Chicago Atlantic Talks New York’s $150 Million Equity Investment Deal

Just before the long 4th of July holiday weekend, news broke that a long-promised $200 million social equity fund for New York marijuana retailers has been filled to the brim by Chicago Atlantic, which stepped in with a pledge of up to $150 million for building out dispensaries via small business loans.

The news is likely a relief for scores of conditional adult use dispensary (CAURD) license holders that have been waiting for the state to deliver on a pledge by Gov. Kathy Hochul that New York would take care of finding and building out social equity dispensaries. Until now the only dedicated money for those shops had been $50 million in state funds, which observers said would come nowhere close to the amount of money needed.

Chicago Atlantic likely will reap up to an 8% return on its investment, according to an RFP issued by the Dormitory Authority of the State of New York (DASNY) last year, which estimated that’s how much of a guarantee it would take to attract so much investor money.

Chicago Atlantic managing director Peter Sack sat down with Green Market Report to fill in some of the details on how the investment deal came about, which was nearly a year in the making but still moved at what he described as “light speed” in the investment world.

Sack declined to offer specifics such as how his firm will be turning a profit with the investment, or whether New York has guaranteed the $150 million will be repaid even if social equity retailers default on their loans. But he clarified that the funding will be provided on a rolling basis as eligible dispensary sites are located for leasing, instead of Chicago Atlantic simply writing New York a $150 million check.

Sack also said that Chicago Atlantic will be heavily involved in site selection and in a support role for social equity retailers, and made clear that their success will equate to success for Chicago Atlantic.

What attracted Chicago Atlantic to this particular investment deal? 

There’s really two angles: One, New York is going to be a very exciting market that’s going to be extremely dynamic, and is going to change the way this industry thinks about and consumes cannabis. It’s just an extremely important market.

Two, the state had a very distinctive and unique hypothesis that they wanted to test. And that is, can the state in the private market create a cannabis industry in New York, that benefits the people most impacted by the war on drugs? And it’s extremely ambitious.

And we started talking with the fund managers, Lavetta Willis and Chris Webber, from the outset of their contemplation of this fund, and the more they thought about it, and the more we collaborated, the more we decided this is something that we want to be a part of. And it was a long slog to brainstorm to get it right.

But we’re really glad we did, and really glad we get to be a part of it.

Can you tell me about how long negotiations took, and what really sealed the deal for Chicago Atlantic?

I wouldn’t call it a negotiation. It was mutual brainstorming. We all had a problem that we wanted to solve.

Then there’s plenty of other stakeholders around the table, too. There’s the governor’s office. There’s the Office of Cannabis Management. There’s the Dormitory Authority of New York. It’s a lot of stakeholders to bring to agreement.

On some of our deals, they take two months, and some of them take a year. And that’s only with when you’re talking about Chicago Atlantic with one counterparty. Chicago Atlantic with 12 counterparties, and adding to that state counterparties, obviously it gets a lot more complicated.

It sounds like this was about a year in the making. Is that right?

Yeah. Really, the first three months of our conversations, there was no deal on the table. I had no expectation that we would be a part of it. It was me making introductions and being a sounding board of ideas.

From term sheet to closing it was really more like three or four months.

The fund is being run by DASNY, and the funds are being dispersed to social equity retailers in the form of semi-low interest loans. So is this an investment by Chicago Atlantic in the state of New York? Or is it an investment in New York social equity shops?

We’re investing in the Social Equity Impact Fund, as a lender to the fund. And the fund, which is managed by Lavetta (Willis) and Chris (Webber), is executing the program.

We’re playing as many support roles for the fund as we can, but it is the fund managers executing on capital deployment and bringing license holders into the fold.

There’s been a lot of criticism from stakeholders, talking about the pace of the fundraising. Were there other potential investors that the state has been talking to or trying to broker any deals with? Or were you guys were literally the only game in town?

There aren’t that many lenders in the cannabis space generally. But I know they were speaking to our main competitors.

I suspect that one of the key selling points for us was our ability to play an end role in this program, to have one counterparty rather than cobbled together hundreds of millions from two dozen counterparties.

The commitment from Chicago Atlantic, is it definitely going to be $150 million? Or might it wind up actually being less? 

Our aim is to do $150 million. But we are trying to find sites, and trying to spend, and it’s dependent upon finding the right real estate sites. The pace at which we find them will dictate the pace of deployment, and the pace at which we find them, and the pace at which we can construct them to be tenant-ready.

Regarding Chicago Atlantic’s cannabis portfolio, how does this particular investment compare?

We’ve committed and deployed about $2 billion over the last four years to a broad range of multistate operators, single-state operators, very early stage and more developed. We’ve funded expansion and cultivation, we’ve funded that retail, we funded acquisitions.

There’s obviously unique elements of this, but the fundamentals of supporting the site selection and construction of retail is nothing new to us.

As far as size goes, we’ve brokered public deals. We funded Verano, $350 million, and we’ve been their lender since 2019. We’re the lead lender on Schwazze’s $95 million convertible note. We funded TerrAscend’s $50 million loan that’s now $25 million outstanding. We are the lead lender to Goodness Growth/Vireo. So $150 million is right down the fairway in terms of size.

It seems like this might be kind of a step in a new direction, just because it’s an investment in a government-run program, as opposed to investment in a private or public company. 

Yeah, absolutely. This is the first of this type of investment that’s been done by anyone, anywhere. And as far as I’m aware, it’s the largest commitment to social equity in the history of cannabis. So breaking new ground comes with the territory in terms of this program.

We have the confidence to do it because we’ve done so much in cannabis, in a number of other facets and angles, that while this is certainly trail-blazing for the industry, for us, it’s just one more step.

Will Chicago Atlantic have any role going forward in things like actual site selection? 

We’re playing a role. We’ve visited every single site that’s been chosen so far. And we plan to visit every single site that’s laid out in the future. I’m in New York literally every week, doing road trips around upstate and bouncing around Manhattan. We need to create and pick locations and build out locations that are going to be successful for our main client.

And we don’t view our main client as the fund; we view our main client as the social equity license holder. Every every decision that we make, and I know the fund thinks the same way, DASNY thinks the same way: How do we how do we make the right choices that are going to put these operators in the best position to be successful?

Any other benefits to Chicago Atlantic from investing in this fund?

We learn from every deal that we do. Part of our success has been taking the learnings of each of our failures and successes and rolling that into how we underwrite and think about the next deal and our next relationship.

So I have no doubt that we will have some stumbles, and that we’re going to learn from those stumbles to make this program the best that it possibly can be. We’ve funded a number of social equity and ownership groups that come from diverse backgrounds. But I think what was really important to us about this deal was creating a structure that is scalable and replicable.

Finding one operator who is extremely competent, and has a great project to put together is one thing. But funding 100 dispensary owners across the whole state is something completely different. If we can make this successful in New York, we should be able to roll this out in Illinois, and roll this out in Maryland, and roll this out in Ohio.

And so I’m hopeful that this is going to be a program that we’re going to be able to replicate and build upon. And really change the conversation about what is possible in social equity in cannabis.

Up to now, among the biggest problems that I’ve heard of in making equity in cannabis a reality is matching progressive licensing policies with progressive capital. And progressive capital hasn’t existed.

What will happen if some of the social equity retailers default on their loans? Is there a guarantee that Chicago Atlantic will still get paid back its investment?

Our relationship is with the fund, and the fund’s relationship is with the operators. So management of defaults, and supporting operators that have trouble is really going to be up to the fund.

We’re giving the fund as much support as we can. But I know the fund is going to be working hand in hand with these operators on a very granular level, to make this as successful as possible.

Is there anything else that would be good for stakeholders to know about this investment deal, and what it means for New York cannabis companies?

I would encourage license holders to reach out to the fund, to reach out to Lavetta and Chris’s organization and learn how they can be a part of it. And Chicago Atlantic, while we’re not the driving force of site selection for guiding operators, we’re always glad to chat and have a cup of coffee. I’m in New York almost every week and, and glad to meet with anyone who reaches out.

This interview has been edited for length and clarity.