New York's cannabis legislation is rolling out swiftly. Despite an initial delay, local authorities are setting up the regulations that will soon shape the industry in New York State.
In the last few months, New York increased the amount of conditional adult-use cannabis cultivation licenses available, granting 146 licenses to hemp farmers in order to supply cannabis retailers' inventories.
In early July, the Office of Cannabis Management (OCM) received 14 applications from cannabis operators aiming to process cannabis products for New York's first adult-use cannabis sales this fall.
This program will issue 150 licenses to individuals who were either convicted of a cannabis-related offense or who have relatives, guardians, or dependents that were convicted in New York prior to March 31, 2021.
In addition to falling into one of these categories, CAURD applicants must also have experience owning and running a business. CAURD's application window closed on September 26th.
Applicants had to pay a $2,000 non-refundable application and license fee and indicate where they planned to open a dispensary.
To support the first batch of dispensaries, New York is set to inject $200 million into the local cannabis real estate market by leasing up to 150 retail properties.
In some cases, a business would be entitled to receive up to $1.5 million to establish a new dispensary.
However, not everyone who wishes to open a dispensary in New York will be able to get support from the state.
New York's cannabis legislation established a goal to award 50 percent of all adult-use licenses to social and economic equity applicants.
Most likely, the remaining 50 percent of applicants will need to bear the expenses of starting a cannabis business on their own. It is still unknown whether the next batch of licenses will be limited or open to all applicants.
Ari Hoffnung, who is the CEO of Bridge West Consulting, a cannabis consulting firm in NYC, told NYSCC that New York is going to have a unique market because regulators have taken into consideration what has worked and what has failed in other US states that legalized adult-use cannabis.
Hoffnung explained that the range of capital that applicants would realistically need to launch an average cannabis dispensary in New York would be between $1-2 million.
"This depends on a variety of factors including but not limited to locations, cost of labor, [and] upfront renovation of the dispensary, which not only needs to address the customer experience but also [has] to comply with New York and [municipality] regulations," he said.
The choice of location in which to establish a dispensary drives much of the overall cost. Opening a retail shop in Manhattan, NYC, will have much higher costs, for example, than opening a dispensary in any other less expensive city or small town in New York.
Furthermore, any cannabis dispensary, regardless of location, must spend capital ensuring they follow specific rules.
According to the Marihuana Regulation and Taxation Act (MRTA), which legalized adult-use cannabis sales in New York on March 31, 2021, dispensaries must be located at least 500 feet from school campuses and 200 feet from houses of worship.
Social equity applicants must also follow these rules. In the case of these applicants, the Dormitory Authority of the State of New York (DASNY), New York's facilities, finance, and construction authority, will likely provide them with a location.
A spokesperson of Canna Business Resources (CBR)—a financial solutions firm that offers invoice factoring, lines of credit, and real estate financing services for cannabis industry operators—told NYSCC that companies like CBR are currently the only source for non-equity cannabis operators who want to finance their business to enter the industry. The only other option for these operators would be drawing out loans for private individuals, as adult-use cannabis is still illegal at the federal level. Therefore, no commercial banks that adhere to federal law can lend money for cannabis-related activities.
"We financed $100 million last year all around the [country] to any type of cannabis business operators. However, we have high standards to select our clients," the spokesperson said.
Apart from the legal barrier to acquiring the capital to launch a dispensary, the costs of starting a dispensary are similar to those of other traditional businesses.
Retail owners need to set up an accounting system, plan an advertising campaign, hire employees, develop a website, purchase the initial inventory, put a security system in place (as most cannabis retailers have to deal with a lot of cash), and make other investments—all before earning their first dollar of revenue.
"[The] sky is the limit in terms of the maximum amount to spend for a dispensary," he said.
Hoffnung told NYSCC that the fund provided by New York State for social equity applicants might have an interest rate between 10 and 15 percent.
If applicants don't qualify for the social equity loan, they are left with two options: raise capital through equity financing, which involves selling a portion of a company's equity in return for capital, or borrow the money and pay it back with interest, which is likely going to come with a much higher interest rate than what is offered by the state.
While Hoffnung thinks the state's $200 million social equity fund is an impressive step in the right direction, he believes that "it will only cover a fraction of the overall capital needed."
He stated in an op-ed published on Marijuana Moment, "New York's social and economic equity entrepreneurs will collectively require more than $1 billion of startup capital."
To solve this problem, Hoffnung proposed the idea of issuing Cannabis Based Municipal Bonds (CMB) that could be paid back using social equity loan repayments and proceeds from New York's adult-use cannabis tax revenue over the years.
When asked if he thought if the first dispensaries that will open in New York will suffer from competition with unlicensed businesses, Hoffnung told NYSCC that in every cannabis industry established by states that have legalized adult-use cannabis thus far, sales have been segmented into two markets with different market dynamics.
"I think it is in the interest [of the] public health perspective for regulators to make [policies] to increase the portion of the cannabis spending to untax regulated market and minimize the illicit market. In recent years, the illicit market in New York has become stronger, but I hope that the illicit market will decrease in size once the legal market is launched," he said.