Inside New York’s struggling weed real estate experiment

Roland Conner never imagined that getting arrested for marijuana in the ‘90s would lead to where he is now: the owner of a new cannabis dispensary in the heart of Greenwich Village.

The blocks surrounding his shop, Smacked Village, are bustling with potential customers among the NYU students and people coming in for the city’s nightlife — and New York took extraordinary steps to make it work.

By far the biggest perk is that a state agency located, leased and willrenovate a storefront on one of the priciest slabs of real estate in the world to help someone sell a drug that once landed people in prison.

But Conner’sfledgling cannabis business is also vastly outnumbered by illicitcompetitors that have sprouted all over the city since the state legalized weed for adults nearly two years ago. New Yorkers are buying weed from behind the counter of bodegas, shopping in unlicensed stores and ordering from underground delivery services.

Smacked’s soft launch last week marked a milestone for New York’s uniquely interventionist marijuana program, which prioritizes dispensary licenses for entrepreneurs with past pot offenses andtakes care oftheirreal estatechallenges. And whileConner is the first such entrepreneur to open his dispensary’s doors to the public, it’s unclear how the state will follow through on the promises its made to these small businesses.

The slow drip of dispensary openings — Housing Works opened one on Dec. 29 and Smacked nearly a month later — underscores the challenges the state faces in securing real estate and raising capital for entrepreneurs.

Unlike comparing prices for comparable office space, there’s no equivalent, transparent system for retail, explained Kristin Jordan, CEO of cannabis-focused brokerage firm Park Jordan.

“It's really a wild west,” she said. “Retail is not an open book.”

Other legal weed states that have attempted social equity programs have encountered numerous problems: Entrepreneurs often struggle to raise capital or find landlords willing to rent to them, and licensees with little business experience find themselves entering a market already dominated by large cannabis companies.

But there’s nothing quite like New York’s weed experiment.

“This is the boldest and most extreme social equity program that’s ever been attempted,” said University of California, Davis economist Robin Goldstein, co-author of the book “Can Legal Weed Win?” “It’s an experiment and nobody knows how it will turn out.”

Smacked might be open, but only on a pop-up basis. After about one month of sales, the location will be closed again for construction.

Even so, Conner is undaunted by the challenges ahead.

“Sometimes, I pinch myself,” he said in an interview outside the shop ahead of the recent opening. “I just can't believe it.”

How it works

Conner is the recipient of a Conditional Adult-Use Retail Dispensary (CAURD) license. These licenses are reserved for people who have been convicted of a marijuana offense prior to legalization or have an immediate family member who was convicted for cannabis. They must also have prior small business experience. Nonprofits that serve formerly incarcerated populations are also eligible for the first round of licenses.

The state will license 150 applicants to open up dispensaries across the state. So far, 66 licenses have been doled out, with 56 going to justice-impacted entrepreneurs and another 10 going to nonprofits.

The Dormitory Authority of the State of New York, an agency that typically provides financing and construction for schools and hospitals, is tasked with finding locations and building them out for CAURD applicants.

DASNY will sign a lease with the landlord, and sublease the location to the applicant. The agency also selected 10 firms to construct the dispensaries. Temeka Group, one of the 10 firms who won the contract with DASNY, will be working with Conner to build out Smacked. The company has constructed more than 400 dispensaries throughout the U.S., said its CEO, Mike Wilson.

Meanwhile, DASNY is raising money for a $200 million public-private fund that will go toward standing up these dispensaries and providing a variety of other services beyond real estate and construction. The funds are treated like a loan, so licensees like Conner will eventually have to pay the state back, with market-rate interest.

The fund got $50 million from the state and needs to raise another $150 million from the private sector. During a recent press conference, DASNY President Reuben McDaniel declined to say how much money the fund has raised.

“We’ve had significant conversations, significant investors, who are very interested in this program,” McDaniel said. “I’m sure we'll have plenty of money to do what we need to do.”

CAURD licensees have been promised turnkey dispensaries. But that is taking time to implement. In DASNY's original request for proposals, the agency anticipated raising $150 million by September 2022.

“This is an economic opportunity to give people access they wouldn’t have otherwise.” McDaniel said. “In programs like this … capital is always a problem.”

Potential pitfalls

The fastest way to launch a recreational weed market is to allow medical marijuana dispensaries to start serving adult-use customers, which is the path recently taken in nearby states such as Connecticut and Rhode Island.

For New York, where the Big Apple was already home to one of the largest illicit marijuana markets in the world, taking nearly two years to launch recreational sales has prompted a proliferation of unlicensed dispensaries, drawing a variety of public health concerns, including sales to minors and products tainted with contaminants.

New York’s two open licensed dispensaries can hardly compete with an estimated 1,400 unlicensed cannabis retailers that are getting California weed and selling the stuff without paying cannabis taxes.

Faced with delays in securing and building out real estate, regulators have made several changes to the program. Most notably, the state is now allowing CAURD applicants to find their own real estate instead of waiting for a DASNY location.

“Clearly, there’s been a lack of progress,” said Rob DiPisa, co-chair of the cannabis law group at Cole Schotz, of the changing guidance.

If applicants opt to find their own location, it will put them in competition with DASNY for a limited pool of spaces that meet state regulatory standards. For example, retail dispensaries must be located a certain distance away from houses of worship, school grounds and other dispensaries. Plus, if they sign their own leases, they risk their eligibility for the $200 million fund that was designed to help them.

That’s leaving applicants in a bit of a bind: Strike out on their own to find a location and give up state funding, or wait in line for a DASNY location without clarity on when they will be given a shop?

“That’s a tragic choice between two bad options,” Goldstein said.

A spokesperson for DASNY did not answer questions about the specifics of the process.

During a Cannabis Control Board meeting Wednesday, McDaniel acknowledged that allowing CAURD applicants to find their own locations has “added some complexity to the work that we're doing,” he said. But “we’re very excited that the recent retail real estate component of this is actually being accelerated.”

Landlords are apprehensive about working with DASNY because the social equity fund has yet to raise the full $200 million. That’s making potential landlords wary of participating in the program.

Not only that, but many landlords have lenders to answer to — and those lenders are wary of entering into the cannabis industry due to its federal illegality.

With the growth of the state-regulated cannabis industry in the past decade, both landlords and lenders have become more sophisticated when it comes to working with the cannabis industry, said DiPisa, who is working with a landlord in negotiations with DASNY.

“[Multistate operators] understand that there's certain language that needs to go in these lease agreements that the lenders want to see,” DiPisa said. “I think there’s a bit of a learning curve [for DASNY].”

And unlike cannabis companies that are just negotiating for their own operations, DASNY is trying to enter into a large number of leases and build out facilities in a short amount of time.

“The concept is great,” DiPisa said. “The problem is … it’s a very difficult thing to actually implement.”

Jeremy Rivera is one CAURD applicant whose company, Kush Culture Industries, is debating whether it should fund its own construction or wait for a state-leased location.

“Are you willing to wait for [DASNY] or do you want to get first to sale?” he said.

Rivera recently co-founded the CAURD Coalition, along with three other applicants, in hopes of helping other like them navigate an at-times confusing process with shifting timelines and changing regulatory guidance.

“Capitalism has ruined cannabis,” Rivera said. “We’re figuring out how we can all help each other.”