Another late-inning policy shift by marijuana regulators in New York has rattled the industry as the potential billion-dollar market preps for adult-use sales within weeks.
This time, a new real estate allowance threw retail license holders and other stakeholders for a loop, prompting aspiring entrepreneurs to take over the challenging task of finding their own retail space instead of relying on state regulators.
Under new guidance issued Dec. 9 by the Office of Cannabis Management (OCM), Conditional Adult-Use Retail Dispensary (CAURD) license holders – New York’s version of social equity – can now submit their own proposed store locations in prequalified areas to set up shop rather than relying on and waiting for regulators to slot their stores in state-selected properties.
This significant regulatory shift – one of several in the past few months – is a big win for well-capitalized operators, according to New York cannabis attorney David Feder, because they can negotiate lease agreements and create retail designs on their terms.
“The ones who are capitalized view this as a home run,” said Feder, who represents CAURD licensees and applicants on all sides of the financial spectrum.
This option, however, appears to carry more financial risk.
Some operators might forfeit state funding dedicated to real estate procurement, construction and other related startup and operational costs once promised to all CAURD licensees and applicants under New York’s developing adult-use program.
The new guidance states provisional license holders who submit their proposed retail location “may still qualify for financial support for renovations,” a departure from previous assurances.
Scrambling for solutions
Until last week, social equity license holders and applicants in line to open the first adult-use cannabis stores in New York were under the assumption that regulators would find suitable retail locations and negotiate favorable lease terms – with state funding covering rent and other initial operating costs.
That was essentially the state’s initial rollout plan detailed in late June by Gov. Kathy Hochul, who also announced a proposed $200 million fund to support those initiatives.
The fund, which aimed to support as many as 150 CAURD licensees, planned to pool $50 million from adult-use licensing fees and revenue and “up to $150 million from the private sector.”
The equity fund is managed by Social Equity Impact Ventures, led by former NBA star Chris Webber, cannabis entrepreneur Lavetta Willis and an firm affiliated with financial services company Siebert Williams Shank.
The Dormitory Authority of the State of New York (DASNY) is overseeing property leasing and facility construction.
The fund has yet to disclose any private investments or general progress.
The DASNY told MJBizDaily last month the agency is in discussions with “well over 50 property owners” but did not respond to several inquiries for this story.
Feder said some of his existing and potential clients feel the rug was pulled from under them.
“Many of them are scrambling trying to figure out what to do,” he said.
“It puts them in a very challenging position. Now they have to replace all of those support mechanisms.”
This latest development followed another significant turn in November, when the OCM announced it would allow qualifying businesses to launch delivery services before opening their retail stores, another significant contrast from the state’s original plan and other recreational market roll outs.
In that same announcement, the OCM issued the state’s first 36 marijuana retail licenses to applicants convicted of a marijuana-related offense (or had an immediate family member with a conviction) and had owned at least a 10% stake in a profitable business for two years – a rather high barrier for verification.
New rules, new hope
The latest rule change was among several new guidelines issued to New York retailers to kick-start delivery operations.
- Store owners can secure a warehouse to fulfill delivery orders for one year while building permanent retail locations.
- Businesses can employ as many as 21 delivery staffers.
- Deliveries can be handled via bicycle, scooter, similar modes of transportation and cars.
- Customers must place online/phone orders only; no in-person pickups.
- Customers are required to make online prepayments only; no cash transactions.
CAURD applicant Jillian Dragutsky welcomes the opportunity to select her own retail location and build-out plan but is also depending on some state funding.
“Right now, we’re kind of in limbo as to what they’re going to offer,” said Dragutsky, a Suffolk County resident and one of 903 qualified social equity applicants.
“There’s really no clear-cut information on that.”
She applied for a license in Manhattan, one of the jurisdictions unaffected by an ongoing federal lawsuit challenging residency requirements that’s halted the issuance of dozens of licenses throughout the state, including Brooklyn, Central New York, the Finger Lakes, the mid-Hudson area and Western New York.
Like many applicants and market watchers, Dragutsky was caught off guard by the regulatory shift to allow delivery sales before store openings.
“It is a complete departure from the business plan I had in mind,” she said. “I’m just hoping to get one of the licenses.”
Gregory Tannor’s phone has been ringing constantly since the OCM issued the new guidelines.
His commercial real estate brokerage firm in New York City has fielded dozens of requests seeking real estate for cannabis delivery spaces and retail locations for license holders and applicants.
“We haven’t been able to take a breath,” said Tannor, the executive managing director and principal at Lee & Associates.
“The landscape is going to be competitive.”
All the policy shifts and changes leading up to the launch of recreational sales, expected by year’s end, has Dragutsky a bit on edge – but excited about the market’s potential.
New York adult-use retailers are projected to generate $1 billion-$1.2 billion in sales next year and growing to $2.2 billion-$2.7 billion by 2026, according to the 2022 MJBiz Factbook.
“The New York market is set to explode,” said Dragutsky, admitting it’s a nerve-wracking time with so much uncertainty looming.
“You just have to be ready to adapt and change and go with the flow since it is an emerging market.”
Chris Casacchia can be reached at email@example.com.