John Schroyer
Mixed messaging, changing policies, and a lack of clarity on how exactly the state of New York intends to finance scores of social equity cannabis shops has several marijuana industry stakeholders in the Empire State crying foul.
At issue is a $200 million fund announced nearly a year ago by Gov. Kathy Hochul, which has thus far failed to live up to expectations and is still causing headaches for the very demographic of entrepreneurs that it’s supposed to help.
Aside from the fund having reportedly only $50 million to date, stakeholders say state officials have been cagey about releasing actual documentation on how the funding will be dispersed.
“The problem is, it’s like a moving target,” said Andrew Cooper, a New York City attorney who has several CAURD licensees and applicants as clients. “Every day, we’re learning something new.”
Social Equity Loan Terms
The most recent update for social equity retailers came during an information session hosted by state officials in January, which laid out some details of the financing, according to Galina German, a conditional adult use retail dispensary (CAURD) license holder in upstate New York who attended.
Permit holders were told the fund will offer 10-year loans between $800,000 and $1.2 million at 10% interest, German said, a rate she called “shocking.” But so far, she and many others haven’t seen any loan documentation or agreement to review for business planning purposes.
German said she’d been under the impression that the fund’s financial support would be more akin to Small Business Administration loans, which are typically very low interest and can be forgiven over time if certain criteria are met, rather than commercial loans.
“From the way I read what New York state was doing, I thought it was going to be a grant (or a) low-interest rate and forgiven,” German said.
In attendance at the January meeting, German said, were representatives from the Dormitory Authority of the State of New York (DASNY), the New York Office of Cannabis Management (OCM), and Social Equity Impact Ventures (SEIV), the private investment team that was hired to run the fund. There was also a video crew recording the entire three-day session.
But what German learned there left her with more questions. After crunching the numbers, she and her team decided not to accept the loan.
“On a $1 million loan, you’d pay back $2.4 million over 10 years at 10% interest, something like that,” German said she calculated.
One of the stipulations from DASNY and SEIV was that the licensees could “walk away” at any point and simply hand back the keys to the shop the state paid for, without having to worry about a personal guarantee on the loan, German said. But she’s still concerned that social equity entrepreneurs may be getting a bad deal.
“I’m worried this will literally bankrupt people,” she said, and mentioned concerns about market competition from the underground, a slow start to recreational cannabis sales for licensed shops, and the sheer costs that companies like hers would be shouldering if they accepted the loan terms.
An estimate from one of the SEIV officials was that social equity retailers would be repaying about $20,000 a month to the state for the loans. That payment would be in addition to the retail lease costs and operating expenses such as inventory costs and payroll.
To just break even in such circumstances, German calculated her shop would have to sell $400,000 a month in cannabis products, which she fears will be a tall order.
“To me, that’s not equity,” German said. “(The state) seized lots of assets from us. Equity would be giving us those assets back, or the money they took from us. Or giving us a loan at very low interest rate. At least prime. But they’re saying 10%. I wouldn’t borrow money at 10%. So for me, as someone from a finance and business background, those are not good terms.”
Almost more disturbing to her were strings attached to the loan offers being made by DASNY and SEIV, which she learned about at the info session. One requirement is that retailers use some of the loan money to pay for contractors and designers of the state’s choosing, instead of having the flexibility to use the funds how they see fit.
“We cannot use our own contractors for our own buildout. We have to use their contractors, their designers, their cabinetry, and a lot of the (CAURD) recipients are from construction backgrounds. And everyone was like, ‘I could do this buildout with $200,000. I don’t need to hire a company that’s going to charge me $65,000 to run the cameras when I could have my own crew run it for a fraction of the cost,’” said German.
German said her husband spoke to a contractor who was also present at the January meeting who estimated that his firm would get $45,000-$65,000 to install and monitor security cameras for retailers that accept the DASNY loan money. But if German and her husband, who had a successful home-building business prior to getting into cannabis, were to take care of that themselves, she estimated a cost of only $10,000 plus ongoing labor.
“A lot of people are like, ‘I don’t know if I want to do this,'” she said, adding that a lot of the retailers feel like they don’t have a voice, and are afraid to publicly criticize the state due to a “culture of fear.”
German was the only CAURD licensee to respond to requests for comment about the fund from Green Market Report, and she said that many of the licensees are afraid to speak to journalists.
“The CAURD recipients that are waiting for the fund, they don’t want to go on the record, because they’re afraid there will be ramifications,” German said.
DASNY and SEIV did not make anyone available for an interview, but DASNY spokesman Jeffrey Gordon wrote in an email that “Loan terms haven’t been finalized at this point.”
“On use of the funds, licensees participating in the Fund program are accepting a fully fit-out location. The loan program was created by the legislature to be used for capital expenses, not operating expenses,” Gordon wrote, before declining to comment further.
Moving Goalposts
Part of the problem is that when more than 900 CAURD applicants filed for retail permits last fall, the OCM said at the time that license winners would be required to accept retail locations chosen and paid for by DASNY and the fund, said Cooper, who is also a board member of the JustÜs Foundation, which is deeply involved in New York cannabis policy. (Cooper emphasized he was not speaking on behalf of the organization, but as a private attorney.)
In December, that policy flipped, and the OCM announced it would let social equity retailers find their own shop locations. The OCM also enacted stricter True Party of Interest (TPI) regulations, which banned investments from other marijuana companies that operate outside of retail. Those rules were released in November, after the retail application window closed nearly two months prior.
“We feel somewhat like we’re trying to hit a moving target on a lot of these things, because the rules were either unknown or changed significantly,” Cooper said. “Some clients decided not to apply, because we told them that if you apply for a CAURD license, you’re obligated to participate in the fund, and that you had to accept the site offered to you. Now, we know that’s not true.”
Another New York lawyer and tax advisor, Paula Collins, said she specifically advised clients to pass on the CAURD applications, for essentially the same reason that Cooper cited.
“I didn’t know what the state was going to do,” Collins said.
She called the state’s entire rollout “paternalistic” and noted that one of the requirements for CAURD licensure was applicants had to prove they’d been running a successful business for at least two years.
But instead of providing financial support and then allowing CAURD licensees to decide what’s best for their businesses, Collins said, DASNY and the state are attempting to control every aspect of the cannabis market rollout.
Collins described the situation as “Soviet,” and accused the state of treating CAURD licensees as “sharecroppers.”
“This whole idea that they’ve tried to present – ‘This is an entrepreneurial adventure that we’re giving to you,’ – it’s totally bogus. Because they’re trying to remove choice at every turn,” Collins said.
And now, with loan rates possibly at 10%, Collins called that number “edging towards predatory.”
Cooper said that currently, CAURD licensees have three options:
- Accept a property chosen and funded by DASNY, along with the loan at 10% interest.
- Find an acceptable property that DASNY will sign off on and accept the loan to pay for the site build-out.
- Find their own property and finance it themselves.
While Cooper said he thought it was clear that the DASNY fund was always intended to be a loan, he found it disturbing that the state has yet to provide solid documentation or terms in writing for his clients to examine before they commit. And if the situation had been clearer when the application window opened last year, he predicted there would have been far more applications filed than the 903 received by the state, because so many possible industry entrants didn’t like the lingering uncertainty.
OCM spokesman Aaron Ghitelman declined to comment on questions about the fund, but said in an email to Green Market Report, “Operators of all sizes will have the opportunity to compete and thrive. This is not a market that will be dominated or monopolized by a few well-capitalized players, but rather a market that provides all who hope to enter a real chance at success. Nobody’s cannabis journey is over. It’s just getting started.”
Ghitelman also clarified that the TPI regulations issued in November still allow social equity retailers to bring on investors from the cannabis industry as long as they don’t have ownership stakes in other areas of the industry, such as cultivation or manufacturing.
The Fine Print
The fact that the $200 million fund was going to provide financial assistance in the form of loans instead of grants to CAURD licensees was apparently downplayed, but it wasn’t a secret. Press releases from Gov. Hochul’s office last year didn’t delve into the nitty gritty of the program structure, but it was spelled out in a request for proposals that DASNY issued in May last year when searching for a fund manager.
That specific RFP noted that private investors were likely to want at least an 8% return on their investment if they were to be persuaded to donate at least $5 million – the minimum threshold for an investment – to the cause of standing up New York’s social equity cannabis shops.
German said that at the informational meeting in January, a representative of DASNY said the 8% for investors is still intact. Another 2% would go to SEIV, which is where the 10% total interest comes from.
In a term sheet released by DASNY at the time, the agency noted that “DASNY shall, as agent of and on behalf of, the Fund enter into fixed rate, non-recourse loan agreements with the Fund as lender.”
Then on Jan. 5, in the midst of the CAURD loan training that German attended, the OCM issued an FAQ that clarified the $200 million fund would “have licensees repay these costs over 10 years … at an interest rate equal to or less than the market rate of a similar loan.”
New York attorney Jeffrey Hoffman, another lawyer with clients involved in the CAURD licensing, defended the state’s implementation of the loans.
“There’s no confusion. People that are doing deals are very clear on what they’re signing,” said Hoffman, who represents both CAURD licensees and applicants.
“Maybe the confusion was that people thought it was going to be zero dollars from the CAURD licensees, and the state is doing everything. That’s clearly not what they ever intended,” Hoffman said.
Hoffman said the state has been clear from the get-go about how the fund and its loans would be structured, and said anyone caught unaware simply didn’t do their due diligence.
“This is why you hire attorneys,” Hoffman said.
Cooper also said that it’s not easy raising capital in today’s cannabis environment, and because banks and traditional lending institutions are still steering clear of the marijuana industry, the 10% for 10 years offered by the state may be the best deal the CAURD licensees can expect.
“Nobody’s giving that in cannabis anywhere,” Cooper said. “Big picture, why wouldn’t you take the money?”
To German, the answer is simple: She and her team probably can’t afford it. And, she said, a lot of other CAURD licensees may not be able to, either.
“Maybe at first, people will be able to make their obligations to the fund and pay $20,000 a month in interest and fund payments, but eventually I think what’s going to happen … is that people will be walking away from these locations because their overhead is too much,” German said.
