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Stuck in the Weeds with Massachusetts HCAs
By: Burns & Levinson Cannabis Business & Law Advisory Group
A few years ago, the Commonwealth was considered an East Coast cannabis trailblazer for legalizing adult-use cannabis in 2016. However, there is mounting criticism faulting Host Community Agreements (HCAs) for dampening the industry's growth potential in Massachusetts. Let's take a look at the basics and burden of Massachusetts' HCAs:
Hosting Headaches
As a prerequisite for filing an application for a license in Massachusetts, a marijuana establishment must execute a Host Community Agreement with municipality where it intends to be located. (1) A HCA is a negotiated contract between the establishment and municipality, which includes terms and conditions relating to how the establishment will operate in the local community. There is not a standard form HCA because each municipality will need to consider the relevant circumstances and effects of an adult-use establishment entering the local community. This is not a quick administrative decision- the municipality must first vote to consider whether it even wants an adult-use establishment within its borders and any limitation on the number of establishments permitted. After deciding to open its doors to an adult-use establishment, in negotiating the Host Community Agreement the municipality also needs to consider the financial impact and related fees to charge to the establishment.
HCAs carry a substantial financial weight to adult-use establishments, as well. State law permits a municipality to optionally impose a "Community Impact Fee" on a marijuana establishment. The Community Impact Fee cannot exceed more than 3% of the gross annual sales of the establishment, and can only be effective up to five years. The Commonwealth's cannabis regulator, the Cannabis Control Commission ("CCC") provides guidance indicating that Community Impact Fee is charged for the municipality's conveyance of a benefit to the establishment, and such fee needs to be reasonably related to the benefit received. (2)
While adult-use establishments are subject to state taxes, the municipality may also levy a local excise tax of up to 3% of retail transactions.
In addition to the local tax and Community Impact Fee authorized by the statutes, municipalities are seeing further green by requiring additional fees and contributions as terms in the HCAs. An issue with the plain writing of the cannabis statute is that it did solely limit local fees to the taxes and Community Impact Fee and as a result municipalities are free to add other fees and costs as permitted under state law.
To Bring A Hostess Gift?
In the traditional rules of etiquette, it is considered polite to bring a hostess gift. However, is it really a gift if the host requires it in exchange for serving you dinner?
Municipalities are hardly playing the role of a gracious host. Many Host Community Agreements have required an establishment to pay above and beyond the Community Impact Fee and excise tax, and also make a gift, grant or contribution to the municipality or a third party as a term for executing the HCA.
These gifts, grants, and contributions have included on-street parking spaces, donations to local nonprofits, funds for education programs, and tiered annual donations to charity. The scrutiny of these types of arrangements has garnered further public momentum on the issue in recent months.
In November 2019, U.S. Attorney Andrew Lelling subpoenaed several Commonwealth municipalities for documents relating to negotiations of the local Host Community Agreements. This the investigation follows the September 2019 headline, where now-former Fall River Mayor Jasiel Correia II was arrested for allegedly engaging in a pay to play scheme for executing Host Community Agreements.
In December 2019, an Essex Superior Court opinion illustrated frustration with the disproportionate bargaining power of Host Community Agreements. (3) The plaintiff- a marijuana establishment seeking a local operation license, filed suit against the City of Salem. Salem had in place that it would only execute a limited number of HCAs, and chose not to execute one with the plaintiff. The plaintiff had secured site control and a special permit, but was denied through the local application structure. This denial prevented the plaintiff from applying for a license through the CCC. The opinion discusses that just because the plaintiff held site control and permits it did not entitle him to an executed HCA. Salem had a process for reviewing applicants and the municipality has the discretion to accept or deny applicants. The opinion shared the sentiment that HCAs are negotiated agreements, and sometimes negotiations are not successful. Ultimately, the court ruled in favor of Salem and said it was within its discretion to reject the plaintiff. Many view that this may have been a precedential opinion for surrounding municipalities and that this is a step back for establishments searching for more equal terms with the municipality.
Hosting Hold-Up
Host Community Agreements were never intended to the sole decision-factor in adult-use licensure, however in operation- an establishment's inability to execute Host Community Agreement in the Commonwealth precludes it from submitting a valid application to the CCC for a license. Understandably, for a marijuana establishment- negotiation of a Host Community Agreement is a "make or break" for business success. Adult-use establishments feel the pressure to open and operate and are left with little bargaining power when it comes to negotiating a coveted HCA. Additionally, there is little incentive under the current for a municipality to level its bargaining power.
As it currently stands, HCAs are largely one-sided in the municipality's favor. Looking toward the future, Host Community Agreements, we believe the HCA process would benefit from further regulatory clarification on the permissible fee and payment structure.
(1) See: The Commonwealth's Adult-Use Cannabis Statute, MGL Chapter 94G, here.
(2) See: Cannabis Control Commission's Guidance on Host Community Agreements (08/2019), here.
(3) See: Mederi, Inc. vs. City of Salem Superior Court Decision, here.
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Frank A. Segall
fsegall@burnslev.com
Frank Segall sits on Burns & Levinson's Executive Committee, chairs the firm's Business, Finance, Restructuring and Venture Capital & Private Equity groups, and co-chairs its Cannabis Business Advisory practice. With a background in finance and business operations, Frank regularly negotiates business deals that include mergers, acquisitions, sales, syndications, loans, restructuring, and equity investments. He also provides counsel to cannabis investors, lenders, and operators of cultivation and dispensary facilities. Frank was named an inaugural "Cannabis Trailblazer" by the National Law Journal in 2018.
Scott H. Moskol
smoskol@burnslev.com
Scott Moskol is a Burns & Levinson partner and co-chairs the firm's Financial Restructuring & Distressed Transactions and Cannabis Business Advisory practices. He is also a member of the Corporate, Finance, and Infrastructure & Public-Private Partnerships practices. Since 2013, Scott has provided corporate counsel to a nationwide base of clients in the cannabis space. He is often retained for assisting with capital raises, structuring appropriate investment vehicles, drafting operative documents, and providing general business advice, given his involvement as an executive team member of one of his operating entity clients. Scott was named to the National Law Journal's inaugural "Cannabis Trailblazer" list in 2018.
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