Funding New York’s Cannabis Social Equity Fund

20 Mar Funding New York’s Cannabis Social Equity Fund

With little fanfare or advance notice, the Dormitory Authority of the State of New York (“DASNY”) released a request for information (“RFI”) last month to determine interest and solicit information from qualified parties for an investment fund to finance “the establishment and development of adult-use retail cannabis dispensaries (“RCDs”)” for social and economic equity applicants. This is the $200 million social equity fund (the “Fund”) that is referenced in the Marijuana Regulation and Taxation Act which New York Governor Kathy Hochul announced on January 5, 2022.

News had trickled out in terms of what the fund would look like: earmarked funds for adult-use dispensary applicants, a mix of private and public funding, etc. Now we have the RFI itself, which is full of enlightening information on both the planned mechanics of the Fund as well as the CCB and OCM’s planning for New York’s cannabis industry. Let’s dive in:

Public and private funds would be used

The anticipated start date of the Fund would be in the Spring of 2022 (soon!), with a 10 year term from full capitalization. During the Fund’s term, all capital would remain committed, which means that investors would not be able to withdraw their funds. Up to $50m of the Fund would be invested by New York State from revenue deposited in the Cannabis Revenue Fund (from tax revenue).

Funding to RCD operators = loans

During the first 2 years of the Fund, interest will accrue on Fund notes (i.e. no principal amortization), with repayment as the sole obligation of the RCD. The RCD would be required to execute a loan agreement with the Fund, acting through a DASNY subsidiary as the loan servicing agent.

Loans to RCDs would be used for “direct and indirect expenses associated with the sourcing, leasing, planning, design, construction and equipping of the RCD.” A significant note: each loan will be in the form of a non-recourse, general unsecured debt obligation of the RCD operator (i.e. no personal guarantees required).

An interesting nugget, the Fund is not intended to be a profitable venture for investors: “As the Fund’s primary objective will be to advance the public purpose of providing social and economic applicants selected and licensed by CCB with a commercially viable RCD operation, the ultimate return provided to Fund investors may be limited and at risk.”

Funds would be used to advance applicants selected by the CCB

On that note, the RFI’s wording indicates that the CCB will be selecting RCD applicants for the program, presumably based on applications submitted by applicants. There is a chicken vs. egg problem when it comes to submitting applications, what with the MRTA’s real estate requirement (which may not apply to social equity applicants), but this seems to indicate that the CCB will be heavily involved in selecting the RCDs who receive loans from the Fund.

Target investment of $750k to $1.5m per RCD

The RFI tells us that the CCB and OCM expect that it will take between $750k and $1.5m to open an adult-use retail dispensary. Given the listed use for loan proceeds, this gives us a clear indication of what New York’s regulatory agencies think about start-up cannabis costs. It bears noting that this is a “request” for information by which DASNY and OCM are expressly soliciting input from the public on whether it’s plans make sense or should be adjusted.

DASNY would become the biggest cannabis tenant in New York

It looks like DASNY will be doing leasing for RCDs itself:

“The leases and sub-leases associated with each RCD shall be the assets of the Fund. DASNY . . . shall have the exclusive authority . . . to select all site locations of all RCDs and negotiate all lease terms.”

Mechanically, this means that DASNY would lease real estate and sub-lease to RCDs, with DASNY responsible for collecting rent from the RCD and paying it to the landlord.

Putting aside the fact that this would be massive undertaking for DASNY, it also raises the question of who would be responsible for notifying the local municipality or community board of the intended application. It also raises the question as to when RCDs will be selected for the program given the MRTA’s requirement that applicants for adult-use retail dispensary licenses provide notice to the local municipality.