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Arizona is Issuing New Medical Marijuana Licenses

Article by: Janet Jackim, Co-Chair of the Cannabis Practice Group, jjackim@zuberlawler.com.

(Phoenix, Arizona)  New MMJ Licenses are to be Issued.  Yes, Arizona’s Department of Health Services recently (the day before Thanksgiving, 2022) notified the public that it may issue new medical marijuana licenses in February or March 2023.

Historical Context.  Historically, Arizona voters narrowly passed Prop 203 (I-04-2010), the Arizona Medical Marijuana Act (the “Medical Act”), on November 2, 2010, establishing the State’s medical marijuana program. The Medical Act, since amended,  may be found at Ariz. Rev. Stats. §§ 36-2801 et seq. [1]

Only a few months later, the Department issued its first rules on growing, producing, and retailing medical marijuana in the State, effective April 14, 2011[2]. The current (amended) rules and regulations of the Department may be found here at https://apps.azsos.gov/public_services/Title_09/9-17.pdf.

State and Federal Obstructions.  However, by the end of May, 2011, the Governor of Arizona announced that the State would file a federal lawsuit to determine whether, in fact, the Medical Act was effective, reflecting the opinion of the U.S. Attorney for Arizona at the time, Dennis Burke, that the new law violated federal law prohibiting controlled substances including marijuana. By January, 2012, the State had dismissed its lawsuit but other lawsuits attempting to enforce or reject the Medical Act continued.  Notwithstanding uncertainties posed by pending lawsuits, the Department and applicants proceeded to process patient applications for medical marijuana cards and entity applications for medical marijuana dispensary (retail) licenses.

Victory in the Arizona Supreme Court. Not until late May, 2018 did the Arizona Supreme Court, in a unanimous opinion in State v. Jones, No. CR-18-0370-PR, find that the Medical Act was effective, thereby exonerating the conviction and prison sentence of a medical marijuana patient (Alex Jones) found guilty in Yavapai, County, Arizona, of possession of a very small amount of cannabis resin and freeing the fledgling Arizona cannabis industry from the monkey on the back syndrome. This author (and her partner, Rob Mandel, whose bio is here https://zuberlawler.com/attorneys/robert-a-mandel/), each filed an amicus brief with the Court on behalf of the imprisoned defendant Jones and physicians actively treating patients with medical marijuana, respectively.

State v. Jones was a monumental development in cannabis law for the personal freedoms of Arizona patients as well as for the dispensary community because over forty percent (40%) of cannabis sales were of resin and other marijuana products.

By 2022, approximately 131 medical marijuana dispensary licenses had been awarded in two tranches of 2012 and 2016.

Medical Marijuana Dispensaries’ Exodus from the Hinterlands.  One of the quirks of the Medical Act (and Prop 207, the Smart and Safe Arizona Act initiative approved by voters in November, 2020 (the “Adult Use Act[3])) is that, generally speaking, the Department may only issue retail licenses on a 1:10 basis, i.e., one (1) dispensary license for every ten (10) open, registered pharmacies in the State.  Recently, the State determined that there were 1,340 open, registered pharmacies, thus yielding the issuance of a few more medical marijuana licenses.

In the early days of the Medical Act, medical licenses were awarded based upon Community Health Analysis Areas (or “CHAAs”), which the Department had developed among communities in the State to monitor various disease statistics (e.g., for cancer occurrences in designated communities), in reference to US 2000 Census Block Groups. In 2012 and 2016 Medical Act dispensary retail licenses were awarded by CHAA, reflecting all of the communities of the State.  However, the then-current rules and regulations of the Department permitted a licensee to move its retail location after three (3) years of operation in the CHAA.

Picture the scenario of a Medical Act licensee which has overcome competitive applicants to obtain a retail dispensary license in the small mining community of Clifton, Greenlee County, Arizona, population 4,000 persons, of which a few hundred may be medical marijuana patients.  With high costs of acquisition of the real estate (by purchase or lease), employee payroll, plant and product acquisition costs, and administrative expenses and costs, a Medical Act dispensary in this and many other rural locations could barely survive. The solution?  Move the location of the dispensary to Pima or Maricopa Counties, the two (2) largest (by population) Counties in Arizona.

Many of Arizona’s rural county Medical Act retail dispensaries did just that, leaving a gaping hole in providing medical cannabis to rural patients.

Fast Forward to Late 2022.  Desiring to at least partially rectify the cannabis’ industry’s failure to provide medical marijuana on an ongoing basis to outlying, minimally-populated Arizona counties, the Department determined in the Summer of 2022 it would invoke a statutory preference to award newly available medical marijuana licenses to underserved (1 dispensary licensee) and unserved (no dispensary licensees) rural Arizona Counties.  This is the current opportunity available to operators and investors.

Cautionary Statement:  We do not know how many medical marijuana retail licenses will be awarded because the Medical Act permits the Department to issue such licenses in excess of the 1:10 ratio to serve the needs of underserved (1 or less dispensary) or unserved (no dispensary) Counties.

Six (6) Arizona Counties are Unserved.  These six (6) Arizona Counties have no medical marijuana dispensary to serve patients:  Apache, Cochise, Graham, Gila, Greenlee and Santa Cruz.  These are the intended beneficiaries of the next tranche of medical marijuana licenses expected to be awarded in February or March, 2023.

Within these six (6) Counties are the locations of former medical marijuana dispensaries that relocated (as discussed above) to higher population centers in Arizona:  these former locations have the highest preference in being awarded a medical marijuana license in this tranche.

Various rules of precedence apply to awarding medical marijuana licenses based upon the current count of licenses and other factors.  Because of  the uniqueness of the location and facts relative thereto, we suggest you contact the author or other qualified Arizona cannabis attorney to determine how one (1) or more of the sites you have located will score in the Department’s list of priorities for license issuance.

Qualified Applicants for Medical Marijuana Dispensaries.  The applicant:

*          Must be operated on a nonprofit basis and subject to various ‘reasonable’ requirements as to sale of assets, employee compensation and otherwise;

*          Must be an entity (LLC, partnership or corporation) – not a human individual;

*          Must have Articles/Bylaws/Operating Agreement and related entity documentation;

*          Must submit documentation to the Department of :

**        Good standing with the Arizona Corporation Commission to the Department; and

**        Attestations from each principal officer and board member (“PO/BM”) of compliance with local zoning codes and ownership or landlord’s approval of cannabis use;

*          May expect to cultivate indoor – only;

*          May expect to have one (1) onsite and one (1) offsite cultivation/extraction/infusion facility;

*          Must submit to not transferring the license (although ZL has alternatively effective transfer opportunities;

*          Must obtain its initial cannabis from ONLY other nonprofit medical dispensaries or patient caregivers to whom no compensation (other than expenses of production) is paid; and

*          Must pay an application fee of $4,000.00 per application, with the maximum applications being five (5).

This is a Short Application Period.  The application period is December 16, 2022 through December 30, 2022 ONLY.

*          Prior to applying, ALL PO/BMs must have obtained their facility card from the Department.  All such cards must be applied to the Department through its online portal and MUST BE GRANTED BEFORE THE APPLICATION IS SUBMITTED;

            *          THE APPLICATION MUST IDENTIFY THE RETAIL LOCATION, KEEPING IN MIND THE FORMER LOCATION PREFERENCE;

            *          Suggest the applicant also designate the onsite and offsite cultivation facilities associated with the retail location;

*          Various local zoning and building codes apply – check them out now!

*          The location of the applicant awarded a license must be open within eighteen (18) months after the award or face the Department’s motion to revoke the license;

*          Various local building codes affect the planning, designing, and construction of a licensed medical marijuana facility;

*          The licensee must apply to the Department for approval to operate (“ATO”) before opening to the public;

*          The application for medical marijuana license must include policies and procedures on operations, recordkeeping, security, and other cannabis-pertinent best practices;

*          All products must be tested by a licensed testing lab, typically at the cultivator’s cost and expense;

*          Relocation is extremely limited to the same city or town for which the license was issued; and

*          Licensee must contract with an Arizona physician as the licensee’s “medical director”.

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[1]           The current (amended) AMMA may be found here at

https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ars/36/02801.htm.

[2]           The current (amended) rules and regulations of the Department may be found here at https://apps.azsos.gov/public_services/Title_09/9-17.pdf.

[3]           The Smart and Safe Arizona Act permits the State to develop an adult or recreational use program generally available to adults for recreational or other use.  The current (amended) Adult Use Act may be found here at Ariz.Rev.Stats. §§ 36-2850 et seq. or https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ars/36/02850.htm.

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