The Creation of an On-site Cannabis Consumption Business

In my last post, I described the different laws and regulations that governed the creation and existence of nascent marijuana businesses allowing on-site consumption in states that have recently legalized marijuana for recreational use. As mentioned before, my goal is to highlight the pros and cons of each state’s regulatory efforts for on-site consumption businesses in order to provide an informed vision for California citizens and policymakers on what forms our state’s future marijuana market could take. In this article, I will describe the specific types of businesses currently allowing on-site consumption in Colorado and Washington with an emphasis on the legal processes they went through to gain approval, and, briefly, introduce how similar businesses could exist within California’s current regulatory system.

As highlighted in my previous article, a combination of specific statutory prohibitions on on-site consumption and inherent difficulties in establishing compliance with clean indoor air acts has largely prevented the creation of businesses allowing on-site marijuana consumption in Washington and Colorado. In addition to a number of marijuana-friendly hotels and private tour services, Colorado has made the most progress along this front, with bona-fide on-site consumption locations in Nederland, Denver and Colorado Springs. Washington offers a few similar marijuana-friendly hotels, alongside a small but growing number of private tour bus services.

So how exactly have these businesses gone about navigating the changing and oftentimes unclear laws governing these new types of marijuana businesses?

In Colorado, the majority of all storefront on-site marijuana consumption businesses could aptly be described as private “marijuana lounges/clubs,” where customers bring their own marijuana products to consume socially, but marijuana is not sold on site. In this form of on-site consumption businesses, the clubs charge a small fee or “dues” to become a member, which then provides access to a “private” club area where cannabis can be consumed socially with either the lounge’s or an individual’s personal smoking/vaporizing devices.

The structure of this type of business is important in two ways. First, by ensuring the business complies with legal requirements classifying it as “a place of employment that is not open to the public and that is under the control of an employer that employs three or fewer employees” under section 25-14-205(h) of Colorado’s Clean Indoor Air Act, they fall under an exception to the smoking restrictions. This was the initial legal pathway taken by Club Ned in Nederland, CO. Club Ned’s attorney, Jeff Gard, noted in an article published about the club in Boulder, Colorado’s Daily Camera that he found inspiration for how Club Ned could comply with state and local laws by modeling its business model off of Veteran of Foreign Wars posts that allowed members to smoke tobacco products inside. This included additional requirements imposed by the local municipal zoning code to qualify as a private “club,” such as having a certain percentage of their revenue come from member dues, a very small number of employees, and having members bring their own cannabis products.

An important reason why Club Ned bills itself “America’s first legal cannabis club” is the steps it took keeping city, fire, and local law enforcement officials informed and in the loop during the entire development of the business. “We went to the town. We went to the Marshal. We went to Jeff Gard, our attorney. He talked with the (district attorney) and we basically got everybody’s approval,” co-owner Cheryl Fanelli said in an interview to 9News Colorado.

Indeed, part of the Fanelli’s efforts to get Club Ned approved by local authorities involved having Mr. Gard lobby to amend the Clean Indoor Air Act to add marijuana to its covered provisions. These amendments were passed in Senate Bill 13-283 in section 13 and 14, along with a number of others related to the legal marijuana market. This effectively brought marijuana lounges like the ones the Fanelli’s sought to create into compliance with the Clean Indoor Air Act as long as they could properly qualify for an exception within the code.

How a business is structured and operated is also important for compliance with local zoning ordinances: designing a private club-style on-site consumption business that is exempt from the state’s clean indoor air act is all well and good until your municipalities local zoning code doesn’t allow for private social clubs, or requires additional indicia of a social club that your business doesn’t possess. Because zoning ordinances are important tools for municipalities to control the nature and character of their communities, future on-site consumption lounges will likely have to navigate disputes with local city councils and Planning/Code Enforcement boards.

This was the regulatory hurdle experienced by StudioA64 owner K.C. Stark in Colorado Springs, CO. Mr. Stark, as explained by his attorney Charles Houghton during an initial appeal with the City of Colorado Springs Planning Commission (PDF of Planning Commission Record of Decision), opened StudioA64 as a private social club for enjoying discussion, art classes, and listening to live music and comedy while selling non-alcoholic beverages and allowing the on-site consumption of marijuana, with the on-site consumption of marijuana noted to be  “ancillary” to the other activities at the membership club. The City issued StudioA64 sales tax licenses when he opened in February 2013, and left Mr. Stark to his own devices until he was issued a Cease and Desist order from the Code Enforcement division of the Colorado Springs Police Department. The order stated that “a marijuana smoking establishment is not an identified use within the City of Colorado Springs Zoning Regulation nor is the use recognized as a permitted or a conditional use within the Zoning District.” Later testimony from the City clarified their position that they did not believe StudioA64 was within the definition of a “social club” defined in the “Civic Use Types” of the Colorado Springs City Code Section7.2.302.D.3. Instead, city staff defined the business as a “marijuana-smoking facility” which they argued had not been defined, permitted or conditionally permitted under the City code or the Downtown Colorado Springs Form-Based Code.

After the City Planning Commission granted Mr. Stark’s appeal, the City of Colorado Springs administration exercised its authority via its city planning division to appeal the decision.  The City cited the erroneous decision by the Planning Commission to classify the business as a “civic use” under the zoning code, and, as they had argued before, insisted it was a “marijuana smoking facility” not defined, permitted or conditionally permitted under the city code. Additionally, they further clarified that because StudioA64’s primary purpose (in their view, smoking marijuana) was not “one that could be described as strongly vested with public social importance” such as other educational, recreational, cultural, medical, protective, utility or governmental purposes, within which private social clubs usually fall. By pointing out that the city regulates and has established additional standards for medical marijuana facilities, liquor sales, and bars within the city, the city argued that the intent of the zoning code was clear in regards to facilities that contain or sell marijuana products, as specific use definitions and standards had already been promulgated for those types of businesses.

The City Council, sitting as a quasi-judicial body, held the appeal at an open City Council meeting on April 22, 2014. (Video of city council meeting). With no citizens supporting the appeal besides the city attorney tasked with defending the administration’s position, the City Council rejected the administration’s appeal by a vote of 5-3 with one abstention, and subsequently directed city staff to draft an amendment to the City Code for standards and regulations for similar businesses of this type. At the heart of the decision was the city’s agreement with Mr. Stark and Mr. Houghton that StudioA64 was a social club serving a civic use and purpose(PDF of City Council decision), further evidence by Mr. Stark and the long line of supporters for A64 that noted its importance as a center for political debate, peaceful assembly, and social interaction beyond simply consuming cannabis (video of march to city council meeting and StudioA64 owner KC Stark speaking to the Colorado Springs City Council during the appeal ).

With that City Council decision, the landscape for on-site consumption businesses in Colorado Springs was solidified, and today, there exist multiple smoking lounges within the city. Some of the lounges, such as the Lazy Lion, now even provide cannabis and cannabis products through complicated membership schemes to members who “redeem” their tracked “donations” to the club via a point system, making that lounge as close to the envisioned RPOSC business as this author has yet found.  While this development is again raising eyebrows among Colorado Springs lawmakers and administrators, no new progress has been made drafting revised regulations to control and monitor the operation of these new businesses.

So what can California learn from all this? For one, it’s that entrepreneurs seek hard and fast rules for their businesses, but will not necessarily be stopped by unclear or non-existent rules.

Second, requiring a cannabis club to conform to regulations guiding private social clubs rather than allowing them to operate more like cigar or tobacco bars creates artificial barriers to profits that marijuana lounges are required to follow in order to remain in compliance with local anti-smoking ordinances and municipal zoning requirements. If California wants to allow on-site consumption businesses, especially as a tool for a community’s economic redevelopment, policy makers should craft regulations specifically for their existence, alongside clarifying that exemptions to California’s Clean Indoor Air Act for tobacco related businesses would also apply to similar businesses serving marijuana as well. This would enable businesses seeking to allow on-site consumption to operate as retail point of sale consumption (RPOSC) locations that could sell locally grown and sourced marijuana, all properly taxed and regulated by the local municipality.

Policymakers should also relax current requirements applied to tobacco bars, hookah bars, and smoke shops that indicate serving food or drink relegates the “primary purpose” of smoking-related business away from “smoking,” which qualifies them for the workplace exemption the Clean Indoor Air Act (PDF of California Attorney General Opinion). This would allow for the creation of other on-site consumption business forms that wouldn’t currently be exempted from workplace anti-smoking laws, like gastro-budpubs pairing particular cannabis strains with gourmet menu offerings in a manner similar to current alcohol/food pairings. This would allow greater freedom for entrepreneurs as to what form their business allowing on-site consumption would take, including making it easier for a pure RPOSC business to exist without the legal hula-hoops of rationalizing “membership points” and “donations” to sell a legal product to consenting adults.

These, among other possible ideas I will discuss in my next post, are good starting points for managing and regulating a nascent on-site consumption industry in California. In my next post, I will go into detail about the specific things California lawmakers can do to best prepare our state’s regulatory system for on-site and RPOS consumption, including potentially creating additional enforcement agencies like the Colorado Department of Revenue’s Marijuana Enforcement Division, or adding additional enforcement jurisdiction to the California Department of Alcoholic Beverage Control to monitor future RPOSC businesses.

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