April 26, 2021

BY  Stew Weiss

Nearly 18 months after Illinois legalized recreational, or “adult use,” cannabis, a bill was filed in Springfield to pave the way for rapid expansion of the cannabis industry in the Land of Lincoln.

Despite record retail sales and tax revenues, the number of cannabis dispensaries in Illinois has been limited to 108 licensed dispensaries for many months. Although the Cannabis Regulation and Tax Act (410 ILCS 705) (“CRTA”) directed the State to issue 75 “conditional” adult use dispensary licenses (“Conditional Licenses”) in 2020 and 110 licenses in 2021, the expansion of the retail cannabis market has been frozen since fall 2020 due to concerns surrounding social equity and minority inclusion in the State’s licensing process.

The CRTA was drafted to provide individuals negatively impacted by economic divestment and the war on drugs, referred to as “Social Equity Applicants”, with multiple entry points into the cannabis industry. While Illinois built ambitious social equity goals into its cannabis licensing regime, critics viewed the program’s implementation as flawed. For example, under the CRTA, well-capitalized multi-state operators (“MSOs”) may qualify as a Social Equity Applicant by simply hiring staff from disproportionally impacted areas or employing persons with prior cannabis-related criminal records. But few, if any, MSOs satisfy the CRTA’s goals for minority ownership or control. Competition between MSOs and industry newcomers tended to disadvantage the very prospective licensees that were intended to gain an on-ramp into the industry.

When only 21 applicants, out of a pool of 900, qualified for the first round of Conditional Licenses, CRTA critics pointed to the concentrated group of license recipients as proof that the progressive goals of the CRTA had not been realized. Amidst threats of litigation from both the losing and winning Conditional License applicants, the Illinois Department of Financial and Professional Regulation (“IDFPR”) halted the licensing process and looked to the General Assembly for a legislative response.

Negotiations between state legislators and stakeholder groups progressed in fits and starts over the last six months. The COVID-19 pandemic, combined with the lack of in-person sessions of the General Assembly, further impeded the search for a legislative solution to the impasse.

In March 2021, state Representative LaShawn Ford of Chicago (8th District) announced a compromise supported by Governor Pritzker, the cannabis industry, as well as the Social Equity Applicants who felt shut out of the initial licensing process. The details of the compromise were revealed on April 20, 2021, when Rep. Ford filed amendments to shell House Bill 1443. Ford’s bill amends key provisions of the CRTA and the Compassionate Use of Medical Cannabis Program Act 410 ILCS 130 (“Medical Cannabis Act”) to provide a clear path for a wider range of participants to enter the cannabis market.

The proposed legislation changes how Social Equity Applicants will be prioritized in the licensing process in the following ways:

  • Qualifying Applicants. HB 1443 creates a “Qualifying Applicant” category of dispensary license applicant. Qualifying Applicants include those that: (1) qualify as a “Social Equity Applicant” based solely on majority ownership and control by persons who either live in disproportionally affected areas or have cannabis-related criminal records and (2) have received at least 85 percent of the available points under the State’s application scoring metric. The purpose of the Qualifying Applicants category is to identify Social Equity Applicants that submitted strong license applications and are owned or controlled by individuals who have been disproportionally impacted by cannabis prohibition. The category explicitly excludes firms that sought to satisfy the CRTA’s Social Equity Applicant requirements solely by hiring staff from disproportionally impacted areas or employing persons with prior cannabis-related criminal records.
  • Reserves Large Batch of Conditional Licenses for Qualifying Applicants. HB 1443 would require the IDFPR to issue 110 Conditional Licenses exclusively to Qualifying Applicants within 45 days following the effective date of the bill. Of the 110 licenses to be granted, 61 will be allocated to the Chicagoland region. The proposal to allocate the entire batch of 2021 Adult Use Dispensary Licenses to Qualifying Applicants is designed to address the perceived shortcomings of the CRTA’s social equity efforts.
  • Reserves Five New Medical Dispensary Licenses for Qualifying Applicants. HB 1443 establishes a new licensee class under the Medical Cannabis Act. This “Social Equity Justice Involved Applicants” category is equivalent to the “Qualifying Applicant” category for adult-use dispensaries. HB 1443 directs the State to issue five additional medical cannabis dispensing organization licenses to Social Equity Justice Involved Applicants. Recipients of these licenses will be authorized (i) to establish and operate a “dual-use” medical dispensary that can also serve adult use recreational cannabis customers and (ii) to establish and operate a separate “secondary-site” adult use location, resulting in 10 additional dispensary locations. Medical dispensary licenses are especially valuable to operators because the over 120,000 registered medical use cannabis patients in Illinois must purchase from a licensed medical dispensary to take advantage of the drastically lower sales tax rates applied to medical cannabis. This requirement creates a built-in and loyal customer base for medical dispensaries that is unlikely to be diluted by expansion of the adult use cannabis market.
  • Increases the Cap on Dispensary Licenses. The CRTA established a statewide cap of 500 Adult Use Dispensary Licenses. HB 1443 replaces that with a cap on the number of Conditional Licenses of 500. We interpret the new cap to be over and above the 108 existing dispensing organizations currently operating in the state and the ten additional medical dispensary licenses and secondary site licenses described above. This increased cap paves the way for the eventual opening of nearly 620 cannabis dispensaries in the state, one for every 20,000 Illinois residents.

Interestingly, Rep. Ford’s bill is completely silent on the original 75 Conditional Licenses that remain in limbo with the IDFPR. It may be that the compromise offered by HB  1443 will entice the aggrieved applicants from the initial licensing round to drop their challenges to the 2020 selection process and instead join the 2021 Qualifying Applicant pool, freeing up the state to release the 75 previously-allocated licenses.

What are the odds this legislative fix will pass? Based on the wide support the bill has garnered, its chances of success appear strong. Immediately upon introduction, the bill was co-sponsored by House Speaker Chris Welch, House Majority Leader Greg Harris, Deputy Majority Leader Jehan Gordon-Booth, as well as CRTA Chief Co-Sponsors Kelly Cassidy and Bob Morgan. Governor Pritzker indicated that he backed the bill when it was first announced in March. We are not aware of any significant opposition to HB 1443 as proposed.

Practical Impacts for Property Owners and Municipalities and Next Steps

If HB 1443 is enacted, an estimated 185 Adult Use Dispensary Licenses could be released by the IDFPR as early as mid-summer, approximately 108 of which will be reserved for the Chicagoland region. Licensees will be a mix of experienced operators, well-capitalized operators and smaller, entrepreneurial newcomers.

Once awarded, licensees will have 180 days to secure a location for their proposed dispensary. Consequently, licensees will need to secure property or leases and zoning certifications/entitlements quickly. Local land use regulation continues to be a hurdle for prospective dispensaries. As part of the site selection process, licensees should consult with a land use attorney to determine what zoning approvals are required to establish a dispensary, and whether the use is permitted by-right or requires special/conditional use approval in designated districts. Prospective licensees may also rely on their land use attorney to determine whether prospective locations satisfy state or locally imposed distance and separation requirements.

HB 1443 also presents an opportunity for communities that previously took a “wait and see” approach to cannabis retail or were not able to attract a dispensary during the initial licensing round. Municipalities that have not already established land use, licensing, or sales tax regulations to govern cannabis sales should consider whether now is the moment to implement a local regulatory regime.

Contact Stew Weiss or any Elrod Friedman LLP attorney with questions on HB 1443, cannabis regulation more generally, or local zoning codes or processes that might guide dispensary site selection.