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Massachusetts Legislature Passes Host Community Agreement (HCAs) Reform Legislation –

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Key Takeaways:

  • The Massachusetts Legislature has proposed new limitations on
    community impact fees, which may change the dynamic of the
    relationship between licensees and their host communities.

  • Once effective, the Cannabis Control Commission would be
    charged with reviewing the community impact fee provisions of both
    new and existing HCAs for compliance.

  • Specific limitations on community impact fees include a
    prohibition on fees tied to a percentage of gross sales.

  • Cannabis businesses should carefully review the specific
    language of their HCAs and consider next steps to reduce or
    eliminate their fees.

The Massachusetts Legislature passed a bill, S. 3096, on
August 1, 2022 that among other items clarifies and limits the
authority of municipalities to demand percentage-based annual
Community Impact Fees and other donations or fees in Host Community
Agreements (“HCAs”). This bill – which we expect
Governor Baker to sign – has the potential to generate
substantial cost savings for cannabis businesses in Massachusetts
– many of whom are currently paying 3% of gross revenue or
more per license to their host community.

Recommended Next Steps for Licensees

We describe the key HCA-related provisions in the bill below. If
signed by the Governor, we recommend licensees take the following
actions to respond to this significant change in law:

  1. Review Your HCAs Carefully. The HCAs may
    have severability clauses that void flat, percentage based fees.
    However, the HCAs may also have clauses that allow a municipality
    to terminate the agreement by right. The precise language in each
    HCA will help inform next steps.

  2. Consider Timing. As discussed below, the
    Cannabis Control Commission (the “Commission”) must
    review all HCAs now as part of the license application or renewal
    process. Consider where your licenses are in this process and how
    soon a submission may be required to the Commission. As discussed
    below, we also expect the Commission to adopt regulations and/or
    guidance regarding its review of HCAs, which may delay review by
    the Commission of the HCAs.

  3. Consider Other Approvals Needed from the
    Municipality
    . Some municipalities require an HCA
    – and amendments  – to be voted on
    by the City Council or Select Board. Other municipalities require
    cannabis businesses to hold licenses from a municipal licensing
    authority separate from an HCA, and often these require annual
    renewal or can be revoked. Consider these factors before
    determining the right approach to your host community.

  4. Strategize on an Effective Approach to the Municipality
    to Reform Your HCA and Next Steps if You Encounter
    Resistance
    .

Summary of Key Provisions of the New Law

Although the concept of Community Impact Fees was originally
well intentioned and sought to compensate municipalities for
anticipated, incremental costs related to hosting cannabis
businesses, certain municipalities were quick to take advantage of
the lack of regulatory oversight demanding annual payments of 3% of
gross sales – the statutory maximum amount – regardless
of the actual expenses that the municipality incurred. The existing
Community Impact Fee rules, which have elicited considerable
contempt from industry due to widespread abuse, are poised to
change dramatically if the Governor signs the bill, which would
overhaul the existing HCA paradigm, invalidate many existing
Community Impact Fee arrangements and install the Commission as a
watchdog for improper municipal exactions.

The key provisions of S. 3096 are summarized below. In short, it
would have far-reaching impacts on the industry and licensee-host
community relationships. All licensees should seize this
opportunity to scrutinize the terms of their existing HCAs and
strongly consider engaging with their host communities to
renegotiate illegal Community Impact Fees.

  • Invalidation of All Fees Based on Percentage of
    Sales. 
    Section 10 of the bill states that Community
    Impact Fees “cannot mandate a certain percentage of total or
    gross sales” and, further, that such fees: 1) must be
    reasonably related to the costs imposed upon the municipality as a
    result of the operation of the cannabis establishment; 2) cannot
    exceed more than three percent of gross sales; 3) cannot be
    effective after the establishment’s 8th year of
    operations; 4) must commence on the date which the establishment
    obtains final licensure from the Commission, but the first payment
    of the fee shall not occur before the first annual renewal of the
    final license; and 5) shall be due annually to the host community.
    Licensees should review the Community Impact Fee requirements in
    their HCAs to determine if they are compliant with the new
    limitations.

  • Additional Payments Are Not Enforceable. 
    Section 10 of the bill invalidates and renders unenforceable
    “any additional payments or obligations, including but not
    limited to, monetary payments, in-kind contributions and charitable
    contributions” by the establishment. It also confirms that,
    except for a legitimate Community Impact Fee, any other financial
    obligation in an HCA is not enforceable. Note, however, that many
    licensees have committed to certain payments and charitable
    contributions in the Positive Impact and Diversity Plans filed with
    their initial license applications. This provision of the bill
    would not invalidate those existing commitments.

  • Licensees Can Sue Host Communities for Breach of
    Contract. 
    Section 10 of the bill requires a
    municipality to transmit to a licensee documentation of costs
    imposed on the municipality no later than one month after the
    annual renewal of the establishment’s final license. The bill
    also includes a mechanism for a licensee to bring breach of
    contract actions against its host community if it believes that the
    supporting documentation from the municipality is not reasonably
    related to the actual costs imposed on the community. In such
    lawsuits, licensees would be able to recover damages,
    attorney’s fees and other costs that are not reasonably related
    to the actual costs imposed on the community.

  • Existing Licensees Must Submit Compliant HCAs with
    Annual Renewal Applications
    . Section 10 of the bill
    requires existing licensees to submit compliant HCAs with their
    annual license renewal applications. Practically speaking, it
    requires licensees with noncompliant HCAs to renegotiate compliant
    HCAs prior to their next license renewal submission deadline. We
    will need to see whether the Commission provides a grace period
    while it considers guidance and/or regulations to address this
    provision. The bill provides that the Commission must promulgate
    regulations no later than one year after the law takes effect. This
    should inform the timing of outreach to host communities.

  • Commission Oversees Compliance with the New HCA
    Rules. 
    Section 10 of the bill installs the
    Commission as the arbiter of HCA disputes and obligates the
    Commission to review all HCAs during initial licensure and during
    annual license renewals. The Commission must review an HCA within
    90 days of receipt and, if the Commission determines that an HCA is
    not compliant, it must provide written notice of deficiencies and
    can request additional information from the municipality and
    licensee. The Commission is also expressly prohibited from
    approving a final license application unless Commission staff
    certifies that the HCA is compliant. However, the bill does not
    imbue the Commission with the power to compel municipalities to
    execute compliant HCAs. Accordingly, without new regulations and/or
    guidance from the Commission, it is conceivable that recalcitrant
    municipalities could upset the annual license renewal process for
    existing licensees.

  • Commission Will Promulgate New Regulations on
    HCAs. 
    Section 15 of the bill requires the Commission
    to adopt regulations addressing “criteria for reviewing,
    certifying and approving host community agreements and community
    impact fees,” including but not limited to criteria for
    calculating Community Impact Fees consistent with the above
    described rules. However, Section 28 of the bill provides the
    Commission with 1 year to promulgate new regulations or amend
    existing regulations to be consistent with the new rules.
    Therefore, there is some uncertainty regarding how and when the
    Commission might begin enforcing strict compliance with these new
    HCA rules.

We welcome any questions you might have regarding the potential
impact of these looming statutory changes on your business and are
prepared to analyze your current HCA terms and provide strategic
advice for engaging with your respective host communities.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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