Inside the struggling New York weed real estate experiment

But Conner’s fledgling cannabis business is also vastly outnumbered by the illicit competitors that have sprung up across the city since the state legalized weed for adults nearly two years ago. New Yorkers buy weed behind the counter in bodegas, shop in unlicensed stores and order from underground delivery services.

The soft launch of Smacked last week marked a milestone for New York’s unique interventionist marijuana program, which prioritizes dispensary licenses for entrepreneurs with prior pot use offenses and supports their real estate problems. And although Conner is the first such entrepreneur to open the doors of his dispensary to the public, it’s unclear how the state will keep its promises made to these small businesses.

The slow pace of dispensary openings — Housing Works opened one on Dec. 29 and Smacked nearly a month later — underscores the challenges the state faces in securing real estate and raising capital for entrepreneurs.

Unlike comparing prices for comparable office space, there is no equivalent, transparent system for retail, explained Kristin Jordan, CEO of cannabis-focused brokerage firm Park Jordan.

“It really is a wild west,” she said. “Retail is not an open book.”

Other legal weed states that have attempted social equity programs have encountered many problems: entrepreneurs often struggle to raise capital or find landlords willing to lease to them, and licensees with little of business experience find themselves in a market already dominated by large cannabis companies.

But there’s nothing quite like the New York weed experiment.

“This is the most daring and extreme social equity program that has ever been attempted,” said Robin Goldstein, an economist at the University of California, Davis, co-author of the book “Can Legal Weed Win ?” “It’s an experiment and no one knows how it’s going to turn out.”

Smacked can be opened, but only on a contextual basis. After about a month of being sold, the location will be closed again for construction.

Even so, Conner isn’t intimidated by the challenges ahead.

“Sometimes I pinch myself,” he said in an interview outside the store ahead of the recent opening. “I just can’t believe it.”

How it works

Conner holds a Conditional Adult Dispensary License (CAURD). These licenses are reserved for individuals who were convicted of a marijuana-related offense prior to legalization or who have an immediate family member who has been convicted of cannabis. They should also have previous small business experience. Nonprofits that serve formerly incarcerated populations are also eligible for the first round of licenses.

The state will allow 150 applicants to open dispensaries statewide. So far, 66 licenses have been distributed, including 56 to justice-impacted entrepreneurs and another 10 to non-profit organizations.

The New York State Dormitory Authority, an agency that typically provides funding and construction for schools and hospitals, is responsible for finding and building locations for CAURD candidates.

DASNY will sign a lease with the landlord and sublet the location to the applicant. The agency also selected 10 companies to build the dispensaries. Temeka Group, one of 10 companies that won the contract with DASNY, will work with Conner to develop Smacked. The company has built more than 400 dispensaries across the United States, said its CEO, Mike Wilson.

Meanwhile, DASNY is raising funds for a $200 million public-private fund that will be used to set up these dispensaries and provide a variety of other services beyond real estate and construction. The funds are treated as a loan, so licensees like Conner will eventually have to repay the state, with interest at market rates.

The fund has received $50 million from the state and is to raise another $150 million from the private sector. At a recent press conference, DASNY Chairman Reuben McDaniel declined to say how much money the fund has raised.

“We’ve had important conversations, important investors, who are very interested in this program,” McDaniel said. “I’m sure we’ll have plenty of money to do what we need to do.”

CAURD licensees are promised turnkey dispensaries. But it takes time to set up. In DASNY’s initial RFP, the agency planned to raise $150 million by September 2022.

“It’s an economic opportunity to give people access they wouldn’t otherwise have.” McDaniel said. “In programs like this…capital is always an issue.”

Potential pitfalls

The fastest way to launch a recreational weed market is to allow medical marijuana dispensaries to begin serving adult customers, which is the path recently taken in neighboring states such as Connecticut and Rhode Island.

For New York, where the Big Apple was already home to one of the largest illicit marijuana markets in the world, the fact that it took nearly two years to kick off recreational sales has led to a proliferation of unlicensed dispensaries, attracting various public health issuesincluding sales to minors and products contaminated with contaminants.

New York’s two open licensed dispensaries can hardly compete with the approximately 1,400 unlicensed cannabis retailers who buy California weed and sell the product without paying cannabis taxes.

Faced with delays in securing and building real estate, regulators have made several changes to the program. Most notably, the state now allows CAURD candidates to find their own real estate instead of waiting for a DASNY location.

“Obviously there’s been a lack of progress,” Rob DiPisa, co-chair of the cannabis law group at Cole Schotz, said of the evolving guidelines.

If applicants choose to find their own location, it will put them in competition with DASNY for a limited pool of spaces that meet state regulatory standards. For example, retail dispensaries should be located some distance from places of worship, schoolyards and other dispensaries. Moreover, if they sign their own leases, they risk their eligibility for the $200 million fund that was designed to help them.

This leaves applicants in a bit of a bind: find a location on their own and forgo state funding, or line up for a DASNY location not knowing when they’ll get a store?

“It’s a tragic choice between two bad options,” Goldstein said.

A DASNY spokesperson did not respond to questions about the specifics of the process.

At a Cannabis Control Board meeting on Wednesday, McDaniel acknowledged that allowing CAURD applicants to find their own locations has “added some complexity to the work we do,” he said. But “we are very pleased that the recent commercial real estate component is being accelerated.”

Owners fear working with DASNY because the social equity fund has yet to raise the full $200 million. This makes potential owners reluctant to participate in the program.

Not only that, but many owners have lenders to answer to – and those lenders are hesitant to enter the cannabis industry due to its federal illegality.

With the growth of the state-regulated cannabis industry over the past decade, owners and lenders have become more sophisticated when it comes to working with the cannabis industry, said DiPisa, who works with a landlord in negotiations with DASNY.

“[Multistate operators] understand that there’s a certain language that has to go into these leases that lenders want to see,” DiPisa said. “I think there’s a bit of a learning curve [for DASNY].”

And unlike cannabis companies that only negotiate for their own operations, DASNY tries to close a lot of leases and build facilities in a short period of time.

“The concept is great,” DiPisa said. “The problem is…it’s a very difficult thing to implement.”

Jeremy Rivera is one of the CAURD candidates whose company, Kush Culture Industries, is debating whether it should finance its own construction or wait for a state-leased location.

“Are you ready to wait [DASNY] or do you want to be the first to sell? ” he said.

Rivera recently co-founded the CAURD Coalition, along with three other candidates, in hopes of helping others like them navigate a sometimes confusing process with changing deadlines and shifting regulatory guidelines.

“Capitalism has ruined cannabis,” Rivera said. “We are looking for how we can all help each other.”