Changes to cannabis laws could see return of community impact fees
After years of demanding cannabis businesses pay up to open up in Massachusetts, with municipalities charging community impact fees that reached 3% of gross yearly profits in anticipation of problems, the state Legislature clarified the laws surrounding host community agreements. That clarification could see previously signed contracts between municipalities and businesses revisited, and the return of those fees.
It was a new industry, transitioning from illegal to legal in the state, a detail that prompted legislators to write certain safeguards into the laws regulating the cannabis industry in Massachusetts.
Now those safeguards, host community agreements and community impact fees, are more of a hindrance than a help. They serve as a barrier to hopeful entrepreneurs seeking entrance into the marketplace and have cost the state’s first wave of cannabis business operators millions of dollars that could find a way back into their businesses.
Roughly 450 retail marijuana licenses are issued in Massachusetts, with retail sales up around $4 billion. The state taxes these businesses at 20%. They are also subject to the standard 6.25% sales tax, excise tax and, until the revision, the 3% of gross annual revenue charged as a CIF.
A review of the regulations undertaken last year by the state Legislature, coupled with a number of reports highlighting inequities in the HCA and CIF system, prompted a “clarification” and generated a measure voted into law last November.
Since then, the Cannabis Control Commission has been writing the regulations, filed with the Secretary of the Commonwealth Aug. 21, to bring municipalities, businesses and the state into compliance with the intent of the legislation by November. While the clarification mandates all future HCAs are to be reviewed and approved by the Commission, there has been no determination as to how the state plans to handle existing HCAs.
Public hearing scheduled for Sept. 8 in Worcester
A public hearing on the proposed regulations is scheduled for 10 a.m. Sept. 8 at the CCC headquarters in Worcester's Union Station.
The working group at the CCC charged with implementing the clarifications has said that reviews of agreements during license renewals would not look at “past payments, fees or agreements that are no longer in effect at the time of renewal.”
It also indicated that municipalities would not be required to refund past payments prior to the change in legislation. However, the question of whether the clarification would be retroactive is still very much open. At its July 13 meeting, the CCC indicated that past HCAs will “not necessarily be grandfathered in.”
“It was a brand-new industry,” said Rep. Dan Donahue, D-Worcester, chair of the Joint Committee on Cannabis Policy, explaining the inclusion of the HCAs and CIFs into the original legislation. “It was an industry coming from illegal to legal in the state. How could we predict the impact of marijuana businesses on the community?”
The host agreements and the fees were written into the law as a way to offer a safety value to municipalities, a way for them to alleviate any potential harm the businesses may have caused.
Those impact fees were always required to be “reasonably related” to the harm caused by the business. Now the state will enforce that provision. Under the clarification, municipalities are required to account for the use of those fees and the harms mitigated to the business and the state when a license comes up for renewal.
Fees cannot be folded into the general fund and used for other purposes such as street paving, new sidewalks and police or fire apparatus unless they improvement is directly related to the business.
Since the beginning, municipalities were authorized to charge up to 3% a year of a business’ annual gross revenues as the impact fee. Yet they have demanded the full 3% as the base community impact fee. In many communities the projected revenue funneled about $1 million a year into municipal coffers.
Municipalities have also accepted other perks offered by the entrepreneurs who were ready to promise the moon, sun and stars in their eagerness to secure a license to operate in specific communities.
Medford signs HCA, sample of 'extras' provided by applicant
The first license issued by Medford in March 2022 went to Theory Wellness. In addition to accepting 3% of its gross annual sales as the community impact fee, the business offered to modify its retail space to include a community arts center. Other perks included in the agreement include:
Providing $250,000 of interest-free financing and technical guidance to a Medford resident of color to open a business in Medford
Providing at least $100,000 of financial support and technical guidance to sponsor environmentally sustainable businesses and business practices in Medford
Making annual contributions of $50,000 to Medford-based nonprofits or city-run organizations
Providing $50,000 to the City of Medford to support funding of a Health Impacts Assessment within the first year
Making contributions of $35,000 to public and private schools in Medford for art supplies
Purchasing and donating one police cruiser annually
Adding an EV charging station and a Blue Bike station on site
The retail recreational business is scheduled to open Sept. 15, almost 2 ½ years after it first submitted an application in April 2021.
“This is an industry that was falling all over itself to get into communities,” said Athol Town Manager Shaun Suhoski, a past president of the Small Town Administrators of Massachusetts who is active in the Massachusetts Municipal Association. “All our negotiations were in good faith.”
Athol, with 11 approved licenses to grant, is home to two retail establishments, a home delivery service and two cultivation facilities.
Community impacts lean to beneficial, not detrimental
Suhoski concedes that the businesses have been a boon to Athol overall. The grow facility operates in an abandoned mill building that was refurbished to accommodate it. The businesses overall have brought 100 to 150 jobs to the community.
The biggest complaint: the odor from the grow center and the need to process wastewater differently given its nutrient load.
In Hubbardston, a small rural farming community, odor is the biggest complaint stemming from two licensed outdoor grow facilities.
“The businesses haven’t had a huge community impact overall,” said Town Administrator Nate Boudreau. “There’s no ill will between the town and the company. We will wait to see the guidance and go from there.”
But he complained that the state is moving the goal posts.
In addition to tax revenue and jobs, the cannabis businesses in many municipalities are responsible for the revitalization and the increase in value of less than desirable commercial real estate.
Alexis Fallon, a tax attorney with the Fallon Group in Marlborough who specializes in cannabis tax law, said the valuation of the real estate occupied by many of the businesses has increased. A former applicant for a cannabis retail recreational license, Fallon notes that communities tended to rezoned areas to accommodate cannabis businesses, as required by law, in their industrial areas.
In securing a location for her proposed business, Fallon found a commercial garage, the home of a landscaping business, located on a busy highway, adjacent to an adult book shop. Other proposed businesses in the community also sought out properties in the same vicinity.
Jobs for residents, hike in property values
“The municipalities benefit from the increase in property value,” Fallon said.
In Worcester, Ulysses Youngblood, owner of Major Bloom on Millbury Street, said that the presence of the retail store has benefited what once was an underserved, marginalized community.
“We came in with security cameras, security guards,” Youngblood said of the establishment, which also distills flower and makes certain specialty products. He also has a home-delivery license. Studies have shown, Youngblood said, that once marijuana enters an area, property values increase.
“Some 500 people a day come into the store,” Youngblood said. If they don’t buy from him, they may purchase from his neighbors.
Worcester has been great to work with, Youngblood said. The city charged him a flat $15,000 as an impact fee and spread it over the three licenses he holds. And the city did provide an accounting of how that money was used. Not business by business, but an accounting of revenue collected from the sector and overall how it was dispersed.
Youngblood praised the city’s intentional goal to increase its equity cannabis businesses, reaching out to bring Black, brown, and women entrepreneurs into the market.
That push to expand the market with marginalized players has also been stated as a goal of the Legislature and the commission. To that end, the state has established a fund designed to dole out loans and grants to hopeful entrepreneurs.
“This fund allows access to capital,” Donahue said, adding that because marijuana is still considered a Schedule 1 drug by the DEA, normal banking routes are barred to cannabis businesses. On Thursday, the federal department of Health and Human Services suggested a schedule change for cannabis to a Level 3 substance, a move that must be approved by the DEA.
Youngblood said he had to get creative to raise his initial investment of $1.5 million. He suffered some of the ups and downs inherent in the business.
Deep pockets needed by applicants
In scouting out a location, Youngblood said he initially secured a building and was in the midst of the application process when a city councilor nixed the deal, indicating that they didn’t want a cannabis business in their district. The cost to Youngblood: $10,000 and the hassle of finding a different location.
But he had deep faith. Applicants also need to have deep pockets.
Fallon noted that the lengthy application process, the cost of securing and holding an appropriate property, coupled with the fees charged by municipalities, is detrimental to those entrepreneurs she called “mom-and-pop” and social equity applicants.
“They succeeded in keeping out the little guy,” Fallon said. The HCAs and impact fees served as a barrier to social equity applicants.
“Municipalities looked at the cannabis industry as a blank check,” said Blake Mensing, founder and chief counsel of the Mensing Group, a Massachusetts firm that specializes in cannabis law, permitting, compliance and promoting the industry. “But the jig is up.”
In his estimation, the review of the community impact fees and the host agreements should be retroactive. Failure to review and revise the impact fees and agreements could lead to a spate of litigation on the part of cannabis businesses.
Adam Fine, a partner at Vicente LLP, a firm specializing in cannabis law, agrees.
“This was an exploitation of the law,” Fine said of the imposition of the full 3% gross revenue annual community impact fee. Of the states that have legalized marijuana, Massachusetts is the only one to require the HCA. Inherently unfair, the HCAs tilted the odds in favor of the applicants with deep pockets.
All three attorneys contacted indicated that they had advised clients on occasion not to sign the predatory HCAs.
“But they needed to get a host community agreement in order to operate,” Fine said.
Some cannabis businesses have already filed suit. Stem Haverhill requested a full accounting of how the municipality spent its community impact fee. The cannabis operator filed suit to have the fees returned, alleging the city failed to document the expenditures.
Returning fees to cannabis businesses
Boston city officials indicated last fall that the city would stop collecting impact fees and return $2.86 million to its cannabis businesses.
“We’re already seeing other communities following suit,” Donahue said. “Northampton, for example, the mayor said there was no negative impact to the community.”
He believes that if a municipality cannot account for the spending of the funds, it will be required to return the money. Donahue had no explanation as to why the commission decided it did not have the authority to review or regulate host community agreements and voted in 2018 to remove itself from the process.
An applicant for an adult recreational retail license, one of nine filing paperwork in Medford, Brian Zarthar, opted to focus on another business, The Great American Beer Hall, rather than chase the marijuana business down the rabbit hole.
“I’m fully out of cannabis,” Zarthar said.
He described the whole application process as “stupid.”
The committee reviewing applications had been hand-picked and appointed by the mayor and the way it functioned had no bearing on the cannabis business, Zarthar said.
“It seemed predetermined, it felt as if we were not going to get a license no matter what,” Zarthar said. While his family owned the property where he intended to open Bloom on Mystic, it still cost him money to hold it open for more than a year while the city decided which of the nine applicants would get the three available licenses.
“The demands didn’t bother me, marijuana is a lucrative business, and we could afford it,” Zarthar said. “But other businesses don’t have to pay that.”
This article originally appeared on Telegram & Gazette: "Reasonably related:" the new standard for community impact fees
