Riverside County Will Lose $30 Million with Proposed Marijuana Biz Ordinance

Riverside County has just released its proposed ordinance on marijuana businesses and will hold a Board of Supervisors hearing on the morning of Tuesday, Jan. 29 at 9 a.m. As expected, the ordinance is a morass of overly complex regulations, byzantine bureaucratic application procedures designed as a full employment program for lawyers and a Developer Agreement finance scheme that will result in massive losses of tax revenues to Riverside County.

Now am I sure about what I wrote above? No I am not because this ordinance is as transparent as lead. There are 9 lengthy, complex and obtuse attachments for the BOS to consider when this ordinance comes up for consideration on Tuesday, Jan. 29. If you want to peruse this entangled amalgamate of regulations, permits, fees and more CLICK HERE.

Under this ordinance the county will issue 100 permits broken down into 50 for cultivators, 19 for retailers, 22 for manufacturers, 4 for nurseries, 4 for distributors and one testing laboratory. The rational behind these off-the-wall numbers is that this is the most the Planning staff can handle in 2019.

The major flaw in this entire ordinance is that it is based on a Developer’s Agreement model instead of a Regulate and Tax model which is used by every other municipality that has allowed cannabis businesses to exist. The problem with a Developer's Agreement is that fees cannot be based on sales as then it would be a tax and would require a vote of the people.

If you do not know what a Developer Agreement model is and how absurd it is to apply to cannabis businesses, check out my Oct. 2018 newsletter by CLICKING HERE. With an understanding of what a Developer Agreement is and what it does, it becomes crystal-clear see why no other city or county in California has gone the Developer Agreement route.

The Riverside County BOS had no concept of what they were doing when they went along with Supervisor Chuck Washington’s insistence that a Developer’s Agreement be used for legalizing cannabis businesses. After passing this absurd ordinance, they dumped the problem on figuring out how to implement a Developer’s Agreement onto the backs of the Riverside Co. Planning Dept.  The Planning Dept. had no idea how to do this so they spent an unknown amount of taxpayer dollars to hire HdL Consulting Company.

HdL bills themselves as “the only consulting firm with professionals who have direct experience regulating cannabis operations at the local and state level.” They have made millions developing ordinances, writing regulations, crafting licenses and constructing tax programs for befuddled cities and counties throughout the state.

Not knowing what to do the Riverside County Planning staff punted to HdL to essentially reinvent the wheel as no one has ever done this before with cannabis businesses.

Did the County get its money’s worth? As far as I can tell from my reading of the HdL Companies report, they didn’t - that is if they were expecting a scheme to produce the same $30 to $40 million a year in revenue that a traditional regulate and tax system would produce.

Why is this? It’s the nature of the beast of what a Developer’s Agreement is and is supposed to do. The ordinance is exceedingly complex but I will endeavor to make the following explanation easy to understand. If you take the time to methodically explore it with me, I believe you will come away with an understanding of why this is a prime example of our county government not knowing its ass from a hole in the ground.

In explaining what a public benefit fee does the HdL report noted “The public benefit contribution presents an anticipated range of additional benefits that cannabis business applicants may offer and commit to as a competitive part of the development agreement process.”

The report then offers an example of a typical public benefit fee.

“For example, a cannabis business applicant may offer to pay an additional contribution per square foot (on top of the baseline fee), or they may offer to fund a specific service, such as the full or partial cost of an additional Sheriff’s Deputy, or a public works project that improves the neighborhood where the business intends to locate.”

Here is where it really gets cagey as the report notes:

“These public benefit contributions are presented as a range, from high to low.  These ranges are based upon common cannabis tax rates among 25 local government ballot measures on this past November’s ballot.  It is common to base cannabis cultivation taxes on square footage, but it is uncommon to do so for retailers, manufacturers or other types of cannabis businesses.”

The report tries to pull its punches by saying “it is uncommon to do so for retailers . . .” – the fact is it is beyond uncommon – it is non-existent.

Now the HdL report shows just how goofy a Developer’s Agreement is when applied to cannabis businesses  when it states:

In this case, the public benefit contribution is not intended to be proportional to earnings in any way, but is rather intended to be proportional to the amount of impact that the business may have broadly on the community.

This is followed up with this zinger:

“The rates are generally tiered so that smaller operations (by square footage) pay a lower rate than larger operations.”

For a retailer, that means a dispensary with 1,000 square feet and $100,000 a month in sales will pay a lower Community Benefit Fee then a dispensary with 2,000 square feet but only $60,000 a month in sales.

The HdL report then list four scenarios for how much money Riverside County will generate using the Developer’s Agreement. Depending on the scenario the amount of money generated from retail sales will range from $2,870,000 to $4,300,000 – a far cry from the $30 to $40 million the county could have earned from conventional regulate and tax programs.

To explain how they arrived at the figures in these hypothetical scenarios, HdL presents a truly off-the-wall and disingenuous justification:

“The range of public benefit contributions is intended to approximate the amount of contributions that cannabis businesses around the State are able to reasonably provide, based upon typical profit margins and operational costs converted to a reasonable square-foot apportionment.”

The HdL report is totally silent on how to actually in a real-world sense determine a benefit fee “based upon typical profit margins and operational costs converted to a reasonable square-foot apportionment.”  I guess they are dumping that on the County, but since HdL couldn’t figure it out I doubt if the County’s Planning staff can either.  

The HdL report is a rip-off and Riverside County should ask for their money back. Then again they were asking HdL to do the impossible so they shouldn’t be surprised when HdL can’t do the impossible but writes a report in order to justify the amount of money the County paid them to write a report.

Now it may be argued that the lower fees under the Developer Agreement model will mean lower costs for cannabis consumers. Now that would be worth celebrating but I really doubt if cannabis consumers will see much in cannabis price reductions. They certainly haven't seen much in retail price reductions even though wholesale prices of cannabis have plummeted from an average $2,500/pound pre-Prop. 64 to about $1,250/pound post-Prop. 64.

I have no idea what Riverside County is going to do with the HdL report and the ordinance under consideration at the Tuesday, Jan. 29 meeting of the BOS. If you are looking to get into the cannabis business in Riverside County then you need to be at this meeting if you are ever going to understand what is  happening in Riverside County and what you will have to do if you want to have a cannabis business whether it is a farm, an edible’s manufacturer, a dispensary or a mom-and-pop microbusiness.

It is possible that the BOS may just put this off for another year or two, so if you are a cannabis consumer, you should be there too and let the County know that you expect to have safe, reliable and local access sooner rather than later.

For political junkies who live to see elected officials tie themselves up in knots made under the influence of reefer-madness, this will be a most entertaining government meeting.

The Riverside County BOS meeting will be held on Tuesday, Jan. 29. The meeting begins at 9 a.m. but it is anybody’s guess when it will come up for consideration. I have been told by a reliable source that it is unlikely to be discussed before 10 a.m. BUT if you want to testify it might be best to get there earlier just in case the BOS limits public testimony to just one hour.

The Riverside County BOS meeting is held in the first floor council chambers in the Riverside Co. Administration Building at 4080 Lemon St., in downtown Riverside 92501.

I will be making contact with Riverside County staff and officials on Monday and I may learn a few things – like I got everything wrong and I don’t know what I am talking about or I may get my worst fears confirmed. For those who are interested in learning about what I learn on Monday, I will be holding an open-to-all teleconference on Monday, Jan. 26 at 9 p.m. If you would like to participate in the teleconference, call 605-475-3235 and use access code 275905# to join the conversation.

February MAPP Meetings

Learn about what happened in Riverside, get the latest news, join in the discussions, network, make new friends, stay in touch with old friends, enjoy cookies with milk and win a genuine silicon pipe.

Coachella Valley/Palm Springs MAPP meeting – Saturday, Feb. 2 at 12 noon at the exotic Crystal Fantasy, 268 N. Palm Canyon in downtown Palm Springs 92262.

Morongo Basin/Joshua Tree MAPP meeting – Saturday, Feb. 2 at 3 p.m. at the legendary Beatnik Lounge, 61597 Twenty-Nine Palms Hwy., Joshua Tree CA 92252.

Western IE/Riverside MAPP meeting – Our meeting place has closed so the Feb. meeting is canceled until a new place to meet is located..

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