Jerry Chesler – Attorney/Consultant, Chesler Consulting, LLC writes……

Lawyers who practice in states with legal cannabis know the highest hurdles to their clients’ success come from local zoning. Most practitioners in in non-legal cannabis states have not yet encountered this difficult reality.

Cannabis sales and production are both real estate intensive. They follow the three traditional rules of real estate: “location, location and location”. Dispensaries need the same things as any other retail establishment: access to their customer base; visibility; parking; and freeway access. Cultivation facilities need much (indoor and/or outdoor) space; security; access to retailers; and (reasonably priced) water and electricity. This sounds like any other business.

So what’s the issue? It is the age-old “NIMBY” (Not In My Back Yard) problem. Many towns, counties and municipalities have made conscious decisions to “zone out” cannabis operators. Even when the town allows it, protestors arrive from surprising places. I have clients with dispensaries that sponsor Little League teams. But I have seen Little Leagues oppose zoning of cannabis facilities that are near parks or future parks. People who have not been around cannabis for the past 50 years generally do not recognize the level of public pushback that can appear.

There are large swathes of eastern Washington State that allow no cannabis operations, despite their legality under state law because of local zoning. California is undergoing a boom in new zoning regulations as it prepares for cannabis regulation under the MMRSA (Medical Marijuana Regulation and Safety Act) (http://www.safeaccessnow.org/the_medical_marijuana_regulation_and_safety_act) and, possibly, the AUMA (Adult Use of Marijuana Act). (https://en.wikipedia.org/wiki/Adult_Use_of_Marijuana_Act) This is an ongoing story in Colorado as well.

Those of us in practice in legal cannabis states have learned that getting a cannabis ordinance passed is just the tip of the iceberg. Now that your clients are legal, they have to find some place to operate. And that is where local zoning takes over. Every location has some kind of local rules. They can be welcoming to the legal cannabis industry. But, more often, they are dead set against it.

Small towns and cities often are supported through organizations that provide materials like the Model Cities Proposed Zoning Ordinances. The proposals for medical cannabis seem designed to make operations as difficult as possible. They certainly do not take the operators’ concerns into account. Restrictions on hours of operation and deliveries tend to work against both the patients and the operators. The zoning rules don’t keep the operators out, as that often would be illegal.

The effect of these restrictive zoning policies is to push cannabis operations to the worst locations and limit the municipalities’ potential tax revenues. Fortunately, some reconsideration of these positions is starting to take place as the sky hasn’t fallen from the presence of medical cannabis establishments and their tax dollars spend just like everyone else’s.

We have seen well-documented reversals of restrictive zoning rules in Colorado and California. In Arizona, the rural town of Snowflake (http://www.azjournal.com/2015/07/16/medical-marijuana-grow-facility-approved-by-county-supervisors/) recently annexed some land to incorporate two large cultivation operations. The hope was to bring jobs and tax revenue. While this seems very forward thinking by the town, some residents have now sued alleging open meetings violations. A prohibitionist Arizona state lawmaker recently referred the matter for investigation of the same issues, relying on controversial new statutes that allow the State to meddle in local affairs. (Ideologies favoring small government and local control seem to quickly fall away when cannabis is involved.)

The conflict between state and local rules was never more apparent than during the recent application period for the 31 remaining Arizona Medical Marijuana Dispensary Certificates (the “Licenses”) by the Arizona Department of Health Services (“AZDHS”)(http://azdhs.gov/licensing/medical-marijuana/index.php). The rules promulgated by AZDHS require the jurisdiction of any proposed location to provide written confirmation that the site meets the requisite local zoning requirements or confirm that there are no such requirements. AZDHS created a form for this purpose.

Of course, AZDHS is not in the planning and zoning business. The language of the regulation relates to zoning, but includes nothing about spacing, permitting and variance requirements. Planning and Zoning professionals at many of the cities took exception and refused to sign the AZDHS form. The largest city in Arizona, Phoenix, created its own procedure with a significant charge. Phoenix provides a confirmation letter on zoning, but will not sign the form.

As I write this, it is unclear whether the City of Phoenix will get all of the zoning certification letters done before the final AZDHS deadline. Litigation would not be surprising, as many applicants have paid the $5,000 application fee and are hoping to receive their city documentation before the cure period expires.

The interplay between state and local rules may yet play out in a more significant fashion. In this round of licensing, the sole determining factor was based on the proposed location of the future dispensary. AZDHS had developed a formula to determine if the proposed location will service the most “under-served” patients in the most populous CHAAs (see below). This involved calculating the number of cardholding patients within ten miles of the location and dividing them by the number of operating dispensaries (plus the one on the application).

CHAA has become a term of art in Arizona, but is irrelevant elsewhere. CHAAs are Community Health Analysis Areas, created by the federal government decades ago to identify disease clusters. Since the numbers worked (125 Licenses, 125 CHAAs), AZDHS created a regulation that put one of the original dispensaries in each CHAA.

The idea was to spread dispensaries around the state geographically. Combined with a rule that prohibits home cultivation within 25 miles of a dispensary, the CHAA system was expected to virtually outlaw home cultivation in Arizona. Of course, dispensaries are allowed to leave their CHAAs after three years. At this time, many rural dispensaries have moved to urban areas, leaving large areas of rural Arizona available for home cultivation. AZDHS may or may not address this problem. The market certainly will fill this void if the state does not step in.

The AZDHS formula was problematic to applicants from its outset. The addresses of cardholding MMJ patients are essential to the formula, but they are confidential and protected by both federal HIPPA laws and the AMMA (Arizona Medical Marijuana Act). Industrious applicants (and/or their consultants) estimated populations and checked against available patient information to calculate patient populations. The unknown patient addresses and dispensary locations were locked in by DHS in the middle of June. So very little time was left for the applicants and cities to prepare for the July application window.

The entire system was flawed and litigation may still arise. The premise was that locations would be graded and picked based on the location’s proximity to the most underserved MMJ patients. However, while the dispensary must be in the CHAA, there is nothing that requires an applicant to open at the address for which it applied. In many cases, spacing, permitting and physical obstacles will make these locations unusable. It is likely that many of the winning addresses will not be the actual location of future MMJ dispensaries. That certainly was the case in the initial License allocation. It is possible that aggrieved applicants will feel cheated and sue.

Federal cannabis prohibition continues to haunt the cannabis industry. The problems with finance, banking and enforcement of contracts have been well documented. But federal prohibition also fuels and encourages the local anti-cannabis forces that have ultimate control over the location of cannabis businesses.

As with so many issues in cannabis, there are far more questions than answers. In addition to planning and zoning issues, there are unanswered questions in labor/employment, family law, intellectual property, banking, finance and advertising among others. The good news about having more questions than answers is that there is plenty of work for lawyers.

Chesler Consulting, LLC and Law Offices of Jerald S. Chesler, P.C.
20860 North Tatum Blvd., Suite 300
Phoenix, AZ 85050

Phone:- 480-488-7875

email:- jerry@jchesler.com