Cannabis Businesses Cry Foul Over One City’s Equity Rules

August 11, 2023 · Green Market Report

Brandon Kanitz, CEO of Grand Rapids, Michigan-based marijuana company Fluresh LLC, moved to Traverse City, Michigan, in September 2020. The COVID-19 pandemic had closed schools, the family man needed help with child care and his wife’s family lived in the Grand Traverse region.

But moving put Fluresh in violation of Grand Rapids’ medical marijuana social equity system, which requires 25% local ownership. The city’s licensure scoring system provided “bonus points” to companies that committed to local ownership, a diverse workforce and diversity among its supply base, among other stipulations.

However, at the time, it was a problem without consequence as the city had yet to finalize its social equity program or enforcement regime. Then came Jan. 1. The city now requires companies to abide by the social equity commitments or face a fine of up to 5% of sales or risk their business license not being renewed.

In April, Fluresh was fined $60,000 for Kanitz’s move and must pay the total into the city’s new marijuana social equity nonprofit fund, which aims to distribute money to projects that benefit disadvantaged groups in the city impacted by drug laws, for the next three years.

“It’s a circus,” said Sharon Reid Williams, general counsel for Fluresh. “We made the commitment, yes, but the city dragged its feet for years on what enforcement would look like. There was so much confusion around the city’s policy that it took this long to figure out. We were unclear what the hell we were supposed to do. So now we’ve got to pay a portion of our sales? There is no businessperson that would sign up for this if they knew ahead of time.”

The city says the fine and nonprofit arrangement is innovative and just to offset decades of negative marijuana laws. But industry representatives say the system is unnecessarily cumbersome and puts further risk on operations under rules that don’t apply to any other sector.

A System for Giving Back

Municipalities across the country were encouraged by state governments to create cannabis-related programs to regulate businesses and fund social equity, a sort of mea culpa from drug laws that often discriminated against underprivileged and minority communities.

Grand Rapids established the Cannabis Justice Workgroup to handle the creation of its program, and in July 2020 it recommended that the City Commission approve the formation of the nonprofit Community Reinvestment Fund to carry out its equity goals. But the pandemic derailed those plans and the fund wasn’t created until February 2022.

The penalties associated with noncompliance of equity agreements and donations will make up the nonprofit fund, said Ciarra C. Adkins, the interim director for the city’s office of equity and engagement.

But even though enforcement is now ongoing, how much the city is collecting from fines and where it will be distributed has yet to be decided.

“These are conversations we’re actually having with the board right now,” Adkins said. “Those are some big decisions for the board to make. We think this is an innovative opportunity to support communities of color, knowing there have been historic harms.”

Williams takes offense to the entire fund as the company always intended to support disadvantaged communities, especially those near its operations on the city’s south side, including the neighborhoods of Burton Heights, Garfield Park, the Madison area and Martin Luther King Park.

Now it has no choice in where those dollars go, she said.

“When the city asked me about this (nonprofit fund), I told them it wasn’t a good idea,” Williams said. “It’s misplaced. It’s not individuals in the cannabis industry that overpoliced or enforced redlining or housing discrimination in the city. It was the government. I fundamentally have a problem with this only being an albatross on the neck of the cannabis industry. It doesn’t mean we can’t have an impact in the areas of focus. That board takes our money and then decides where it goes. I want to see our dollars going into the areas we serve. I care about the 49507. They need to show me their commitment to the 49507.”

Good Intentions

There are also larger questions afoot about how the fund will progress and the social equity fines will be imposed, said Paul Albarrán, associate attorney for Grand Rapids-based law firm Varnum LLP.

“Look, when the city started this whole program, I don’t think anything was done with bad intentions; the underlying intentions are similar all over the country — make sure the money goes back to the community,” said Albarrán, who represents several cannabis companies in Grand Rapids. “The problem really comes in when it’s as robust as Grand Rapids put together. We see this often, a really good idea with an implementation of that good idea becoming a problem.”

Albarrán said the equity program compliance requires a lot of expensive effort that usually requires companies to hire outside counsel and increased expenses without even knowing exactly what the city wants.

“There’s a lot of info we need to provide, which for larger companies is very tough to do,” Albarrán said. “We’re not even sure what information we need to provide to the city to prove employees are below the poverty line or whether they’ve had a drug conviction. That’s difficult, and I’m not sure the city has a robust enough guidance in terms of what they need to prove these things. We try to meet them as best as possible, but it usually ends up with a lot of back and forth with the city. It’s just onerous and requires a lot of communication. There is no other industry that has to operate under this type of scrutiny.”

Cities, including Detroit, do impose community benefits agreements on companies expanding, but those are usually linked to tax breaks, not fines imposed for noncompliance.

Adkins said the back-and-forth communication is a benefit to the companies as the negotiations often lead to reduced fines and less punitive measures.

Albarrán agrees but said the administrative burden outweighs the benefit often.

“All this interplay makes it very difficult for these businesses doing what they do best,” he said.”

Williams said the failure of the plan is in its lack of contingencies. The social equity agreements are tied to the land, not the company. So if a marijuana company looks to sell its business, those equity rules would transfer to the new ownership, at least 25% of which must live in Grand Rapids.

Even though medical marijuana is less profitable under current market conditions, Fluresh must maintain its medical licenses as it is allowed to grow under the medical licenses and transfer some of that product to the recreational market.

Fluresh has yet to receive the $60,000 bill from the city. It is only required to pay the fine for three years unless it comes under compliance sooner. The city’s recreational marijuana fines would be paid in perpetuity unless something else is negotiated.

“I can’t think of any other business that has these types of restrictions,” Williams said. “People are going to end up suing. The rules were changed in the middle of the game. We had no idea what the compliance punishment would be until years later. There is no sane businessperson who would sign up for this. The way this has been rolled out is very disappointing.”

Adkins, however, believes the city is just in its enforcement and that its nonprofit fund program will be a model for others.

“There are going to be organizations that don’t support this or believe in this,” Adkins said. “We believe, in the city of Grand Rapids, this is the right thing to do, so this is why we took this action.” (Full Story)

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