Delays in NY pot rules mean big costs for small businesses

ALBANY — Jeff Collins and his wife had big early plans to open their dream dispensary. But nearly two years after recreational cannabis was legalized in New York, most of the regulations that will govern the industry are months from final approval, and the couple’s energy — and savings — are waning.

The couple, who also have partnered with friends in the venture, had watched the marijuana legalization process unfold in other states and knew that having a retail storefront ready to open would be key to expediting the application process. So they bought one, right in the heart of Woodstock in Ulster County, where it sits unused.

“We kept hearing month after month that the regs would be here next month, then next month, and finally we stopped believing them,” Collins said. 

Like many marijuana-business hopefuls in New York, the couple had been excited by the details of the state law, which prioritized “small business opportunities” and a suite of “equity applicant” categories: communities disproportionately impacted by cannabis prohibition; minority- or women-owned businesses; distressed farmers and service-disabled veterans. 

But the lack of a clear timeline for the regulations and application process has kept many prospective business owners and other newcomers to the retail marijuana industry hemorrhaging cash at a rate some aren’t able to afford. 

“You can’t plan what you don’t know,” Collins said. “If you can’t plan your finances and you can’t plan your entry, it makes it really difficult.”

The state’s Office of Cannabis Management and its corresponding lawmaker-appointed Cannabis Control Board have shifted target dates for industry regulations and other key milestones, frustrating even supporters who are eager to get into the business. The process stalled early on when former Gov. Andrew M. Cuomo did not nominate regulatory leaders for several months; then, once the regulators were in place they shared information on their plans gradually, and eventually pushed back the application timeline for most prospective businesses.

While a conditional licensing strategy allowed some retail marijuana sales to kick off before the regulations are finalized, most small business and “equity applicant” hopefuls did not qualify. 

Some New Yorkers who thought they’d have priority have since given up or decided to enter the market in a different way. But “there’s this other pool of folks that are literally holding on for dear life at this point,” said Jesse Campoamor, a political operative and cannabis equity advocate. 

“They’re a little bit overleveraged, they raised from friends and family and are literally calling their lobbyists, calling their professionals they’ve retained and saying, ‘Hey, can we just put things on hold for a second,?'” Campoamor said. Others have gotten so deep in debt that they’re “looking for folks that sponsor them or straight up buy them out.”

According to interviews with industry insiders across the state, some applicants who can’t afford to wait or to give up say they are making handshake deals to turn over high percentages of their businesses to investors while retaining controlling interest in the short term; others are giving up a share to their landlords to avoid paying rent on an empty space in perpetuity.

“We understand the desire for everything to happen faster and all at once,” said Aaron Ghitelman, a spokesman for the Office of Cannabis Management. But he said they are “thoughtfully regulating” and “have always advised hopeful entrepreneurs to not let the cart get in front of the horse.”

Ghitelman said the state is designing the industry to last, and that “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.”

Still, some larger companies have the capital to charge ahead in spite of uncertainty. Cresco Labs, which has operations across the country and reports quarterly revenues of more than $200 million, is already setting up in Ulster County about 30 miles from Woodstock. The group broke ground this fall on a marijuana cultivation, manufacturing and distribution plant that will cost hundreds of millions to build. 

Cresco has also acquired multiple cannabis companies with preexisting medical marijuana licenses in New York, closing deals to take over Valley Agriceuticals in 2019 and Columbia Care last year, with a build-out timed for sales in the recreational market. And it isn’t the only large company making inroads: industry insiders have flagged real estate negotiations by competitors who do not have New York licenses yet.

New York realtors with experience in the cannabis industry in other states said they have been cautioning clients that the timeline of the rollout may shift as they help negotiate storefront deals that leave potential applicants with an out if they do not get a license. 

But those deals look different in high-margin places such as New York City than they do in the rest of the state. 

For Collins, he said buying a suitable storefront in Woodstock seemed to make sense, since having a location is usually a prerequisite for the costly application process. Even before draft rules came out, licensing experts like Cannaspire’s Warren Harasz were saying that businesses needed to sort out their real estate as well as proof of local support, security measures, insurance, environmental plans, workforce development strategies and a community reinvestment approach by the time the application periods open.

Now, Collins’ team is paying off the property without knowing how much longer it will sit idle.

“We lost a lot of momentum, a lot of desire even,” Collins said. “We now have a building that we’ve had for a year and a half, we thought we’d have a dispensary a year ago. And we’re paying the mortgage on it every month, with no end in sight.”

Shifting timelines

New York’s landmark cannabis legalization bill became law in March 2021, when political leaders estimated the industry would be up and running in 18 months. At the time, there was no talk of prioritizing conditional licensing, and many entrepreneurs started readying for their dreams by hiring consultants and lobbyists. 

Cuomo’s tenure ended in turmoil several months later, at a time when he and his administration were engulfed in corruption and sexual harassment investigations and before the former governor had nominated leaders to head the industry’s regulatory agency. Some lawmakers argued that the state Department of Health should have been in charge during the gap in leadership, but that agency declined to take action even on the law’s changes to medical marijuana regulations. 

Gov. Kathy Hochul called a special session to have her picks confirmed shortly after she took office following Cuomo’s resignation in August 2021. 

But in the months that followed, as the agency staffed up and began to work, regulatory leaders’ varied statements on industry kickoff dates shook the confidence of some entrepreneurial New Yorkers who took their statements at face value.

In November 2021, Cannabis Control Board Chairwoman Tremaine Wright said regulators would “finish crafting regulations” and begin issuing licenses within an “additional year and a half.”

A month later, Wright appeared at a Crain’s Forum, saying that she hoped regulations would be “out for public comment by January 2022” and “businesses will be able to apply for adult-use licenses before September 2022.” But that January, she also said on a webinar that the rules “should be starting their way through the next stage in late winter or early spring.” Those statements predated mention of regulators’ conditional licensing plans.

At a board meeting last March, Chris Alexander — the Office of Cannabis Management’s executive director — said the general regulation package would “come out in May” and that they would have to go through two mandatory public comment periods, so officials were expecting “end of year for that application window.”

By August, Alexander was saying applications for most cannabis licenses would not be available until the middle of this year, though regulations would “come out sooner, in the next two months or so.”

In the end, those regulations were approved in draft form and shared with the public in November. They went through an initial public comment period, which ended on Monday. Now, regulators are required to sift through the thousands of comments received, adding and modifying the rules when necessary. According to New York law, updated regulations will need a new 45-day public comment period before being adopted. 

The varying messages have meant the state’s general licensing process accessible to businesses like Collins’ have rolled out at a much slower pace than many expected. For some who invested their limited capital early with hopes of a foothold in the fledgling industry, moving targets have rocked those plans. 

“We are incredibly proud of what we created and firmly feel it reflects the statements we’ve made throughout the process,” said Ghitelman, the regulatory spokesman. He said the office predicted in the fall of 2021 that “it could take up to 18 months to get this going, yet we needed less than a full year after opening applications for cultivation licenses to create a new legal cannabis ecosystem.”

Referring to the conditional licensing system, Ghitelman said that last year regulators “built a complete cannabis supply chain from the ground up, including licensing cultivators, processors, laboratories and retail dispensaries,” and started training growers and processors who had been operating illegally to enter the formal market. 

The next regulatory step has proven time-consuming in the past: for the shorter and less contentious rules for medical cannabis home grows, it took the agency nearly four months to process the public’s feedback before offering up a draft for a second round of comments. The rules were adopted five months later — nine months after they were at a stage similar to the industrywide guidelines under consideration. 

Rules for issues such as packaging requirements were drafted earlier, but the overall regulation package has to be adopted before any applications can be processed for nonconditional cannabis businesses, according to regulators.

Given the impacts of the current uncertain timeline on less well-resourced applicants’ processes, some cannabis lobbyists have been pitching alternatives. Joe Rossi, a lobbyist for Park Strategies who specializes in cannabis regulations, has advocated for a pre-licensing system like those in Michigan and Vermont, which he has said could allow entrepreneurs to secure financing for their plans. Without it, he argues, the slowdown is favoring those with more cash on hand. 

But while local entrepreneurs have been caught off guard by the pace and order of the industry rollout, many attorneys and lobbyists with cannabis industry experience and familiarity with New York’s bureaucracy have been less surprised, saying they were prepared for this exact process.

“I think (they’re following) the timeline most people had in mind when things were kind of moving slowly in the beginning,” said Elliot Choi, a New York City-based cannabis attorney.

“Some potential licensees did go ahead and start paying rent early in the process, trying to lock down premium locations; some of those people have unfortunately run out of money,” he said. “But while the timeline has definitely frustrated a lot of folks, I honestly don’t think too many have given up.”

Richard Thomas, co-chair of a separate cannabis law group, said his team also feels the pace was moving as expected, though he does have a lot of clients eager to see the regular application period open. 

“Once applications are open, it’s going to be a mad rush,” Thomas said. 

Other slowdowns

Some of the skepticism among cannabis business hopefuls stems from the conditional dispensary program. 

Early last year, regulators announced a program that would prioritize businesspeople with past marijuana convictions in the state. It promised them an assigned location and a turn-key retail shop to begin selling recreational marijuana “conditionally” by the end of the year, before full industry regulations were released. Twenty-five additional nonprofits could get the same designation, but without the financial support.

A year ago, Hochul noted that a $200 million public-private fund managed by the state’s Dormitory Authority would finance the build-outs, and the state budgeted $50 million to kick it off. 

Dormitory Authority officials said publicly that they expected their selected fund partner to raise $150 million by Sept. 1 to ensure a smooth process. Social Equity Impact Ventures, which was selected to be the fund’s partner in June, missed that target without publicly announcing any change in their timeline and neither they nor the state have disclosed the amount that has been raised. 

Information about the store build-outs has been scarce, and most businesses that won the early licenses have yet to be assigned a location; some have found their own locations instead. And application documents recently released to NY Cannabis Insider show that Impact Ventures detailed its wariness about the September deadline to Dormitory Authority officials before it was selected for the role. 

“We believe we are fully capable of raising all requisite capital,” the application says. “Impact Ventures does, however, believe that a (Sept. 1) … target date for completion of capital commitments is aggressive and will be significantly informed by volatility in the market and economic outlook.”

After the document was released, the Dormitory Authority said “events and facts” had changed when the fund’s contract was negotiated. 

But a month after the missed deadline, Hochul said the program was “still on track” to open 20 conditional adult-use retail dispensaries by the end of the year, with “another 20” every month or so thereafter.

The only retail dispensary to open last year, run by the nonprofit Housing Works in Manhattan, did not receive support from the fund. The first fund-supported shop opened in January, also in Manhattan, though its storefront is currently a “pop-up” that will need to close to allow for a full build-out of the shop.

There have been other issues with the rollout, including a federal court ruling that put most temporary retail licensing on hold in the Finger Lakes, central New York, western New York, Mid-Hudson and Brooklyn as the state faces a constitutional challenge over its prioritization of New York-based applicants.

“The effort to build out dispensaries for justice-involved individuals is a first-of-its-kind enterprise,” said Jeffrey Gordon, a spokesman for the Dormitory Authority. “Clearly the federal court injunction prohibiting operation of legal dispensaries in a significant portion of the state … impacts timelines, but (the dormitory authority and the state) are confident in our progress with the Cannabis Social Equity Fund,” he said. 

But the delays have increased doubts among some industry stakeholders, said Mark Wagner, chair of the Capital Region committee of the Cannabis Association of New York, since there has not been “a ton of transparency” from the dormitory authority on the leasing process.

“It’s raised some real concerns about how the Office of Cannabis Management, the Legislature and the governor are moving this industry forward with the full licenses,” Wagner said. 

Cooling enthusiasm

In the wake of the industry’s uncertainty, momentum in the Capital Region has waned. 

Last May, in a back room of the Albany Public Library branch a short walk from the state Capitol, dozens of energized cannabis entrepreneurs flooded a community event led by regulators. Many were born and raised in the predominantly Black neighborhoods nearby in West Hill, Arbor Hill and the South End, but some had traveled from much farther to hear Office of Cannabis Management representatives lay out their plans for the industry. 

Spirited orators nudged presenters, voicing urgency over the need to get regulations done right, and frustration that they didn’t see more Black farmers among the first licensees approved to grow recreational marijuana. That group had been provisionally licensed based on their experience cultivating hemp, rather than other criteria. 

Regulatory staff returned to the library earlier this month, speaking to a strikingly different crowd: whiter, and smaller, with around two dozen excluding staff members. While the presenters appeared to listen carefully to the attendees, they did not have any new deadlines to share. A PowerPoint slide with a timeline graphic showed that their next two steps would be “assessment of public comment” and “revised regulations or finalized regulations,” but neither had a date.

A few familiar faces from the May meeting also showed up. One person who spoke had his face and head covered, unwilling to be identified. 

He said that if the state’s plan was to prioritize people from the “legacy market” who sold pot while it was illegal transitioning to the licensed industry, “you have to prevent people from backsliding. But in the short term, there are a lot of things that are going to incentivize people to go back to the black market.”

“I know it’s a long-term thing, and I’m here, but the short term is almost more important,” he said. 

Multiple other sources have cited formerly energized entrepreneurs in the Capital Region and across the state doing just that: after briefly imagining themselves with a formal storefront, they have opted to return to selling unlicensed marijuana in the illegal underground market.

Some dealers have told regulators publicly that they are concerned about things like quality control and testing requirements in the new market structure, which prevents sellers from directly controlling the cannabis on their shelves unless they’re a small-scale “craft” business. But others, especially those with active clientele, decided over time to return to their unlicensed work rather than to wait any longer in uncertainty.

State regulators have said they want to absorb parts of New York’s robust underground market into their new industry structure. But they also sent a series of cease-and-desist letters to unlicensed storefronts and insinuated that the licensing process could penalize those engaged in the widespread illicit selling that has occurred since marijuana possession was legalized two years ago. 

For some, the price of betting on the regulated market is starting to look daunting. 

“If you’re someone who has put your life savings into this looking at a way to build generational wealth, every month you’ve got to eat another 20 grand, another 30 grand for your attorneys, your accountants, your real estate. At what point do you cry uncle?” said Stu Zakim, who works with cannabis hopefuls in New York. “It’s unsustainable.”

Dr. Mark Oldendorf, a primary care physician who is licensed to prescribe medical cannabis, said his plan to open a retail marijuana shop and use any profits to fund research on the drug stalled due to hurdles in securing financing for the project. Although Oldendorf thinks it could still work under the current draft regulations, the version that came out in December did not include a research license category that some insiders had been expecting during the nearly two-year wait.

“I think people are getting discouraged that the timeline is been pushed off so long,” he said. “It’s like a ship, we set sail, and there was no wind in the sails. And now it just sits there.”

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