Three IEDs in DHS’ Actual Final Rules Detonate & Blow Many Would-Be Arizona Medical Marijuana Dispensaries Away

Let the litigation begin.  The Arizona Department of Health Services had 120 days to create the rules to implement Arizona’s medical marijuana law.  During that time DHS produced FOUR versions of its rules, but it saved its three  improvised explosive devices until the 120th day.  When the smoke clears from the DHS final rule bombs and allows would-be dispensaries to check their damage, many will find that they are too crippled to continue the race to the dispensary license finish line.

Today, the DHS submitted its final rules to the Arizona Secretary of State, but not without making three new rules that will prevent many would-be dispensaries from actually filing an application for a dispensary license.  Here’s what DHS did:

The Zoning Comfort Letter Bomb

The first bomb is contained in new rule R9-17-304(D)(6), which reads: “To apply for a dispensary registration certificate, an entity shall submit to the Department the following . . . . Documentation from the local jurisdiction where the dispensary’s proposed physical address is located that:

a. There are no local zoning restrictions for the dispensary’s location, or

b. The dispensary’s location is in compliance with any local zoning restrictions

DHS issued the following FAQ on this issue:

Do I need a certificate of occupancy from my city in order to apply? No, applicants do not need to submit a certificate of occupancy in the initial application. They must attest to meeting zoning requirements and provide documentation from the local government saying either there are no local zoning requirements or the location meets the requirements. However, if chosen as the dispensary for a specific CHAA, a copy of a certificate of occupancy or other documentation issued by the local jurisdiction will be necessary when requesting approval to operate the dispensary.”

The legal significance of this new rule is that the decision on which entity will get a dispensary license will be determined at the city or local zoning level.   The rule does not give any guidance on what it means to be “in compliance with any local zoning restrictions.”  Each local zoning authority will decide the conditions on which it will give its zoning comfort letter.  The zoning authorities are  able to give one comfort letter per CHAA if they so desire.  Any would-be dispensary that fails to get a zoning comfort letter by June 30, 2011, is precluded from filing an application to get a dispensary license.   Each local zoning authority is now free to determine who will get its zoning comfort letter.  This new rule is an abrogation of DHS’ duty to select the qualified dispensaries and a shameful dereliction of its duty.

For a an actual example of how the cities are now able to select who will own a medical marijuana dispensary within their jurisdictions, see “Fountain Hills Faces Medical-marijuana Challenge.”  Fountain Hills has only accepted one zoning application so no other would-be dispensaries will be able to operate in Fountain Hills.  Result:  Fountain Hills will determine who owns the dispensary in Fountain Hills, not DHS.

The Landlord Comfort Letter Bomb

New rule R9-17-304(D)(7 ) reads: “To apply for a dispensary registration certificate, an entity shall submit to the Department the following . . . . Documentation of:

a. Ownership of the physical address of the proposed dispensary, or

b. Permission from the owner of the physical address of the proposed dispensary for the entity applying for a dispensary registration certificate to operate a dispensary at the physical address;

DHS went backwards.  The second draft of the rules created a nightmarish situation for prospective dispensaries because a large number of prospective tenants were all trying to enter into leases for a very small number of possible sites.  The law of supply and demand made it impossible for most prospective dispensaries to find a properly zoned site and tie it up with a lease.  This caused rents to soar way above market because the laws of economics applies to medical marijuana dispensaries and available rental space like it does to every other commodity.  It was because of this hellish situation that I wrote an article on February 8, 2011, called “Prospective Dispensary’s Single Most Important Task Before May 30, 2011.”

Once again would be dispensaries will be engaged in a mad scramble to get a comfort letter from a landlord.  Many will not be successful or will be successful only at great expense in time and money.  Most landlords will demand real money to get a letter.  Few will give away comfort letters.  A commercial real estate broker who has been successful in getting leases for would-be dispensaries told me today that some landlords are demanding $5,000 to give a tenant a comfort letter for the purpose of getting local zoning approval.  He also said that he has seen rents for dispensaries as high as $27 a foot, which is more than the going rate for class A office space in the Camelback corridor.

I predict that no prudent landlord will simply issue a comfort letter that satisfies the vague language in the new rule.  I am a real estate lawyer and if I were advising a landlord and asked to draft a comfort letter that said the landlord will give the dispensary permission to lease the premises for a medical marijuana dispensary, I would put in language the makes it clear that the letter does not create a legal obligation on the part of the landlord to lease the premises to the dispensary.  Without actually having a signed lease with the dispensary, every landlord should be concerned that a comfort letter does not obligate the landlord to lease the premises.  I would also advise my landlord client to charge a substantial fee to get a comfort letter.

Query:  If the landlords issue comfort letters that clearly state they are not binding on the landlord, then what is the purpose of requiring the prospective dispensaries to get the comfort letter?  Maybe I’ve missed something, but the only reason I can see for this new requirement is to reduce the number of applicants for dispensary licenses and increase the applicants’ costs of doing business.  Landlords once again have the upper hand which means the dispensaries will pay higher rents and the patients will pay more for their medicine.

See “Arizona Medical-marijuana Dispensaries Face Property Hurdles.”

The Bank Comfort Letter Bomb

Last, but not least, are new rules R9-17-302.A.5 and R9-17-304.D.1.f.ii.  This last minute bomb was triggered by a question that should never have been asked of Will Humble last week at the April 5, 2011, forum in Phoenix.  The first final rules issued by DHS on March 28, 2011, added a new requirement that said the dispensary application had to include:

“Documentation, from an in-state financial institution or an out-of-state financial institution, demonstrating that the dispensary has at least $150,000 available to begin operating was submitted with the dispensary registration certificate application.”

Unfortunately for many would-be dispensaries, a man asked Will Humble if it would be ok to deposit money in the bank, get the letter from the bank and immediately take the money out of the bank.  Mr. Humble was visibly stunned by the question as he visualized a hole a mile wide in his capital requirement plan.  Because of that question, RR9-17-304.D.1.f.ii requires the applicant for a dispensary license to submit “documentation that:

(1) Is from an in-state financial institution or an out-of-state financial institution;

(2) Is dated within 30 days before the date the dispensary registration certificate application was submitted; and

(3) Demonstrates that the entity applying for the dispensary registration certificate or a principal officer of the entity has at least $150,000 under the control of the entity or principal officer to begin operating the dispensary and has had control of the $150,000 for at least 30 days before the date the dispensary registration certificate application was submitted

In-state financial institution” means the same as in A.R.S. § 6-101Out-of-state financial institution” means the same as in A.R.S. § 6-101.

A client asked me the if Charles Schwab or Merrill Lynch are “out-of-state financial institutions?  A.R.S. § 6-101 states that “Out-of-state financial institution means a state or federal bank, savings bank, savings and loan association or holding company with its home office in a state other than this state.”  I don’t believe these types of institutions are banks or S & Ls, but could they be “holding companies?”  I have no clue what the term “holding company” means.  It appears, however, that a person who has sufficient assets in Merrill Lynch or a similar financial institution could not use that type of entity as an out of state financial institution for the purposes of this new rule.

This rule is outrageous, unreasonable, unfair and just plain wrong.  Whether or not the reasoning behind the rule is good is something we could debate, but that is not my problem with the rule.  I despise this rule because it is much too late in the process to issue the rule and simply not enough time for many prospective dispensaries to be able to comply with this new rule issued on the last day of the 120 days DHS had to finalize its rules.

The last day applicants may submit applications for dispensary registration certificates is June 30, 2011.

Note carefully requirement number 3.  It could be a nuclear bomb!  Either the entity applicant or A PRINCIPAL OFFICER OF THE ENTITY (whichever one actually has the funds) must show that it/he/she has had control of the $150,000 for at least 30 days before the dispensary application is submitted to DHS.

Bottom line:  DHS may have just opened the litigation flood gates and may have cost the State of Arizona mega-millions in damages for promulgating unreasonable rules that have no basis in Proposition 203.

What do you think?  What am I missing?  Am I wrong.  Add your comments below.

By |2017-02-11T17:21:23-07:00April 14th, 2011|Banking Issues, Legal Issues|1 Comment

DHS’ Final Arizona Medical Marijuana Rules Now Final

As Will Humble said last week, the March 28, 2011, “final” version of the rules have been changed.  Today the Arizona Department of Health Services submitted to actual final rules to the Arizona Secretary of State.  Here is the  Department of Health Services summary of the changes made to the March 28, 2011, rules.

R9-17-302(A)(5) and R9-17-304(D)(1)(f)(ii)
The 03/28/11 rules allowed applicants for a dispensary registration certificate to submit documentation of $150,000 available to begin operating. The rule was clarified by requiring the documentation to be dated within 30 days before submitting the application, the monies to be under the control of the entity submitting the application or a principal officer of the entity, and the documentation to demonstrate that the monies had been under the control of the entity or principal officer for at least 30 days before the application was submitted.

R9-17-304(D)(1)
Two subsections were added: One subsection requires an applicant for a dispensary registration certificate to submit documentation from the local jurisdiction where the proposed dispensary is located that the local jurisdiction does not have any zoning restrictions or that the proposed dispensary location complies with the zoning restrictions. A second subsection requires an applicant for a dispensary registration certificate to submit documentation that the applicant owns the location of the proposed dispensary or has permission from the owner of the location to operate a dispensary at the location.

R9-17-313(E)
The 03/28/11 rules prohibited a medical director from providing a written certification for medical marijuana for a qualifying patient obtaining marijuana from the dispensary associated with the medical director. Because there is no way for a medical director to ensure that a qualifying patient would not obtain medical marijuana from the dispensary associated with the medical director, the rule was amended to prohibit a medical director from providing written certifications for medical marijuana to any qualifying patient.

By |2011-04-18T09:03:19-07:00April 14th, 2011|DHS Rules|1 Comment

Arizona Department of Health Services Publishes the Final Medical Marijuana Rules

The Arizona Department of Health Services published its final medical marijuana rules (92 pages).

Here are my first impressions of the provisions that apply to would-be dispensaries:

  • DHS took my recommendation and added the owners of entities to its definition of board members who must satisfy the eligibility requirements to obtain a dispensary license.  R9-17-301.B adds the owners of limited liability companies, partnerships and members of a cooperative to the list of board members.  The section starts, “in addition to the individual or individuals identified in the dispensary’s by-laws as board members of the dispensary the following individuals are considered board members: If a corporation is applying for a dispensary registration certificate, the officers of the corporation”  Wow!  This subsection is astonishing because it shows how totally unaware of the business world DHS is.  First, the Bylaws do not normally name the members of the board of directors.  Second, the shareholders of the corporation are not considered principal officers or directors – only the officers of the corporation are deemed to be board members!!!!!!!!!!!!!!!!!!!!!  DHS open the door a mile wide.  People with excluded felonies and non-Arizona residents  apparently can be shareholders of a for profit corporation that seeks a dispensary license.
  • R9-17-302.A states, “If more than one dispensary registration certificate application. . . is received for a single CHAA, the Department shall review the dispensary registration certificate applications for the CHAA to determine if:

1.  Each applicant, principal officer, or board member associated with a dispensary registration certificate application has submitted Arizona state income tax returns for the previous three years with the dispensary registration certificate application;

2. Each applicant, principal officer, or board member associated with a dispensary registration certificate application:

a. Is current on paying court-ordered child support;

b. Is not delinquent paying taxes, interest, or penalties due to a governmental agency;

c. Does not have an unpaid judgment due to a governmental agency; and

d. Is not in default on a government-issued student loan;

3. Each individual who has 20% or more interest in the dispensary is the applicant or a principal officer or board member of the dispensary;

4. Each applicant, principal officer, or board member has never filed for personal or corporate bankruptcy; and

5. Documentation, from an in-state financial institution or an out-of-state financial institution, demonstrating that the dispensary has at least $150,000 available to begin operating was submitted with the dispensary registration certificate application.

Holy money bags Batman!  I didn’t see that one coming.  I guess the big money players won.  Mom & pops lose.  This new and outrageous rule apparently means that applicants for a dispensary license must have at least $150,000 in a bank account to get in the lottery.

What’s with the bankruptcy exclusion?  Many good people have been forced to file for bankruptcy.  There is no relationship to bankruptcy and being involved with a medical marijuana dispensary.  It’s just a DHS excuse to limit the possible pool of owners for what reason I cannot imagine.

R9-17-302.A.3 seems to require that every person who owns 20% or more of an entity (including a for profit corporation) that applies for a dispensary license must be a principal officer or a board member.

  • There are major changes in the way dispensary registration certificates will be awarded.  The lottery may or may not be used, depending on the actual to be determined facts associated with each CHAA.  DHS may award a dispensary registration certificate based on if there are no qualified applicants or multiple applicants at each of the five levels set forth in R9-17-302.A.  Think of R9-17-302.A as containing five review levels.  If only one qualified applicant exists at the A(1) level, that applicant gets a dispensary registration certificate.  If there are multiple qualified applicants at a R9-17-302.A level, they move to the next round/level.  For example, if there are multiple qualified applicants that meet the requirements of A(1), A(2) and A(3), they move to the A(4) level and if only one qualified applicant meets the A(4) level, that applicant gets the dispensary registration certificate.  If there are multiple qualified applicants that satisfy A(1), A(2), A(3), A(4) and A(5) then “the Department shall randomly select one of the dispensary registration applications” to get the dispensary registration certificate.  So, the lottery lives!
  • Looks like there will be a dispensary in all 124 of the 126 CHAAs.  If there are no qualified applicants for a dispensary registration certificate in a CHAA, DHS will select an applicant from another CHAA and award the dispensary registration certificate to that “lucky” or ‘unlucky” applicant.  R9-17-302.B.3 states, “If the Department determines that none of the reviewed dispensary registration certificate applications meets the criteria in subsection (A)(1), the Department shall randomly select one dispensary certificate registration application and allocate a dispensary registration certificate to that applicant.”
  • Multiple dispensary applications are allowed with one catch.  R9-17-302.C states,  “If an applicant submits more than one dispensary registration certificate application, the documentation in subsection (A)(5) needs to demonstrate there is at least $150,000 available for each dispensary registration certificate application submitted.”
  • R9-17-303.C states, “A city or town that contains more than one CHAA may request the reassignment of a dispensary registration certificate allocation from one CHAA to another CHAA under the jurisdiction of the city or town by submitting a written request to the Department by June 1, 2011”
  • DHS pushed back the start date for accepting applications for a dispensary registration certificate to June 1, 2011.  R9-17-303.D states, “The Department shall accept dispensary registration certificate applications for 30 calendar days beginning June 1, 2011.”
  • R9-17-304.A states, “An individual shall not be an applicant, principal officer, or board member on:

1. More than one dispensary registration certificate application for a location in a single CHAA, or

2. More than five dispensary registration certificate applications for locations in different CHAAs”

DHS sanctions multiple applications for dispensaries so long as the applications are in different CHAAs, no more than five applications are submitted and the applicant can get a letter from a bank that it has at least $150,000 for each dispensary application.  Big money wins again!  Shame on DHS for misleading people who don’t have $150,000 cash in the bank into believing for months that they could possibly obtain an Arizona medical marijuana dispensary license.

Note:  DHS appears to have taken my suggestion and that of Alan Sobol to clarify that dispensary applicants do not have to get final city or county zoning approval to be able to file an application for a dispensary registration certificate.  Rule R9-17-304.D.5 combined with R9-17-305.A give dispensary applicants a two stage zoning process.  R9-17-305.A requires final zoning approval only after the would-be dispensary obtains a dispensary registration certificate.  Unfortunately DHS took my suggestion and will allow the winner of a dispensary registration certificate to change its dispensary site to a different location within its CHAA if  final zoning is denied or some other reason exists to move to a different location arises.  Getting final zoning approval is a good thing to do before getting a dispensary registration certificate, but not a requirement to filing an application as some people said.

  • DHS actually set minimum requirements for a business plan.  R9-17-304.D.7 states that the application for a dispensary registration certificate must contain “A business plan demonstrating the on-going viability of the dispensary on a not-for-profit basis that includes:

a. A description of and total dollar amount of expenditures already incurred to establish the dispensary or to secure a dispensary registration certificate by the individual or business organization applying for the dispensary registration certificate,

b. A description and total dollar amount of monies or tangible assets received for operating the dispensary from entities other than the individual applying for the dispensary registration certificate or a principal officer or board member associated with the dispensary including the entity’s name and the interest in the dispensary or the benefit the entity obtained,

c. Projected expenditures expected before the dispensary is operational,

d. Projected expenditures after the dispensary is operational, and

e. Projected revenue;”

  • DHS apparently clarified that applicants for a dispensary registration certificate do not need to jump through all the city and county zoning hoops just t be eligible to apply for a dispensary license.  R9-17-305.A states, “To apply for approval to operate a dispensary, a person holding a dispensary registration certificate shall submit to the Department, at least 60 calendar days before the expiration of the dispensary registration certificate, the following:

2. A copy of documentation issued by the local jurisdiction to the dispensary authorizing occupancy of the building as a dispensary and, if applicable, as the dispensary’s cultivation site, such as a certificate of occupancy, a special use permit, or a conditional use permit;

3. A sworn statement signed and dated by the individual or individuals in R9-17-301 certifying that the dispensary is in compliance with local zoning restrictions”

  • Finally, we get some guidance on what it means for a dispensary to operate on a not-for-profit basis.  R9-17-310.A states, “A dispensary shall:

13. Not lend any part of the dispensary’s income or property without receiving adequate security and a reasonable rate of interest;

14. Not purchase property for more than adequate consideration in money or cash equivalent;

15. Not pay compensation for salaries or other compensation for personal services that is in excess of a reasonable allowance;

16. Not sell any part of the dispensary’s property or equipment for less than adequate consideration in money or cash equivalent; and

17. Not engage in any other transaction that results in a substantial diversion of the dispensary’s income or property.”

  • R9-17-316.B states, “A dispensary shall only acquire marijuana from:

1. The dispensary’s cultivation site,

2. Another dispensary or another dispensary’s cultivation site,

3 A qualifying patient authorized by the Department to cultivate marijuana, or

4 A designated caregiver authorized by the Department to cultivate marijuana.”

 

By |2011-04-03T22:43:13-07:00March 28th, 2011|DHS Rules, Video|Comments Off on Arizona Department of Health Services Publishes the Final Medical Marijuana Rules