skip to Main Content
New York CAURD Expansion Puts Non-CAURD Applicants in License Limbo

As New York moves steadily forward with the rollout of its adult-use cannabis program, new regulatory measures proposed last week by the state’s Office of Cannabis Management (OCM) are still in a comment period, with inevitable changes to come. Revising regulations is common in every state, of course, with alterations usually made to improve initial mistakes or evolving environments.

Robert M. DiPisa | Cole Schotz

The decision by OCM to double the current number of Conditional Adult-Use Retail Dispensary (CAURD) licenses being issued from 150 to 300, on the other hand, adds a level of uncertainty for non-CAURD applicants that makes planning to open a business fraught with unnecessary risk. To be sure, New York still offers plenty of opportunity for cannabis operators to find good locations for licensed businesses, especially in retail, but as attorney Robert DiPisa explained in a call with Cannabis Business Executive, extending the timeline for non-CAURD licenses to some unknown date in the future didn’t make the process any easier, to say the least.

A commercial real estate specialist and chair of the cannabis law group at New Jersey-based Cole Schotz, DiPisa started doing regulatory compliance work in the cannabis space in 2013. “We had a client who was looking to buy one of the existing medical operators in New Jersey,” he recalled. “At that time, they were all nonprofits, and the patient pool was very low because of very limited qualifying conditions in New Jersey. I slowly realized that I was probably one of a few people who had gone through these regulations and really understood the industry. We started picking up work in Nevada, California, Washington state, Massachusetts, Illinois, and now, New York, New Jersey, and Maryland. I’ve also done a lot of work in Florida and now Texas.”

Over time the two tracks intertwined. “Now my real estate practice has organically merged with my cannabis work,” he said. “I do a lot of work with publicly traded companies and real estate investment trusts, and on the regulatory compliance side, we represent everyone from multistate operators all the way down to mom and pops.”

New York, New York

DiPisa’s general criticism of the New York rollout is that it has been relatively static, especially when compared to its neighbor. “New Jersey ramped up their medical program before the adult use program came online,” he explained, “and I think that it was almost like an incubator for the future adult-use program, because they had more operators coming into the medical space, they expanded the patient pool, so they had more patients they needed to service, and it gave them a preview of where problems could lie.

“New York, on the other hand, has been relatively stagnant, and there haven’t been multiple rounds of new medical licenses,” he added. “And even though New Jersey did limited licenses, it’s not like a bunch of licenses came online; but they still had multiple rounds of new medical licenses come online, and New York didn’t have that track record.”

DiPisa did have high hopes for the program when it was announced. “When I first read the MRTA and when I first read about New York’s proposed regulations, I honestly felt like New York set a new benchmark for social equity when they set a goal that 50 percent of the licenses would be put in the hands of social equity-type applicants,” he said. “Some of the things they sought to solve, like the real estate issue, have always been a big hurdle, especially for social equity applicants, because it takes a lot of money to secure real estate. And in the New York program, the Office of Cannabis Management was going to lease the real estate for the social equity operators and then slide them into those locations. I thought, talk about setting a new bar for identifying a problem and just solving it.

“But while in concept it was very forward thinking and a great way to solve an issue that seemed to be transcending every single jurisdiction,” he added, “when it came down to execution, you’re not seeing the efficiency and speed that the operators themselves would be bringing. Of course, it’s also no secret that the social equity fund was supposed to be funded with $200 million for leasing and build-out of up to 150 of the CAURD applicant dispensaries, and only $50 million give or take was actually raised for that $200 million dollar fund.”

The problem, he said, is that you cannot fault people for now knowing what they do now know. “The Dormitory Authority of the State of New York (DASNY) was tasked with leasing and overseeing the leasing and the building out of these facilities, but you can’t put the blame on any company or government body that has no experience in the cannabis space to then just jump in and be responsible for leasing all of these prospective cannabis dispensaries, and you can’t expect them to know what is and is not market in the cannabis real estate space.”

Was the decision to pick such a company in light of all the experience other people have had with these issues over the years a good one? “I don’t disagree at all,” said DiPisa. “I hate to use a term like perfect storm, but it’s a combination of things. It’s a government entity being tasked with this very onerous responsibility without having a lot of experience in the cannabis industry, and in addition to that, because the social equity fund was not fully funded, and that $50 million needs to get spread 150 different ways, what message does that send to the landlords when the fund or a subsidiary of that fund is going to be the actual tenant under these lease agreements?

“The landlords are scratching their heads, saying, ‘Originally it was supposed to be $200 million for 150 locations, and now you have arguably a quarter of the amount you were supposed to have,’” he continued. “But what happens when the well runs dry? There are no guarantors on these leases, so what happens when the fund runs out of money? How does the landlord recoup losses when there’s no one left to pay rent? A lot of landlords knew about this, especially those who were engaged in negotiations with DASNY, and it made a lot of them very gun shy. So, you have this combination of landlords who sometimes are enamored by the price per square foot or the numbers they could get for the cannabis-related use, but if they’re sophisticated landlords and they know there’s really an empty bucket backing it up, what are they committing themselves to, and is it worth the risk?”

In combination with that, he added, you have a government entity negotiating the business terms of these leases “when in all fairness they don’t have a lot of experience negotiating business terms for cannabis leases, especially in New York City, and arguably, a lot of those deals haven’t even been struck”

The upshot is that there are only three regulated dispensaries open in New York City right now. “And when you look at that pace,” noted DiPisa, “the people who should be paying very close attention to it are the non-CAURD-eligible applicants looking to open a dispensary in New York City. The key here is that the CAURD program is intended to give social equity applicants first crack at the industry in a license class that has an easier entry point – dispensary.

“So, what would happen if they permitted non-CAURD dispensary license holders to open and commence operations before all of the CAURD license holders become operational? It’s pretty much contrary to the entire point of having that program, so if you look at everything that’s happening, they originally had 150, and now 300, and since the first 150 will take priority when it comes to the social equity fund, the second 150 may not have any funding available and may have to go off on their own and find their own real estate.

“But if I am looking to open a dispensary in New York City, and I’m looking at the number of CAURD license holders in front of me, and at the timing window within which these leases are getting done and built out and these CAURD license holders becoming operational, I cannot help but set my timetable back on my plans to open a dispensary in New York.”

It’s a conundrum with no ready solutions. “If the first 150 CAURD license holders get the first crack at the social equity fund, and then the second 150 essentially get whatever’s left, if anything’s left, that means the second 150 is going to have to either go into their own pockets or try to raise funds to secure their own real estate. That takes time and a lot of effort and could further delay that second 150 from getting open and operational. It remains to be seen.”

Could the need to open more store faster become so acute that non-CAURD applicants are allowed to open even before all 300 CAURD stores have become operational? “I think that’s certainly possible,” said DiPisa. “What I said about them having to wait is only because the way I have viewed everything that’s been put out, the goal is to get them open first and to permit non-CAURD applicant dispensaries to open prior to them would be counter to the whole objective of the program. But I don’t ignore the fact that they’re going to have pressure from multiple angles to get dispensaries operational especially if you think about the supply chain.”

For New York cultivators producing product, he noted, there are only three licensed CAURD dispensaries where they can sell that product. “It’s headed towards an oversupply type situation, and that could also be a catalyst to permit non-CAURD qualifying dispensaries to commence operations so that we don’t run into a big supply chain issue in New York.”

Bad Timing

Any talk of non-CAURD opening before CAURD is speculative at best, of course, and the current playbook, such as it is, offers little in the way of assurance for those non-CAURD applicants trying to guarantee they have a desirable location to open in when the time that they are able to even apply.

“I have landlord clients in New York that are continuously being approached, and these are the flagship locations that larger operators are interest in,” said DiPisa. “They’re continuously being solicited by larger operators, and now there are a bunch of LOIs floating out there, but the operators aren’t pulling the trigger, and I think that is in part due to the unknown timing.

“It’s always the game,” he continued. “You want to secure viable real estate, but what you don’t want to do is pull the trigger too early where you’re obligating yourself to spend money on a monthly basis to carry that property before you have an opportunity to apply. And with regs only in draft form, anything can happen. They’re still taking comments, and the property you think might be viable may not be viable later on. So, if you’re an operator, you want to try to secure it at the lowest cost possible to try to lock it up, but where is the incentive for the landlord to accept small dollars to lock up their real estate so they can’t explore the other options?”

To be sure, that is not the only disincentive a prospective landlord may have regarding taking on a cannabis client, especially one negotiating within the DASNY guidelines. “In addition to the lack of funding, the terms that are expected, the landlord obligations to potentially refinance their properties to accommodate cannabis use – and we know rates aren’t what they were when these landlords probably locked in those low rates sometime in 2020 – but also changing insurance companies and potentially changing banks because some are trigger shy to even take the rent money from cannabis tenants into their accounts, in addition to all of those obligations that landlords need to take on in exchange for maybe a higher price per square foot, the most important thing is the tenant knowing and appreciating the kind of language that the landlord’s lenders expect to see in the lease in order for those lenders to permit the cannabis use.

“There are only certain banks that are okay with having financing on a piece of property that’s used for cannabis-related uses,” added DiPisa, “and those banks that are okay with it expect certain protective language in the lease to protect their collateral. Mostly from things like civil asset forfeiture, which even though it is unlikely to occur, the Controlled Substances Act still permits the Department of Justice to come in and seize real property that’s used in connection with federally illegal activity, like the sale of cannabis. So, the lenders want to see language in the lease that permits the lease to be terminated in the event that there’s a threat or potential threat of civil asset forfeiture or other kinds of federal enforcement of the Controlled Substances Act.”

These are details that can derail a deal even if federal enforcement is improbable. “Even though we all know it’s unlikely, and we’re not seeing it, the banks want to see it to give them that comfort, and it’s important for the tenants and the operators to understand and be receptive to the language the lenders need,” stressed DiPisa. “That’s how you’re really going to get a deal done, and by the way, it’s easier in a dispensary, where there isn’t as much money being poured into that real estate. With a cultivation facility, where you have tenants pouring tens of millions of dollars potentially into that property to build it out, it gets much harder to get that type of termination language in there for obvious reasons. For dispensaries, it’s usually more palatable for the operator.”

It’s a problem that leads inexorably to diminishing returns. “We’ve tasked a government entity to negotiate the business points of lease agreements within the cannabis industry, an industry that they really don’t have a lot of experience in,” noted DiPisa. “While you can’t fault them for that, because not a lot of people have experienced negotiating those business points, it’s important that the business people on the tenant side who are operators understand and appreciate what landlord’s lenders want to see in the lease, be receptive to it, and accept that type of language.

“If you don’t have that type of experience, you’re not receptive to it, or understand why it’s needed,” he added, “it’s going to be very difficult to get deals done, because all it does is shrink the pool of potential landlords that you can negotiate with to those with zero financing on their property, and money has been very cheap up until recently, so it made sense for landlords to carry that.”

I asked DiPisa what sort of landlord would be best suited for a DASNY deal. “I would say it’s a landlord with no financing on their property who has a bank that is receptive to the cannabis industry and is willing to act as a depository, with an insurance company or with access to an insurance company willing to insure the property notwithstanding cannabis-related use, because that type of landlord would be able to give and wouldn’t need that lender-protective language in the lease.”

But even those landlords want the lender protective language, he added. “At the end of the day, if you want the ability to ever refinance your property, even if you don’t have a lender as of right now, and you’re entering into one of these deals, you still should try to get that language in the lease so that one day in the future you can put debt on this property, notwithstanding the cannabis-related use,” explained DiPisa. “You don’t want an asset that you can’t put debt on at a later date. It’s a difficult question to answer, because you could look at it that you don’t need to worry about getting the lender protective language and it takes that issue off the table, but at the end of the day, if you’re a sophisticated landlord and you are forward-thinking and your counsel is forward-thinking, they’re still going to try to get that language in the lease so that at some date in the future you’ll be able to refi the property.”

DASNY, he added, is trying to enter into 10-year term deals with landlords. “If you want to be able to refi that property over the course of the next 10 years,” noted DiPisa, “who knows what can happen and what you need to do and where you’ll need to be able to access cash, you’re going to try to get that language in.”

Was there a solution to this apparent oversight that DiPisa could suggest? “I’m not going to speak to what DASNY or the Office of Cannabis Management should be doing to try to expedite negotiations of these deals,” he said, “but I think it might make sense that they consider bringing on some kind of real estate-related consultant with significant experience in the cannabis industry to help them negotiate the business terms on these lease deals.”

A Waiting Game

For non-CAURD applicants with time and money to wait, there will be opportunities to score in New York. “If they’re okay waiting, real estate is always going to be challenging in and around New York, but less of a challenge on the retail level, but let me explain,” said DiPisa. “The one good thing for retail dispensaries in New York City is that today you still see storefronts that remain vacant from the pandemic. What that has done is it has created more availability, and more landlords who are willing to explore other potential uses in that retail storefront. That helps the dispensaries that are looking for storefront retail locations in and around New York City.

“One of the problems that other operators face, such as cultivators and manufacturers, is the fact that post-COVID a lot of the industrial and warehouse space has been bought up or leased up by e-commerce companies such as Amazon, Walmart, who are all looking for locations that can accommodate those same day or next day deliveries in and around the city,” he added. “That reduced the availability of those industrial warehouse properties for potential cannabis operators, and it’s also driven up the cost significantly. Industrial warehouse in and around the city is a very hot market, pricing is still high, and it’s likely going to push all of those types of operators mostly north of the city an hour or two, depending on your budget. I think those are the main real estate type challenges that those operators face.”

Regarding the speed at which new dispensaries will open in New York, DiPisa said it can only speed up. “We only have three open,” he said. “The first opened in late December, so it’s about one a month. It’s hard for me to believe that it could slow down. It almost has to speed up, but the question is, at what rate will it speed up? Is it going to be a slow build, or are we going to see a lot more flow in the next six months or so?”

Could he characterize the scuttlebutt from clients and others since the announcement about the doubling of CAURD licenses? “It just makes it more challenging,” he said. “The conversation is obviously about whatever timetable we had anticipated, and let’s set it back another three to six months. But then again, clients don’t want to sit on the sidelines and wait, so I think one of the most challenging aspects of all of this, when you’re in a jurisdiction that requires you to secure real estate, is when to pull the trigger on that real estate. If you do it too early, whether it’s a startup or an entity that has operations elsewhere, you’ve committed them to a monthly expense, and the duration of time that they need to carry that real estate and incur that expense is vital. It could be a difference of a significant amount of dollars if you pull the trigger 12 months in advance or you pull it three months in advance. That’s a lot of dollars that you don’t want to be spending if you don’t have to, especially when you’re trying to start a new venture in a new jurisdiction.”

At least one MSO has threatened to sue New York over its adult-use rollout. Did DiPisa think that was likely?  “I’m a transactional attorney, not a litigator by practice,” he replied, “but what I will say is, if you look at every other jurisdiction with the rollout, litigation is almost a certainty to some extent. But while there is usually litigation associated with most rollouts of the adult-use market, I think it’s too early to determine if companies are going to file based on what we’ve seen so far. As we watch the rollout, if additional obstacles are presented and if there are actual grounds to sue on, I think people will [sue]. That’s just what I’ve seen during my career in the industry and the different jurisdictions that I’ve filed applications in. I’d say almost every single one that I’ve worked in, there have been lawsuits associated with the application process and the rollout.”

With all of the challenges and unknowns that have been addressed, could DiPisa even hazard a guess when we might see the first non-CAURD storefront in New York? “I don’t even think you can make that prediction until there’s a call for applications for the non-CAURD dispensary owners,” he said. “When the application process has opened up, at that point in time, you could probably make a rough judgment, and they’ll always give a rough timetable – for instance, the applications will be reviewed in 90 days, though you have to be conservative about timetables, and always set it further back – but I don’t think you can even start guessing until that application process is opened up. I mean, you can comment on the regs right now, so it’s far too early to even guess, but I do think that we need those types of benchmarks to be met.”

Isn’t it even too early to estimate when the non-CAURD application process will begin, much less become operational? “That’s exactly right,” responded DiPisa, “and that’s what makes it so challenging for non-CAURD dispensary applicants to judge what they should be doing at this point in time.”

Tom Hymes

Tom Hymes

Tom Hymes, CBE Contributing Writer, is a Connecticut-based writer and editor with over 20 years’ experience covering highly regulated industries. He was born and raised in New York City. He can be reached at [email protected].

This Post Has 0 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Recent Stories

If FL Supreme Court approves cannabis ballot language, will voters go for recreational weed or not?

The long wait on whether Floridians will get a chance to vote to legalize recreational cannabis for adults 21 and older is almost over, as the Florida Supreme Court is…

Missouri strips marijuana licenses connected to company accused of predatory behavior

Missouri’s health department on Wednesday stripped two coveted marijuana micro-licenses tied to an out-of-state company that had been accused of predatory practices and had listed the licenses for resale. The…

Dug In: Big Island Grown’s Deep Cannabis Roots

Big Island Grown (BIG) is a vertically integrated cannabis company based in Kailua-Kona, Hawaii County, on the Big Island of Hawaii, whose reach now extends to several islands in the…

Unlock the Secrets of Social Media for Cannabis Brands

There are three primary ways that brands can use social media platforms for marketing: organic posts, shared posts, and paid posts. With paid posts still off limits to most businesses…

More Categories

Back To Top
×Close search
Search