New York launches $200 million investment fund to help social equity applicants get retail stores open
New York may be poised to become one of the biggest legal cannabis markets in the world, but its social equity goals might be even bigger.
That’s the goal written into the Marijuana Regulation and Taxation Act; a full 50% of the state’s legal cannabis licenses going to applicants disproportionally affected by the War on Drugs. It’s a bold ambition, considering that more than 80% of licenses in the country go to white applicants.
But in the cannabis industry, getting a license is only part of a difficult and costly road to opening a business. And finding funding can be even more difficult for minority candidates in particular, making it a barrier to entry all its own.
Unlike most states with social equity programs, the Empire State is investing directly in cannabis entrepreneurs, with the $200 million New York Social Equity Cannabis Investment Fund, a public/private partnership that will be supported by up to $50 million in licensing fees and tax revenue from the adult-use cannabis industry and up to $150 million from the private sector. Part of the state’s Seeding Opportunity Initiative, it will provide funds to assist with everything from identifying suitable locations for dispensaries to design and construction and even furniture.
The retail locations will be among the first to open in the state, supplied initially by New York’s conditional use cultivators that were drawn from the hemp industry and given the go-ahead to plant crops this spring in preparation for the retail market to open by year’s end.
And while questions have yet to be answered about eligibility as well as the final regulations and administration of the fund, it has garnered near universal praise.
“With the MRTA, there is extraordinary potential to get it right,” says Amber Littlejohn, executive director of the Minority Cannabis Business Association. “The concept of the fund is incredible. I think both the $200 million fund and the potential use of state properties are really innovative and exciting solutions to two of the biggest problems facing cannabis entrepreneurs.”
For many, the most difficult aspect of opening a cannabis business is securing land and a building to house the business. It’s often an expensive process that, in some cases, requires cannabis business hopefuls to lease a location just to be able to apply.
“That is inevitably one of the most challenging chicken-and-egg scenarios for most people who want to apply for a cannabis business license,” says attorney Lauren Rudick, a partner at the New York-based law firm Hiller PC. “That land transaction turns out to be a very, very high barrier to entry.”
According to the MCBA’s 2022 National Cannabis Equity Report, 23 states require an applicant to secure a location, often “render(ing) ownership in the legal cannabis industry beyond reach for many.”
And that’s before state-mandated security features or even new fixtures and branding are added.
With cannabis still being federally illegal, the financial and banking services available to entrepreneurs in other industries are not available, so for many cannabis businesses, finding funding means tapping savings, friends, family and potentially finding private equity.
For minority candidates in particular, the wealth disparity makes it “really challenging” to find money from family and friends to start a cannabis business, says Littlejohn, noting additionally that only 2% of all private equity money goes to Black-owned businesses.
“So if you’re looking at cannabis, we’re looking at a really scant amount of money available to social equity businesses and minority businesses,” Littlejohn says.
It’s one of the largest obstacles for success for not only social equity applicants, but social equity programs and one the state of New York was eager to avoid.
“The obstacles that most social equity entrepreneurs have is access to capital and access to the tools that make a business successful: real estate and the capital to transform that real estate into a functioning business,” says Jeffrey Gordon, director of communications for the Dormitory Authority of the State of New York, the agency tasked with overseeing the fund. “So what New York has done is basically taking care of that.”
The $200 million fund is a public/private partnership with the state putting up $50 million and the rest of the money and management coming from Social Equity Impact Ventures, LLC, a minority-led investment team, according to a June press release from Governor Kathy Hochul’s office. The release describes Impact Ventures as a joint venture between an entity led by NBA Hall of Famer and entrepreneur Chris Webber and entrepreneur Lavetta Willis, a partner in the cannabis-related venture with extensive brand building experience; and a firm affiliated with Siebert Williams Shank, a minority- and women-owned investment banking firm, that will be led by SWS CEO Suzanne Shank and SWS chief administrative officer William Thompson, the former New York City comptroller.
The idea is to provide licensees with a loan to help identify potential locations, negotiate with landlords to get leases and ensure the sites comply with state regulations, as well as to pay for the furnishings and equipment needed to open.
“And it will enable them to hit the ground running,” Gordon says. “So there’ll be essentially turnkey operations that will be matched to individual entrepreneurs.”
There are still some questions over exactly what the final stores will look like. For example, how much they may look alike or how much local branding and control an owner may end up having, but they will remain privately owned by Impact Ventures and leased to the operators, not owned by the state, which may in turn technically tie the license to the land and not the individual licensee.
While the Investment Fund could certainly help level the financial playing field as well as give its recipients a head start in the new marketplace, there are still some concerns about how effective it will ultimately be. For example, the state’s qualifications to be part of the program are quite complicated and limiting and there are concerns about how the state plans to fund its portion of the investment fund.
“It’s very challenging to find people who actually qualify and are actually going for this license,” Rudick says.
To be part of the conditional use adult retail dispensary license program, an applicant must be a “justice-involved individual” — meaning someone who has received a New York State cannabis conviction — and own 51% of the proposed business, as well as also having at least 10% ownership in a business that can demonstrate two years of net profit, a difficult ask that could leave restaurant and other break-even business owners on the outside looking in.
“It is a bit concerning that the limitations placed on this first round of licenses, including that you have owned or been an owner of a successful business, really seem to unnecessarily limit the applicants,” says Littlejohn.
Littlejohn also raises questions about the state’s funding mechanism for its share of the fund — the licensing fees and revenues from the adult-use taxes collected. Because the money comes from the industry, that means it is not available until there is an industry to support it, a problem nationally.
According to the MCBA’s 2022 National Cannabis Equity Report, less than half of the states that have social equity programs provide funding beyond fee reductions and waivers. Of those, only California provides money collected from something other than adult-use operations.
“The truth is that only six programs in the country give any funding directly to social equity applicants, New York included,” says Littlejohn. “And none of them actually have to be given the funding before the market opens or at the at the time that the market opens.”
There are also some questions as to whether the fund will be enough to help meet the state’s goal of having at least 150 of these conditional use retail stores open by year’s end, though it is unknown how many will take advantage of the investment fund.
In all, while there are questions, many observers and experts agree that while it will ultimately come down to administration, the investment fund is absolutely a step in the right direction and a tremendous opportunity for those that qualify.
“I think New York has really been innovative in addressing both the real estate and the funding issue,” Littlejohn says. “It’s just what is left to be seen is whether the timing and amount of funding is going to be enough to really support these businesses at the inception of the market.”