Equity applicants for cannabis business permits are facing waits of anywhere from 13 to 24 months before approval, according to a new city report. (Examiner file photo)

SF’s permit delays cause disadvantaged cannabis applicants to go into debt, sell-off shares

Report: ‘The City has undermined its own equity goals’

San Francisco’s cannabis equity program was supposed to help those impacted by the criminalization of the drug in the past by giving them a foothold in the new legalized industry.

However, the City’s permitting process is so slow and cumbersome that it is actually hurting equity applicants by forcing them to take on debt or sell shares in their prospective businesses while they wait for approval, according to a new report released Thursday.

The report from the City Controller’s Office is the most recent evidence of the shortcomings of a program meant to help disadvantaged residents who were impacted by enforcement of anti-cannabis laws that disproportionately impacted people of color.

The San Francisco Examiner has previously reported on the delays that the report said may cause these applicants to “be further disadvantaged by the city’s inability to provide timely permit processing.”

“To cover costs while waiting for application approval, many equity applicants are incurring debt and/or selling ownership shares in their business to investors who can provide capital,” said the report. The selling of the shares means they will benefit less from their enterprise and monied interests will gain an even greater share of the industry.

Costs for waiting include incurring rent.

“Because applications are tied to this business location, applicants may have to carry the location costs (e.g., rent) for the entirety of the permitting process,” the report said. “This can be an enormous cost to applicants in a city with one of the highest commercial rents in the country.”

The Office of Cannabis, which operates under the City Administrator, is tasked with permitting all types of cannabis businesses and regulating the industry. Approvals from other city departments like police or fire are also required.

But the report, titled Cannabis in San Francisco: A Review Following Adult-Use Legalization, found that The City has created a complex permitting process without the staff resources to handle the process, resulting in a “significant” bottleneck of applicants.

“The City has undermined its own equity goals and intent to eliminate the illicit market,” the report said.

San Francisco’s legal cannabis sales for adults began in 2018, when existing medical dispensaries and other related enterprises were allowed to transition to recreational sales. The City also created a cannabis equity program to allow those with prior arrests or other impacts from cannabis criminalization to open new storefronts and other types of cannabis busineses like grow operations, but it is this effort that has suffered.

There are 277 equity permit applications and “no equity applications have been granted a permanent permit yet,” the report said. The equity applications include 133 for storefront retail sites and 46 for delivery operations.

The 133 storefront applications are for locations “heavily concentrated in Civic Center, Union Square, the Mission District, and South of Market.”

Meanwhile there are 37 permitted cannabis retail storefront operators, “which were medical dispensaries or were in the process to become medical dispensaries before adult-use legalization,” the report said. Factoring in other types of permitted operations, there are a total of 212 cannabis businesses, including 41 deliveries, 45 cultivation operations, 42 manufacturing sites, 46 distribution enterprises and one for testing.

Storefronts vary by supervisorial district. District 4, the Sunset, for example, has one storefront while District 6, the Tenderloin and South of Market area has the most at 25. District 3 has the most delivery-only retailers.

While existing facilities were allowed to start selling cannabis in January of 2018, the application process for equity applicants didn’t start until May 2018.

“As of August 2019, no [equity] applicants have finished it and become permitted; although some hope to do so before the end of the year,” the report said. “That means the process from application to approval will be somewhere between 13 and 19 months for applicants whose applications were well-developed and experienced few delays in the process.” As for those still waiting approval, there’s a longer wait expected of 18 to 24 months before obtaining a permit.

The report recommends that The City should create “a priority permitting lane or expedited processing for equity applicants in departments other than the Office of Cannabis, including but not limited to: Planning, Police, and Building Inspection.”

The report also recommends providing financial assistance to the equity applicants. The City had planned to do just that through the establishment of the Community Reinvestment Fund but it “has instead gone unfunded due to concerns about the city’s liability,” the report said. Cannabis remains illegal under federal law. By contrast, Oakland has provided $3.4 million in loans to its equity applicants.

In addition, the report warned that the market may not sustain the 133 additional storefronts and that “equity applicants will be starting out at a disadvantage compared to existing retailers who have had the benefit of already operating.”

Recreational cannabis was legalized in 2016 when voters passed Proposition 64, a measure that received 74 percent voter approval in San Francisco.

The reported revenue from the cannabis industry continues to grow and now comprises 1.2 percent of all taxable sales in San Francisco. Reported taxable cannabis sales in 2015 totaled $123 million and that increased by 85 percent in 2018 to $228 million, according to the report. The City received $2.2 million in cannabis sales tax last year.

But the report raises questions about the strength of the cannabis industry.

Compared to other major cities, San Francisco has the highest average price at nearly $20 per gram while the least expensive is found in Portland at $6 per gram. In January 2018, the price per gram in San Francisco was $14.11, showing a 41 percent increase since then.

“It is possible that legal cannabis prices are increasing, not because demand is growing, but rather, because demand is falling, and operators need to maintain revenues,” the report said. “Weaker sales and higher prices in San Francisco could also be attributed to the continued presence of the competing and less expensive illicit market.”

The report also looked at cannabis-related crime data and found racial disparities in arrests persist.

“Despite the total number of cannabis-related crimes decreasing year-over-year from 827 incidents in 2013 to 186 in 2018 (a decrease of 78 percent), the racial disparity of who is arrested has not changed,” the report said. “African-Americans have been disproportionately arrested at the highest percentage rate compared to all other races. In fact, African-Americans comprise between 41 percent and 52 percent of cannabis-related arrests since 2000.”

The report was required by the legislation approved by the Board of Supervisors and mayor regulating recreational cannabis.

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