New York’s adult-use cannabis program hoped to be a model for social equity and economic opportunity. It promised to help individuals harmed by cannabis prohibition enter the newly legalized market by providing financial assistance. However, recent developments show that, instead of supporting disadvantaged entrepreneurs, the program may be setting them up for failure, exposing them to exploitation, and placing the burden of guaranteed profits on taxpayers.
At the heart of this crisis is the New York Social Equity Cannabis Investment Fund (the Fund), a $200 million initiative designed to assist cannabis entrepreneurs. The Fund comprises $50 million in public funds, which will be repaid through future cannabis tax revenue, and up to $150 million from the private equity firm Chicago Atlantic Group. The goal was to provide low-cost loans to “justice-involved licensees,” meaning individuals arrested on a marijuana offense (or with direct family members who were) who might struggle to access the capital needed to secure, lease, and build retail locations.
Only these individuals were eligible to receive a Conditional Adult Use Retail Dispensary (CAURD) license in New York’s first round of licensing. Lawmakers wanted to give these individuals a leg up in the marketplace. The state would manage the challenging and expensive tasks—such as finding compliant dispensary sites, negotiating leases, financing construction, and hiring contractors. Licensees would then take over fully operational dispensaries, using profits from cannabis sales to repay low-interest loans from the Fund.
However, as more details about the Fund’s operations emerge, this seemingly beneficial arrangement looks increasingly like a potential disaster.
Hidden costs, high interest rates, and harsh loan terms
Initially, licensees were promised 10-year loans with a 10% interest rate to cover buildout costs projected to range from $800,000 to $1.1 million. Instead, licensees report being saddled with much higher interest rates, exorbitant rents, and buildout costs, sometimes more than double the state’s initial projections. The situation is exacerbated by licensees having little say in key decisions, including the selection of site locations, the size of the dispensary, or the contractors handling the buildout.
Instead of allowing licensees to manage their projects, the Fund selects contractors, approves itemized proposals, and invoices the licensees. This has led to accusations of inflated construction costs, with licensees facing bills hundreds of thousands of dollars higher than expected. For instance, one licensee was invoiced $125,000 for design services alone and $1.6 million for the buildout of his location, only to discover that the contractor hired by the Fund had subcontracted the work for an estimated $250,000—a fraction of the cost.
The financial strain doesn’t end with inflated costs. Those accepting loans from the Fund face strict repayment terms, where a payment more than five days late can trigger a default. Loan agreements also impose severe restrictions on operations, including limits on profit margins stores may take, staffing expenses, and executive salaries. These constraints make it nearly impossible for licensees to compete effectively or turn a profit.
An official from the Office of Cannabis Management (OCM) estimated that under these conditions, as many as 75% of licensed locations would fail to achieve profitability. Moreover, licensees who default on their loans—by making just four late payments a year—could see their interest rates soar to 18% or face eviction from their dispensary locations by the Fund.
A raw deal for taxpayers
While the funding scheme is already causing problems for CAURD licensees, it may be an even worse deal for New York taxpayers. An investigation by local news outlet The City revealed that the state’s agreement with Chicago Atlantic is heavily skewed in favor of the private equity firm, to the detriment of licensees, the state, and taxpayers.
According to a near-final draft of the agreement, the $50 million loan provided by Chicago Atlantic carries a 15% interest rate guaranteed by the state. Additionally, the firm committed $100 million to develop properties to be leased to the Fund and subleased to licensees. The deal also includes a $10 million reserve, which the state must replenish as needed, from which Chicago Atlantic can draw to cover late payments.
Although licensees are not directly required to put up collateral for loans from the Fund by loan covenants, the state secured the loan from Chicago Atlantic with dispensary leases. Therefore, if a licensee defaults on their loan, Chicago Atlantic gains control of valuable real estate and may remove the licensee and re-lease the space under terms even more favorable to the firm.
Rather than uplifting disadvantaged entrepreneurs, New York’s cannabis social equity program has created a system that, as OCM Chief Equity Officer Damian Fagon put it, “converts our licensees into ATM machines for landlords, investors, fund managers, and contractors before inevitably bankrupting them.”
As it currently stands, New York’s cannabis equity program risks doing more harm than good to those it was designed to help while also distorting the state’s nascent adult-use cannabis market. If the state is serious about fostering a thriving market that provides real opportunities for individuals harmed by cannabis prohibition, it must take immediate steps to reform its equity scheme. To help disadvantaged entrepreneurs succeed in the new market, New York needs to lower bureaucratic and financial barriers to market entry, allow entrepreneurs more control over their business decisions, and provide non-predatory financial assistance. This approach would also prevent taxpayer money from being siphoned into the coffers of private equity firms, ensuring that the program truly serves the public interest.