New York’s Loan Program For Equity-Owned Marijuana Businesses Is Saddling Some With Steep Costs

New York’s Loan Program For Equity-Owned Marijuana Businesses Is Saddling Some With Steep Costs

“The perception was that they were getting handed free money by the state—that they’re being subsidized. But the reality was, that’s not the case, because the state basically couldn’t raise any money.”

By Rosalind Adams, THE CITY

This story was originally published by THE CITY. Sign up to get the latest New York City news delivered to you each morning.

In January 2022, Gov. Kathy Hochul (D) outlined a bold vision to support the ambitious social-equity goals of New York’s new cannabis law: The state would create a $200 million fund to build out ready-to-open dispensaries in prime locations for retail licensees with past cannabis-related convictions. This, lawmakers and regulators agreed, was a chance for those who had been most harmed by decades of racist drug policies to not only participate in the legal market but to thrive from it.

Reuben McDaniel, who headed the state Dormitory Authority in charge of setting up fund-supported dispensaries before leaving that position last month, proclaimed that the new program would “help build generational wealth that has been out of reach for far too many of our citizens, and that will succeed in creating social equity when so many other states’ programs have failed.”

But nearly two years after Hochul announced the fund, financing documents obtained by THE CITY reveal that the 10-year loans it offers to dispensary owners are highly restrictive and potentially burdensome, giving licensees little control over building out their own locations, instead requiring them to foot a bill handed to them by the state. The details of the confidential agreement have been a source of speculation for months, as delays in securing financing for the $200 million fund as well as getting legal stores open have continued to impede New York’s cannabis market.

The loan documents, which Conditional Adult-Use Retail Dispensary (CAURD) licensees are required to sign in order to obtain New York Social Equity Cannabis Investment Fund financing, shows that the public-private fund is authorized to rack up significant expenses without consulting the borrower. And if licensees want to pay off their loan early, they still owe the fund a portion of the interest for its 10-year terms—which could amount to hundreds of thousands of dollars.

Those loans are meant to cover costs including expenses related to store leases, property management and store build-outs, as well as up to $100,000 in litigation expenses.

The agreements additionally restrict what profit margin a store may charge on its products, how much it can spend on staffing costs and the percentage by which executive personnel may increase their annual salaries each year. That means that while dispensary owners can choose cosmetic details like the color schemes of their dispensaries, they can’t control their own costs.

Benjamin Rattner, a cannabis lawyer in New York who reviewed the loan documents at the request of THE CITY, said the reimbursement agreement “grants the New York Social Equity Cannabis Investment Fund a tremendous amount of control.”

The loan documents outline the power the social equity fund has to monitor the dispensaries after they are open, as well, including having access to their sales tracking software and the authority to approach the business’s accountants directly. The document does not specify how that data is protected or how it may be used.

Lavetta Willis, one of the partners of the fund, told THE CITY that these are ways to measure the health metrics of the business to ensure a dispensary’s success. “Our goal is to provide support for CAURD licensees to be profitable and successful businesses,” she said.

Still, the terms have given some in the industry pause.

“I’ve never heard any private lender say, ‘We’re gonna micromanage everything that you do to make sure that we’re gonna get our money back,’” said Jayson Tantalo, co-founder of the New York Retail Cannabis Association, an industry trade group. “Why would they offer such a great program if they didn’t trust us to run the operations?”

Lucas McCann, who runs the cannabis consulting firm CannDelta and has reviewed a number of loan documents on behalf of his clients, said he was primarily concerned with how high the loan payments are for the dispensaries. They range from $20,000 and $35,000 a month in draft agreements he has seen, which he said was a heavy bill to carry along with monthly rent, inventory and paying staff.

“The concern here is defaulting—you can’t have a bad month,” McCann said in an interview with THE CITY. “These companies are going to be set up to default because there’s no control over their expenses.”

If a company does default on the loan, for instance by making four late payments in a year or engaging in “restricted cannabis activity”—for instance, potentially offering on-site consumption if it’s not licensed for that—it can trigger an 18 percent interest rate, according to the documents obtained by THE CITY. It also gives the fund the authority to remove the dispensary from the location.

States of Grace

Other states where cannabis is legal have launched social equity programs with aims similar to New York’s but with vastly different terms. In Illinois, the governor announced low-interest forgivable loans for cannabis entrepreneurs last year. These loans carry just a 4 percent interest rate after an 18-month grace period of no required payments.

California offers grants or low-interest loans for cannabis businesses as part of its social equity program, depending on the municipality. Sacramento, for example, offers six year interest-free loans. In Massachusetts, the state is similarly making no-interest and forgivable loans available as part of its social equity program. And last month, New Jersey awarded $250,000 grants to social equity cannabis businesses.

New York took a different approach, instead bringing in private capital to support its smaller sellers. But while the state put up $50 million it struggled to find an investor willing to stake the other $150 million.

It wasn’t until late June of this year that Gov. Hochul announced New York had finally secured the money from Chicago Atlantic, a real estate fund based in Illinois, which would receive a 15 percent return, according to SEC filings. Chicago Atlantic isn’t actually investing in the actual cannabis dispensaries, but simply loaning the fund money at an interest rate that reflects the new and quasi-legal industry’s difficulties in accessing the banking system.

Unlike with typical private loans, licensees have no personal liability for the fund loans, losing only the location if they can’t make the payments.

Akele Parnell, who has worked in the cannabis industry for the last six years and is part of the team for a CAURD license in the Bronx, said they plan to accept a social equity fund site for their dispensaries. He considered the terms fair, noting that loans for cannabis businesses could be higher than 13 percent in the private market.

“Almost from the beginning,” Parnell said his team planned on accepting one of the social equity fund’s sites. Because of federal illegality and other factors, “you have a situation where the majority of Black and brown cannabis license-holders have a really difficult time accessing capital.”

Until now, the details of the loan agreements have been largely unknown. The first revelations about the loans came at a state Senate hearing two weeks ago in Albany where a number of stakeholders expressed their concerns. The fund “is exposing the most vulnerable New Yorkers to predatory exploitation—the precise outcome that the MRTA [law] was designed to stand against,” Eli Northrup from the Bronx Defenders said in his testimony on October 30.

“The perception was that they were getting handed free money by the state—that they’re being subsidized. But the reality was, that’s not the case, because the state basically couldn’t raise any money,” said Jon Purow, a cannabis lawyer in New York who reviewed the social equity fund loan documents.

“It’s not surprising then, that in order to convince someone to sign up, terms have to become more favorable to the lenders putting in all of this money,” Purow added.

Asked about those criticisms, state Dormitory Authority spokesperson Jeffrey Gordon wrote in an email: “The $200M New York Social Equity Cannabis Investment Fund is a first-of-its-kind public-private partnership, representing the largest cannabis dispensary social equity investment in the country.”

He noted, “The Fund’s unsecured loans require no collateral and offer social equity licensees a unique opportunity to access capital on terms much more favorable than many could get from private lenders.”

‘Financial Slavery’

Last November, Carl Anderson, a disabled veteran living in The Bronx, was thrilled to learn he was among the first cohort of justice-impacted people who had been awarded a dispensary license as part of the CAURD program. The prize wasn’t just the conditional license itself, intended to give smaller players in marginalized communities a leg up before bigger players with deeper pockets hit the market, but the state’s promise of offering its first 150 licensees ready-to-open dispensary locations. Those locations would be secured and built out under the guidance of the Dormitory Authority, a state agency that typically provides financing for schools and hospitals, with the financial support from the social equity fund.

By that time, the state had selected Willis and her partners to manage the fund, but raising private capital and securing leases was moving more slowly than expected. State officials revisited their insistence CAURD licensees had to accept a Dormitory Authority-selected site and told licensees that they could try and find dispensary locations on their own and then submit them to the state for approval.

The Dormitory Authority started signing leases for dispensary locations with landlords, documents obtained by THE CITY show. In December 2022, it signed a lease for a store on 125th Street in Harlem. In March, it signed another for a store at Union Square.

Subleases for these locations sent to CAURD licensees earlier this year show 10-year rent schedules along with an estimate of the monthly cost of the construction loans, ranging from $25,000 to $26,000 for three Manhattan sites reviewed by THE CITY. Under those terms, licensees would pay $3 million over 10 years for the design and buildout costs of their dispensaries alone. Yet none of those specific costs were enumerated—they simply listed a flat rate. Those monthly payments would be in addition to rent, which, in the first year, ranged from about $44,000 to $76,000 according to the documents.

Marty Feinberg, the owner of a building on the same block as the Union Square location, told THE CITY that the lease the fund had signed for that site was a fair price, rattling off the $76,000 rent from memory. “That’s what it should go for, maybe even more. It’s Union Square West.”

The site eventually went to the dispensary Dazed, which had its grand opening last week. “When the email came across, I immediately said yes to the opportunity for this location,” said Keshawn Warner, one of the owners of the store.

“It’s very hard right now with the way the banking rules are set for the cannabis industry to raise funds,” said Warner, in part because the business still violates federal law, making it more difficult to raise capital and access the banking system. Working with the fund to open his dispensary, he said, “really expedited the process.”

Mike James, the co-owner of Good Grades, which will have its grand opening in Jamaica on Wednesday, told THE CITY that while he’s heard the complaints about the loans, they helped launch his business. “I look at it as an opportunity that no one else is giving us,” he said

But not all aspiring store owners have seized the opportunity after doing the math.

Anderson decided to pass earlier this year on a site the Dormitory Authority offered in Hunts Point in The Bronx, after he read the estimated cost of the buildout and the monthly rent. The area has much lower foot traffic than a Union Square location, for example, and he was unsure that he’d make enough sales to cover his costs. “It doesn’t make sense. Where am I going to get that money from?” he said.

Others have expressed similar concerns. In May, a group of licensees sent a grievance letter to state officials citing a lack of transparency in the loan terms as well as the high rents for available sites. “It appears as though we are once again asked to participate in a market that is fundamentally inequitable and counteractive to the purpose of the very initiative the government launched,” said the letter.

At a meeting officials from the Office of Cannabis Management and the Dormitory Authority held in early June to address licensees’ concerns, one of them, Carson Grant, summed up the circumstances around his Fund-supported Queens retail location as “financial slavery.”

“You guys keep saying ‘transparency.’ I don’t know what anything costs. I don’t know what a light bulb costs,” continued Grant, whose plans have been suspended by a court order that’s also upended the business plans of many CAURD license holders.

“Just tell us the numbers! That’s all I’m asking for!”

Budtender At New York City’s First Legal Cannabis Store Jailed On Marijuana Charges

Photo courtesy of Philip Steffan.

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