Massachusetts Cannabis Industry Reform

Burns & Levinson LLP

Over the past few years, August has become a popular month for cannabis industry reform in Massachusetts.

Lauren Medeiros Forster

Most recently, the Massachusetts legislature approved a bill, S. 3096, earlier this week that significantly changed many of the challenges faced by operators in the Commonwealth’s cannabis market for years. At a high level, the reforms focused on two main aspects – social equity and host community agreements (HCAs). The bill has been sent to the desk of Charlie Baker for approval.

Here’s the top three things you need to know about the updates to social equity and HCA as proposed in the new bill.

Social Equity

  • Leveling the HCA Playing Field – The new bill establishes that the Massachusetts Cannabis Control Commission (CCC) will now have the power to develop a model HCA with minimum standards and best practices to be implemented during the negotiation process between social equity licensees and their host communities that they intend to operate. These standards will be specific to social equity businesses (SEBs), which presumably could give SEBs a leg up in negotiating power with municipalities with respect to HCAs that may not necessarily be available to other licensees.
  • Cannabis Social Equity Trust Fund – The legislation proposes the formation of a fund called the Cannabis Social Equity Trust Fund “to encourage the full participation in the [C]ommonwealth’s regulated marijuana industry of entrepreneurs from communities that have been disproportionately harmed by marijuana prohibition and enforcement”.
    • Purpose – Focus on areas or communities in the Commonwealth that have been disproportionately impacted or harmed by the War on Drugs has been one of the main focal points of the CCC since its creation of as an administrative body. The establishment of the Cannabis Social Equity Trust Fund falls in line with this effort.
    • Funds – The Cannabis Social Equity Trust Fund is expected to consist of funds from private sources (such as gifts, grants, and donations) as well as fees generated from monetary penalties issued to any municipalities that fail to adhere to the new policies and procedures relating to HCAs described below.
    • Positive Impact Plan Credit – Current Marijuana Establishments and Medical Marijuana Treatment Centers are encouraged to donate to the Cannabis Social Equity Trust Fund under the new bill’s proposal to give such operators credit to satisfy their positive impact plan requirements via contributing a percentage of their revenue to the Fund as a donation.
    • Violations of a Grant under the Trust Fund – There will also be new regulations forthcoming from the Commonwealth’s executive office of housing and economic development controlling the structure and administration of the Cannabis Social Equity Trust Fund, which will include, among others:
      • Provisions prohibiting the sale, transfer or pledge of assets or interest by a SEB to a person or entity that is not an SEB within a 5 year period from the date the SEB is authorized to commence cannabis operations;
      • Clawback terms for the Commonwealth to recover 100% of the granted funds under the Cannabis Social Equity Trust Fund in the event of such sale, transfer or pledge of any assets or interest by an SEB in violation thereof. Such provisions could have a chilling effect on SEB’s ability to obtain funding from sources other than the Cannabis Social Equity Trust Fund as well as could interfere with their exit strategies within this initial 5 year restricted period;
      • Violations of a condition of a grant or loan made under the Cannabis Social Equity Trust Fund also include fines of up to 50% of the loan value per violation in addition to the Commonwealth’s recovery of 100% of the funds loaned.
  • Advisory Board – Oversight of the Cannabis Social Equity Trust Fund will be administered by the executive office of housing and economic development, as well as a newly created cannabis social advisory board (Advisor Board). The advisory board will be comprised of, among others, one member with a background in the cannabis industry, one member with a background in finance or commercial lending and one member with a background in business development or entrepreneurship. Each member shall serve for a 5-year term without compensation except for reimbursement of reasonable expenses.

Host Community Agreements (HCAs)

The new legislation also proposes significant changes to HCAs – replying to several gripes operators have been raising for years. Cannabis businesses in Massachusetts have had little leveraging power in negotiating HCAs in municipalities in which they seek to operate. Many HCAs are riddled with fees excessive of the statutory 3% of gross sales (ie., terms that set the floor of a community impact fee which can be “the greater of 3% gross sale and such other negotiated number”), additional contributions required to be made to town departments or charities, and other egregious terms. This new bill proposes new regulations to level these waters.

  • Community Impact Fee Limits – under the new bill, municipalities are only allowed to charge licensees up to 3% of gross sales of the cannabis operator for an eight-year period (author note: HCAs statutorily could only continue for a term of 5 years under previous law).
    • Payments of the community impact fee are required to be paid on an annual basis, commencing no sooner than the licensee’s first annual renewal of final licensure by the CCC.
    • Community fees are required to be “reasonably related to the costs imposed upon the municipality by the operation of the [cannabis operator].” Additional payments, such as monetary payments, in-kind contributions and charitable contributions are prohibited and explicitly not enforceable.
  • CCC Oversight – The CCC is given statutory authority to review and approve each HCA, both at the application stage and on an annual basis at each license renewal. The CCC will provide both the licensee and the municipalities of any deficiencies and may request additional information as needed to complete its review.
    • The CCC has 90 days after receipt of an HCA to complete its review. If this law is signed into effect, licensees should be mindful of sending the CCC its HCAs with enough time to review within the slotted 90-day period prior to their license(s) lapsing, considering a final license cannot be issued until the CCC has completed its approval.
    • Further, this leaves open the possibility that a municipality can freeze up the issuance of final licensure to the extent that recommendations or violations issued by the CCC are not corrected. We hope to have some of these questions answered with forthcoming rules and regulations expected to be promulgated by the CCC within one year of the bill’s effective date, to the extent this law is signed into effect.
  • Violations – The new bill addresses a few potential consequences in the event of violations to these new HCA requirements.
    • Municipality Fines – In the event of any violations committed by the host municipality, such city/town shall be required to pay a fine up to the annual total of community impact fees received from all cannabis operators operating in such host community and shall distribute such payment to the Cannabis Social Equity Trust Fund.
    • Remedies for Licensees – in addition to the above, licensees also have a statutory right to raise a breach of contract claim and recover damages, attorneys’ fees and other costs if they believe that such city/town is not providing information documenting a community impact fees that is reasonably related to actual costs imposed upon the host municipality in the preceding year by operation of the cannabis facility.

Other reforms promulgated by this new bill include expanding certain tax deductions cannabis licensees may be able to partake in that are not otherwise available due to federal illegality of cannabis, as well as the legislator’s interest in initiating a study on elementary and secondary education with respect to the possession and consumption of medical marijuana in public or private schools in the Commonwealth to students who have been issued a valid medical card.

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