licensing staff to handle clerical work like answering phones instead of processing paperwork.
“We’ve always been in this position where the expectations have been greater than the resources allocated and, unfortunately, it was this way from the beginning,” she said.
Sharmi Shah, an attorney who works with a statewide network of cannabis companies on licensing and compliance, said she’s experienced similar snags while trying to help her clients open their doors, including messy licensing processes and overworked city departments that take months to complete basic tasks.
“I can’t tell you the number of times I’ve called a city and asked ‘who’s in charge of this?’” she said. “And then I’ll talk to somebody who says, ‘not only am I in charge of that, I’m in charge of these 18 other things, so it’s not really high on my priority list right now.’”
There are a handful of cities that have developed permitting procedures that get businesses open more efficiently, Shah said. She pointed to San Jose, which has a dedicated cannabis team and does its licensing and building inspections simultaneously, as an example.
California’s two-tier licensing system requires cannabis businesses to get a state permit after receiving local authorization, extending the wait. And the strict caps many cities impose on cannabis licenses have bred fierce competition and lawsuits — often, from applicants themselves — that have thrown the permitting process into disarray.
Pasadena has been sued nearly a dozen times since 2019 by retail hopefuls passed over for licenses who argue the city violated its own rules by having one person score applications, rather than a body of three independent judges. Some of those lawsuits have been dropped or seen rulings in favor of the city, but four approved dispensaries continue to be held in limbo.
Cannabis company MedMen filed a new lawsuit to block the city’s licensing process in October after its application was disqualified, which threatens to extend Pasadena’s delay even further.
Fresno, which awarded 21 dispensary licenses in September, is already facing four lawsuits from passed-over applicants who say the city should have approved their proposals. That could derail the city’s new market before it even gets going.
Litigation is the natural byproduct of a system that for political reasons severely limits the number of cannabis shops that can open, said Adam Spiker, executive director of the Southern California Coalition, a cannabis trade association. He said this is a unique challenge for marijuana operations, as restaurants, clothing stores and even liquor stores don’t face similar restrictions.
“If there’s more desire than opportunities, you better have every single ‘i’ dotted and ‘t’ crossed as you go through your process selecting who wins and loses, or else you’re going to get held up in appeals and litigations by those that feel like they were wronged in the process,” Spiker said.
Mike Moussalli, a co-founder of cannabis manufacturing and distribution company Se7enLeaf, said licensing delays extend throughout the marijuana ecosystem. He said his company paid four times above market rate to lease a facility for two and a half years while waiting for Costa Mesa to approve a permit.
He said city officials worked closely with his business and maintained consistent communication in an effort to speed up the process, but did not have the expertise to regulate a volatile cannabis extraction business, which uses butane and propane to extract compounds like THC from the plant.
“I can say our group spent about six months alone working with the city of Costa Mesa to help educate the fire department and building department of what we were doing,” he said.
Moussalli said the prospect of new cannabis businesses opening in the next few years is promising, but it could be too late if the state doesn’t also push cities to move faster and lower taxes. The legal market continues to be out-competed by a robust network of illicit operations more than double its size that can sell products at much lower prices by avoiding state and local taxes.
State lawmakers have largely been unwilling to pressure cities to act more quickly. A bill that would allow cities to outsource licensing functions to the state stalled this year.
“It’s not as easy as opening 1,000 more retail stores,” Moussalli said, “because it’s going to take five, six years for that to actually happen, and 50 percent of the current businesses are going to die.”