At the City Council meeting of November 19, 2019, staff conducted a workshop on the topic of cannabis. Staff and the consultant firm HdL Companies provided background information on cannabis law and policy issues. The City Council expressed interest in legalizing and regulating all aspects of commercial cannabis activity with the exception of cultivation. The City Council provided staff direction to begin working on regulatory and zoning ordinance changes for consideration since cannabis activities are currently prohibited.

Staff has since contracted with HdL Companies to provide cannabis consulting services which include the development of a cannabis ordinance and regulatory management program. To ensure staff is effectively caring out City Council policy, staff has identified the following areas for City Council to provide further policy direction.

What Types of Businesses Should be Allowed?

There are six categories of cannabis business that could be allowed: cultivation, manufacturing, testing labs, distribution, microbusinesses, and retail. City Council has previously expressed interest in permitting all categories of cannabis business with the exception of cultivation.

It is unclear to staff if a microbusiness will be a permitted use. A microbusiness is defined as a single location which is authorized to conduct a combination of cultivation (up to 10,000 square feet of canopy), manufacturing (non-volatile only), distribution, and retail (storefront or non-storefront). In order to qualify for this license, a microbusiness must be engaged in three of the four cannabis business activities as a part of their operation. This is often seen when a vertically integrated business operation desires to establish a business supply chain model. A ban on cultivation would limit the third business activity to include retail (dispensary) or non-storefront (delivery). In addition, this type of business would cause potential zoning issue concerns if it incorporated retail and wholesale activities in one location. Therefore, staff recommends eliminating microbusinesses and cultivation as permitted uses.

How Many Businesses Should Be Allowed?

The City Council should make the determination as to the number of each business type it wishes to allow in the City. Based on the current cannabis market in the state and the surrounding cities and counties, HdL Companies estimates that permitting up to six (6) retailers, would allow for each individual business to develop into a sustainable business operation. This number is equivalent to providing one (1) cannabis retailer per 20,000 residents. Staff recommends allowing a total of up to six (6) retailers within the City but limiting the issuance of new retail licenses in the first year to two (2). This will allow for staff to monitor and further evaluate issues for public safety, traffic, and other unforeseen issues, and recommend changes to licensing parameters if necessary.

For the non-retail business types, testing, manufacturing, and distributing, HdL Companies recommends permitting four (4) manufacturers, four (4) distributers and an unspecified number of testing labs, or any combination of the three (3) activities not to exceed a total of ten (10) permits. The second option would allow the cannabis market to determine the best permit type and number of any given category in the City. However, City Council can opt to allow fewer or more of each type or evaluate the quality of applicants combined and establish a total cap for all businesses upon further evaluation.

What Restrictions Should Be Established?

The City Council may also choose to implement a number of restrictions and requirements as to how, where, and when a cannabis business may operate. The City Council may consider the following issues in making these determinations.

i. Business Location

Cannabis businesses may be restricted to specific zones, or they could be permitted in zones that are specific to the business type. The City Council could opt to restrict manufacturing and distribution to industrial zones while allowing cannabis retailers to operate in commercial zones. HdL Companies notes that cannabis retailers prefer to be centered around “like for like” business types, meaning retail stores (dispensaries) in typical storefronts locations, in areas zoned for retail land uses, as opposed to broadening industrial zoning to accommodate cannabis retail businesses. By accommodating the retailer’s preference to be located in commercial areas, the City becomes a more desirable location for retailers to establish shops and generate higher revenue.

Staff is concerned about the potential impacts of a broad rollout of retail cannabis within industrial zones. The City has a limited supply of industrially zoned land; it makes up less than 10% of the total land within the City and is concentrated into just a few areas. Despite a limited supply, the asset valuation of industrial space within the City is estimated to be $2 billion, the highest in the region. This signals a high demand for industrial space within the City and a need to preserve industrial land for industrial users such as manufacturers and distributors. Retail cannabis in industrial zones presents additional public safety concerns that it could lead to an “out of sight, out of mind” mentality where there are not enough “eyes” on these locations to ensure safe operation. Existing industrial buildings, with limited parking and minimal lighting, are not well suited for retail establishments. Staff recommends limiting the number of retail cannabis businesses within industrial zones to a maximum of two.

Ultimately, these restrictions can be implemented through a zoning ordinance or through a merits-based application process. By utilizing the merits-based application process, the City will have more control over the final location of a business.

In addition to zoning requirements, sensitive distance buffers can be created between cannabis businesses and any particular area of the City, for example schools or parks. State law creates a sensitive buffer requirement that cannabis businesses must be located at least 600 feet from certain land uses (youth facilities, K-12 schools public/private, and commercial daycare centers). However, City Council has the discretion to increase or decrease these sensitive buffer zones as well as add additional sensitive buffers such as parks, public recreational facilities, and residential zones.

ii. Type of Permit

Cities vary in the method they use to address potential site-specific impacts associated with allowing cannabis businesses to operate. One method that is commonly used to address similar sensitive land uses is the Conditional Use Permit. This permit type is required in the City for bars and nightclubs, and a variety of businesses where individual characteristics of operation may be better suited to one location over another in the same zone district given its local context. However, a Conditional Use Permit provides entitlements that can restrict the City’s ability to regulate permitted locations or remove bad actors.

HdL Companies recommends creating a new regulatory discretionary permit process specific for cannabis businesses. Such a process could allow the City to address site-specific considerations or include conditions on businesses operations much the same as a Conditional Use Permit but without providing entitlements.

iii. Additional Considerations

Cities may also implement additional requirements in the following categories: access control requirements, police access, owner/employee background checks, record reporting and retention requirements, investigation and inspection protocols, good neighbor policy mitigation, permit suspension or revocation, and fines. City Council may provide direction to staff to implement any or all of these items. In addition, staff, in conjunction with HdL Companies, will develop other best practices related to cannabis specific activity types authorized for City Council to approve.

How Should Applications be Processed?

Cities are granted great discretion in the cannabis business application process. In cities where the numbers of businesses are limited, it is very common for the cities to implement a merit-based application process. Under this process, a series of scoring criteria are set by ordinance or by City Council resolution. If City Council elects to implement a merit-based application process, staff will return with a series of options and criteria for Council’s consideration.

It is important to note, however, that such merit-based applications are a time intensive process and could require significant staff time and/or resources in order to set criteria and evaluate applications. However, wit the assistance of a Consultant, this process can be completed in a timelier manner. As a result, a merit-based process would inevitably increase the cost of the program and applications fees would have to be adjusted accordingly but would ultimately ensure that the best applicants are selected. Staff recommends a merit-based application with processing contracted out and with expenses built into the application fee.

Should a Tax Measure Be Placed on the Ballot?

Another key component to the cannabis business discussion is revenue. One benefit of allowing cannabis businesses into the City is the potential revenue they can generate. This can be achieved through a cannabis tax measure. If approved by the voters, a tax measure will allow the City to implement a tax for cannabis activities conducted in the City. Different tax rates can be set for each type of business in order to enhance the City’s revenue base while establishing flexibility in the tax rate which will make the cannabis businesses sustainable during various market conditions.

City Council could choose not to move forward with a tax measure. However, it should be noted that a tax measure may only be brought forward during a general election for members of the local governing body. The next such election is November 3, 2020. If City Council chooses not to act this year, the City will be precluded from generating revenue from the commercial cannabis industry until the next election cycle in November of 2022. Thus, staff recommends that City Council place a measure on the ballot this year. The added benefit of the tax is if delivery services from out of town are selling cannabis in the City then they would also be subject to the City cannabis tax.

If City Council votes to place a tax measure on the ballot, there are a couple of options regarding this component.

1. Allow certain types of cannabis businesses and instruct staff to move forward with developing a tax measure for the types of businesses permitted.
2. Allow certain types of cannabis businesses and instruct staff to move forward with developing a tax measure for all types of cannabis businesses.
   It is possible that State legislation or initiatives will require the City to change the types of businesses allowed. It is also possible that future City Councils will allow additional cannabis activities. This option would ensure that the City would not need to return to the voters regarding taxation.

Under these two options, staff will return to City Council with a series of possible options for the tax measure in the spring of 2020. Staff also recommends that any tax measure be a condition precedent to the effectiveness of allowing cannabis businesses, meaning that any regulatory ordinance adopted by the City Council allowing for cannabis businesses will be contingent on voter approval of a tax measure.

It should be noted that as part of the Agriculture Improvement Act of 2018 (2018 Farm Bill), hemp was removed from the list of schedule one drugs, as defined under the Controlled Substances Act, allowing it to be regulated similar to other agricultural commodities. While hemp growers in California must comply with existing laws and regulations, hemp specific regulations have not yet been established at the state level; however, state regulations are anticipated within the next 12-18 months. Should the City Council direct staff to proceed with a ballot measure on commercial cannabis, staff recommends that council include language in the tax measure to tax industrial hemp in anticipation of this changing market and state regulations allowing it in cannabis operations or as a standalone business.

Conclusion

In summary, staff is requesting that Council provide policy guidance and direction to the following questions:

1. What types of cannabis businesses should the City of Fairfield allow?
2. How many of each type should be allowed?
3. Where should each type of business be allowed?
4. What sensitive buffers and additional restrictions should be placed on each type of business?
5. What type of application process should be developed?
6. Should the City of Fairfield put forward a ballot measure for a cannabis tax?

          a) If yes, direct staff to return with options for this ballot measure. 

                   i. Cannabis tax only
                   ii. Cannabis and hemp tax

There is no direct fiscal impact associated with staff’s recommendation. Expansion of commercial cannabis activities can have both costs and revenues for the City. The consultant contract with HdL Companies to assist in developing a cannabis regulatory program cost $28,800. Additional costs would be incurred for processing cannabis-related business applications and one-time or ongoing monitoring. All of these costs may be recovered from the application and permit fees. The City Council could also seek a cannabis program that provides positive revenues for the City via taxation. Should City Council direct staff to pursue a ballot measure to tax cannabis, staff will conduct an analysis to determine the fiscal impact for City Council consideration.