As Biden Pardons Marijuana Offenders, New York’s Would-Be Pot Retailers Gear Up

It’s a regulatory and financial minefield for future cannabis sellers. Why they’re rolling up anyway.

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Everything we thought we knew about federal rules concerning marijuana went up in smoke Thursday.

President Joseph Biden announced he is pardoning some 6,500 people convicted of possession under federal law and urged state governors to follow suit.

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But even for states like New York, which planned to authorize the first legal cannabis retail shops before the end of this year, it’s not yet clear if the grass will really be greener on the other side of the law.

From the Upper East Side down to Bushwick, weed bodegas have cropped up in storefronts across New York City and the rules of enforcement have been murky.

Catering to so-called exotic customers — those willing to skirt state law, which has not yet permitted any recreational marijuana businesses — these tacky cannabis outposts purport to operate in the gray area between decriminalization and legality. 

But to the state, these stores and mobile marijuana trucks are indeed flat-out illegal. The New York City Police Department seized 19 cannabis trucks in August and state regulators sent cease-and-desist letters to a handful of blunt-and-mortar shops in Rochester in July. These outposts, offering cheap goods occasionally rung up as other products to disguise a purchase, have nonetheless multiplied, posing a challenge to the 100 to 150 legal operators facing a heavy stack of state regulations.

New York is in the midst of outlining the rules for cannabis retail sales and packaging, based on the 2021 Marijuana Regulation and Taxation Act (MRTA), which set out the legal framework for managing the adult-use medical and hemp industries. The regulations, proposed in June and July, include a laundry list of hoops operators will need to jump through in hopes of scoring state-sanctioned sales.

Ingredients lists are a must, along with child-proof packaging, and sellers would be barred from advertising their product within 500 feet of an elementary or secondary school under the proposed rules. Plus, no marijuana advertising can include colloquial phrases like “stoner,” “chronic,” “weed,” “pot” or “sticky buds” under the initial regulations. Make a pothead joke, and your business might just go up in smoke.

Both the proposed packaging and retail rules — which would also prohibit the use of commercial mascots or calling grass “organic” — need to go through a second public comment period, though it’s unlikely the list will change significantly. Marijuana is an incredibly regulated marketplace, said Ryan George, the CEO and founder of 420 Property, a cannabis-friendly real estate listing service. And it’s not for the faint of heart (or light of tolerance).

“It’s a tough industry,” George said. “I would say it is probably three to four times more difficult than starting a liquor store, and probably 10 times more difficult than any other business.”

That hasn’t stopped prospectors from getting a jump on the market. While most would-be sellers won’t be able to apply for a retail license until the third quarter of next year, Helmsley Spear’s cannabis retail unit and Greg Tannor, a broker at Lee & Associates specializing in marijuana leasing, have both pre-negotiated leases with landlords so their clients can strike while the iron (or the blunt, in this case) is hot. 

Helmsley Spear brokers Gary Levi and Randy Sherman say they represent about a dozen would-be operators, while Tannor said he works on 20 deals weekly. Cannabis is rapidly becoming more culturally acceptable — as evidenced by Biden’s October surprise — and as the slow march to legalization moves forward, Tannor said more and more landlords have opened their minds, and doors, to cannabis retail. 

“For some of the old-school landlords, it’s just not their thing,” Tannor said. “But for every landlord that says no, there’s 50 that say yes. And a lot more people are coming around to the idea. Over the past two years, I’ve spoken to the same landlords, and some of them that weren’t into it have started calling me to say that they’re thinking about it now.” 

Illicit operators are both model and foe to legal retailers, said Jesse Campoamor, a former Andrew Cuomo administration secretary who worked on the MRTA. While unlawful shops skirt taxes and regulations, in some ways they serve as an example of how to reach consumers and help identify what products are most interesting, he said. However, Tannor said that the illegal shops are too obscure to demonstrate how to run a business, and a Helmsley Spear representative said they “thwart efforts to legitimize a potential growth industry.” 

Most of Tannor, Levi and Sherman’s prospective sellers can’t yet apply for a retail permit to (legally) deal the drug. But for Levi and Sherman’s two clients who qualify for the state’s social equity program — an early access initiative aimed at repairing the years-long damage the war on drugs did to Black and other minority communities — it’s now a waiting game.

Last month, the state received 903 applications for the 100 to 150 licenses it will initially roll out to people who have experience operating a successful business in New York state and either were convicted of a marijuana-related offense in New York prior to March 31, 2021, or had a child, parent, spouse or dependent who was convicted before that time.

These applicants paid $2,000 a pop to submit their paperwork, though only 10 to 15 percent will score a retail permit, plus up to $1 million each in financing to kick-start their business thanks to state funds administered by Social Equity Impact Ventures LLC — a joint venture between National Basketball Association Hall of Famer Chris Webber, entrepreneur Lavetta Willis, and investment firm Siebert Williams Shank’s Suzanne Shank. 

A representative for the Dormitory Authority for the State of New York (DASNY), which partnered with Social Equity Impact Ventures to manage the $200 million pot, said the “process of identifying and securing real estate for cannabis dispensaries is ongoing,” though DASNY declined to be interviewed for this story. 

“This is tremendous for any new business,” Tremaine Wright, the chair for the state’s Cannabis Control Board, said. “Traditionally, small businesses across the board, regardless of their industry, cannot often qualify for loan funds from traditional banks. Being able to start off with funds in place that are going to help with the buildouts, acquiring real estate and leases, is a tremendous lift. I can’t tell you that it’s going to solve everything, but it’s really lowering the barrier of entry for New York state businesses.”

New York has already licensed more than 260 cultivators (local farmers growing the good stuff) and 20 processors (those who package the drug), according to Wright. She was confident retail cannabis businesses would be able to open their doors before year’s end.

But even with state assistance, potential cannabis landlords may hesitate when it comes to the devil’s lettuce. Because the drug remains illegal at the federal level, leasing to a marijuana retailer can allow a bank to foreclose early on a property loan or might draw unwanted attention from the Internal Revenue Service — though early foreclosures are rare, according to Massimo D’Angelo, a lawyer at Akerman LLP. Plus, retailers might have trouble nabbing a bank partner, forcing them to pay their rent bill in cash. 

Sellers that qualify for the state’s loan program still have to navigate heavy regulations and, potentially, businesses that take advantage of those that will benefit from the financing, often called social equity applicants. In Los Angeles, a group called the California Minority Alliance accused a Black cannabis executive of exploiting other minorities through “predatory” business deals, though social equity applicants represented less than 8 percent of all people granted cannabis licenses in California through the end of 2020, according to an LA Times investigation. Plus, New York’s illicit market offers stiff competition.

“The common eye [would have] no idea that none of this is legal,” said Campoamor. “Customers still go to the non-compliant folks to get their product because the best weed that I’ve seen is still in illicit places.”

To be blunt, legal cannabis retailers, when they receive their permits, face a thriving illicit market, heavy regulation and a high initial cost burden to secure real estate and product. But Campoamor was cautiously optimistic about New York’s efforts to protect applicants that were unfairly targeted for using a drug that’s now perfectly legal in 19 states

“There’s a history of real discrimination in real life and a whole group that has been alienated,” Campoamor said. “They’re facing real challenges and there’s all the ways that they can fall short. But also there’s all the ways these guys could become millionaires.”

A 2018 Cuomo administration study found that a regulated marijuana industry will create thousands of jobs and a tax windfall for the state, in addition to reducing consumer risk. New York City estimated that the Big Apple’s cannabis market alone would bring in $1.3 billion in sales by the end of 2023, a huge score for those lucky enough to win state approval. And, at least according to brokers like Tannor, Levi and Sherman, the commercial real estate world is ready to light up and sign on the dotted line. 

Steven Phan, who runs the CBD shop Come Back Daily, plans to apply for a retail license when the general application pool opens up next year. After having to close four out of five of his stores during the pandemic, Phan is down to one location in the East Village. But he hopes that once recreational pot is legal to sell, he can open a new outpost to get in on the burgeoning industry — despite the regulatory hoops.

“If you don’t really love this thing, then you should do something else,” Phan said. “[Even] I, in the moments when it’s tough, think, ‘Damn, I should just sell socks. It’s so many rules.’ But you have to remember that for the real true gems of this movement, a lot of them didn’t have a formal education.”

Celia Young can be reached at cyoung@commercialobserver.com.