The perception was that the state gave them free money, or subsidized their business. The reality is that the state couldn’t raise money .”
The City by Rosalind Adams
This article was first published by THE CITY. Subscribe to the New York City News to receive it each morning.
In January 2022 Gov. Kathy Hochul (D), a New York Democrat, outlined an ambitious vision to support New York’s ambitious social equity goals with its new cannabis law. The state would establish a 200 million fund for the construction of dispensaries that are ready to open at prime locations. The state’s new cannabis law offers a unique opportunity for those most affected by the racist drug policies of decades to benefit from the legal market.
Reuben McDaniel who was the head of the Dormitory Authority of the State, responsible for setting up fund supported dispensaries, before leaving his position last month, declared that the new program will “help build generational riches that have been out of the reach of far too many citizens and that will succeed to create social equity at a time when so many states’ programs failed.”
The City obtained documents revealing that, nearly two years after Hochul first announced the fund, the 10-year loan it offered to dispensary owners was highly restrictive and burdensome. It gave licensees very little control in building their locations, but instead required them to pay a bill given to them by state. Details of the confidential agreement were a subject of speculation in recent months as New York’s cannabis industry has been hindered by delays in getting financing for the $200m fund and opening legal stores.
The loan documents that Conditional Adult Use Retail Dispensary (CAURD), licensees must sign to receive New York Social Equity Cannabis Investment Fund funding, show that the public-private funds is authorized to incur significant expenses without consulting with the borrower. If licensees wish to pay their loan off early, the fund will still charge them a portion for the 10-year term interest. This could be hundreds of thousands dollars.
These loans can be used to cover expenses such as store leases, building out stores, and property management. They also include up to $100,000 of litigation costs.
These agreements also limit the profit margins a store can charge for its products, the amount it can spend to staff and how much they may raise their salaries by each year. The owners of dispensaries can make cosmetic decisions, such as the color scheme for their stores, but they cannot control their costs.
Benjamin Rattner is a New York cannabis lawyer who reviewed loan documents on THE CITY’s request. He said that the repayment agreement “grants a tremendous amount control to the New York Social Equity Cannabis Investment Fund.”
The documents describing the loan outline the powers the social equity fund holds to monitor dispensaries once they have opened, and to access their software for tracking sales, as well as the ability to contact the accountants of the business directly. The document does specify how the data may be used or protected.
Lavetta Willis is one of the fund’s partners. She told THE CITY these are the metrics that can be used to determine the success of a dispensary. She said, “Our goal is for CAURD licensees in order to run profitable and successful businesses.”
Some in the industry have expressed concern about the term.
Jayson Tantalo is the co-founder and trade group of New York Retail Cannabis Association. Why would they offer a program of this magnitude if they did not trust us to manage the operations?
Lucas McCann is the owner of the cannabis consulting company CannDelta. He has reviewed several loan documents for his clients and was concerned about the high loan payments. He has seen draft agreements that range between $20,000 and $35,000. This is a large amount to pay along with rent, staff, and inventory.
McCann told THE CITY in an interview that the concern was defaulting. “You can’t just have a bad week,” McCann explained. “These companies will be set up for default because they have no control over their costs.”
According to documents obtained by THE CITY, if a company defaults on a loan by, for example, making four late payments within a year, or by engaging in “restricted marijuana activity” (for instance, offering on-site consumption even if they are not licensed), it can result in an interest rate of 18 percent. The fund also has the power to remove the dispensary.
States of Grace
Other states that have legalized cannabis have also launched social equity programs, with similar goals to New York but in vastly different terms. Last year, Illinois’ governor announced forgivable low-interest loans for cannabis entrepreneurs. After an 18-month grace of no payments, these loans have a 4-percent interest rate.
California, depending on which municipality you live in, offers low-interest loans or grants to cannabis businesses. Sacramento offers, for instance, six-year interest-free loan. As part of the social equity program, Massachusetts offers no-interest loans that are forgiven. Last month, New Jersey granted $250,000.00 in grants to social equity cannabis business.
New York chose a different strategy, bringing in private funding to help its smaller sellers. While the state invested $50 million, it was difficult to find an investor who would be willing to put the remaining $150 million at risk.
Governor. Hochul announced that New York finally received the money from Chicago Atlantic a real estate investment fund in Illinois. According to SEC filings, Chicago Atlantic would receive a 15% return. Chicago Atlantic does not invest in cannabis dispensaries but rather lends the money to the fund at a rate reflecting the difficulties the industry has in accessing banking systems.
The licensee is not personally liable for the fund loan, and only loses the property if he or she cannot make the payment.
Akele Parnell has been working in the cannabis sector for six years. She is part of a team that applied for a CAURD licence in the Bronx. They plan to accept the social equity fund as a site for their dispensaries. He thought the terms were fair and noted that the private market could offer loans higher than 13 percent for cannabis businesses.
Parnell stated that his team had accepted one of the sites offered by the social equity fund “almost from the start.” Due to federal illegality, and other factors “you have a scenario where most Black and Brown cannabis license holders have a very difficult time accessing funding.”
The details of these loan agreements were largely unknown until now. Two weeks ago , a state Senate hearing was held in Albany. Several stakeholders voiced their concerns. Eli Northrup, from the Bronx Defenders, said that the fund exposes the most vulnerable New Yorkers “to predatory exploitation” – the exact outcome the MRTA (law) was intended to prevent.
The perception was that the state gave them free money, or subsidized them. The reality was that the state couldn’t raise money, said Jon Purow a New York cannabis lawyer who reviewed the loan documents.
Purow continued, “It is not surprising that the terms of the loan must be more favorable for lenders who are investing all this money.”
When asked about these criticisms, Jeffrey Gordon, a spokesperson for the state Dormitory Authority, wrote in an email that: “The $200M New York Social Equity Cannabis Investment Fund represents the largest cannabis dispensary Social Equity Investment in the United States.”
He said, “The Fund’s unsecured loan program requires no collateral. It offers social equity licensees an opportunity to access capital at terms that are much more favorable than what they could receive from private lenders.”
‘Financial Slavery’
Carl Anderson, a disabled vet living in The Bronx was delighted to find out that he had been selected as one of the first cohorts of justice-impacted individuals who were awarded a dispensary licence under the CAURD Program. The prize was not just the conditional licence, which would give marginalized communities an edge before larger players with more money enter the market. It was also the promise by the state to offer its first 150 licensees dispensary locations that were ready-to open. The Dormitory Authority would secure and build out the locations under the guidance and financial support of the social equity funds.
The state selected Willis, her partners, and the fund by that time. However, raising private capital, and securing leases, was taking longer than expected. State officials re-examined their original insistence that CAURD licensees accept a Dormitory Authority selected site, and informed licensees they could find their own dispensary sites and submit them for state approval.
Documents obtained by THE CITY reveal that the Dormitory Authority has begun signing leases with landlords for dispensary sites. It signed a lease in December 2022 for a shop on 125th street in Harlem. In March, the company signed a lease for a Union Square store.
The subleases sent by CAURD to licensees in Manhattan earlier this year include ten-year rent schedules and an estimate of monthly construction loan costs. These range from $25,000 to 26,000 for the three Manhattan locations reviewed by THE CITY. Licensees were required to pay $3 million for design and buildout of their dispensaries over a period of 10 years. These costs were not listed in detail, but rather as a flat-rate. These monthly payments are in addition to the rent which in the first 12 months ranged between $44,000 and $76,000.
Marty Feinberg is the owner of the building in the same block that houses the Union Square location. He told THE CITY the rent the fund paid for the site was fair, and he recalled the figure of $76,000. “That’s the price it should be, or even more.” Union Square West.”
Dazed dispensary, which opened its doors last week, was the final recipient of the site. Keshawn Warner, an owner of the shop, said, “When I received the email, I immediately said yes for the opportunity to open this location.”
Warner said that the current banking rules make it difficult for the cannabis industry, which is a federally illegal business, to raise money and gain access to the banking system. He said that working with the fund “really expedited” the process of opening his dispensary.
Mike James, co-owner and co-founder of Good Grades in Jamaica, who will celebrate its grand opening on Wednesday, said to THE CITY that despite the complaints he has heard about the loans, he believes they have helped him launch his business. He said: “I see it as a unique opportunity no one else will give us.”
Not all store owners who are interested in opening a business have done the math.
Anderson passed on a Hunts Point site in The Bronx that the Dormitory Authority was offering earlier this year after reading the estimated costs of the buildout as well as the monthly rent. He was concerned that the area would not have enough foot traffic to pay for his costs. It doesn’t make any sense. “Where am I going get this money?” asked the man.
Other people have voiced similar concerns. In May, licensees complained to the state about the lack of transparency regarding loan terms and the high rental rates for the available sites. The letter stated that “it appears we are being asked once again to participate in a marketplace which is fundamentally unfair and contrary to the very purpose of the initiative launched by the government.”
Carson Grant, who was a participant in a meeting between officials from the Office of Cannabis Management, the Dormitory Authority, and licensees to address their concerns held early in June, described the situation surrounding his Fund-supported Queens retailer as “financial slave labor.”
“You keep saying transparency. I don’t even know what it costs.” Grant continued, “I don’t even know how much a lightbulb costs.” His plans were suspended by a court ruling that also affected the plans of other CAURD licensees.
Just tell us the numbers “That’s all I ask for!”
Budtender at New York City’s First Legal Cannabis Store Jailed on Marijuana Charges
Photo by Philip Steffan.
The post New York’s loan program for equity-owned marijuana businesses is saddled with steep costs first appeared on Marijuana Moment.
