Big Challenges For NY Pot Shops

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A Weed World store front sign on the streets in New York City Photo: Shutterstock

As New York prepares to dole out licenses for recreational cannabis, entrepreneurs face real estate challenges, from Harlem to Lower Manhattan.

As a real estate broker who specializes in the cannabis industry, Colby Piper is well positioned to get into New York’s burgeoning market himself. And as someone who’s been convicted of a crime related to weed, he’s even better situated now to secure one of the state’s first recreational licenses, after officials announced plans in March to give preference to applicants like Piper. “It puts me right at the front of the line,” he said.

But even for Piper, opening a shop in his preferred neighborhood of Harlem may not be easy.

Like most states, New York’s law requires that dispensaries be a certain distance from schools and houses of worship. These and other expected regulatory requirements for where dispensaries can be located pose a particular challenge in dense New York City, where entrepreneurs say some of the neighborhoods with high expected demand — like Harlem and the Lower East Side — offer very limited available space.

“It’s gonna be tight,” said Piper, the director of the cannabis division at Ripco real estate brokerage.

The geography puzzle is just one of a number of real estate hurdles for prospective marijuana entrepreneurs, who face a morass of potential regulatory obstacles — and fierce competition. Although New York’s Office of Cannabis Management has released some baseline guidance, like the storefront distancing requirements, there are still a lot of unknowns. Piper rattled off several unanswered issues, like the size of the storefront and whether a waiting room will be required. “Everything’s a question right now,” he said.

While the state proposed that the first licenses go to people with a marijuana conviction or their relatives, it’s unclear when New York will apportion out licenses to the broader pool of applicants, or how many it will award. But with the state’s cannabis market projected to be worth $5.9 billion by 2030, according to a soon-to-be-released report from New Frontier Data, potential marijuana entrepreneurs are already circling like piranhas, tying up their space now by signing letters of intent or outright leases, or in some cases waiting for more clarity from the state before lunging for storefronts.

Right now, New York’s a tenant’s market in most commercial cases, amid pandemic-spurred vacancies and declining rents. But not when it comes to weed. The high industry demand paired with the premium for spots that are likely to meet regulation requirements means landlords often have the upper hand.

And securing mortgages or leasing spaces that have outstanding debt will also prove a challenge. With the substance still federally illegal, banks are cannabis-shy. They’re unwilling to lend to anyone involved with the industry, including landlords, which further slashes the number of viable storefronts.

“You’re never going to get Wells Fargo, Chase, Bank of America, any of those larger banks to sign off on it,” said Robert DiPisa, co-chair of the cannabis law group at Cole Schotz. “You’re going to have an issue.”

Ensuring equity
The expense of these obstacles gives corporate players an edge, with some multi-state operators (MSOs) already securing space now — despite the risk that their investments may not comply with future regulations. Some of the big multi-state operators already have existing storefronts for medical marijuana where they could start selling recreational pot, too, without having to tackle the real estate hurdles anew.

New York’s legislation seeks to level the playing field, and address a gaping racial disparity in marijuana enforcement. It set a goal of awarding half of its licenses to “social equity applicants” — a broad category that includes those impacted by the war on drugs. Proposed regulations built on that goal with a plan that the first 100 to 200 licenses would go to applicants with a marijuana conviction, or to relatives of those convicted.

New York may also more directly ease the burdens of acquiring real estate for applicants who meet the “social equity” criteria: As part of a proposed $200 million fund earmarked to help entrepreneurs of color and other historically underserved communities, the state is helping to identify viable storefronts and hopes to eventually facilitate leasing.

The fund is currently under negotiation, but if passed with the budget, it would be transformative for the state’s market, according to Melissa Moore, the civil systems reform director for the Drug Policy Alliance.

Real estate puzzle
Even with government assistance, questions remain about where these new pot businesses are going to go.

Under New York’s Marihuana Regulation and Taxation Act, dispensaries and on-site consumption lounges must be at least 500 feet from school grounds and 200 feet from “houses of worship.” There will also likely be rules on dispensaries’ distance from one another, similar to the state’s liquor license regulations.

In some neighborhoods, the volume of churches and density of development mean that these rules leave broad swaths off limits. This is a particular concern in Harlem, which has lasting scars from the war on drugs, and where a lot of entrepreneurs who believe they’ll meet the social equity standard are keenly interested in setting up shop, according to Barrington Rutherford, board chairman of Park Jordan, a commercial real estate brokerage and advisory services firm.

“People like to imagine that they’ll own dispensaries in the community that they most identify with,” said Rutherford, who’s also the chief executive officer of a cannabis-focused investment firm, Who’s Holding Co. “If you live in Harlem now, that’s the place that feels like home to you.”

Piper, the Ripco broker, is applying with a group of friends from Harlem, but finding space has been almost impossible: “There’s a church on every other block,” he said.

These distancing requirements are not just a hurdle for social equity applicants. Although the state law gives parameters on how far these stores can be from particular establishments, it doesn’t make clear exactly how that distance will be measured — making securing a storefront a gamble even for entrepreneurs with the capital to do so.

“It’s like going into something on blind faith that things will turn out for the best and for the regulations to turn out how they’re expected to,” said Mikael Kadosh, the owner of Muz Muz Shop & Cafe in Williamsburg, which sells CBD products ranging from turmeric salve to vegan gummy candies. Just two years after opening his first brick-and-mortar store, Kadosh, 30, is already in talks with a landlord to open a second storefront in the East Village.

Kadosh says the state’s announcement about the first 100 licenses isn’t deterring him from his eventual plans of securing one himself. Although Kadosh has been arrested before on weed charges, he was too young and hasn’t been convicted.

Steven Phan, co-founder of Come Back Daily, a CBD shop in the East Village, knows the industry’s real estate challenges all too well. “I joke all the time, I should just wake up tomorrow and start selling socks, because this is the hardest thing in the world,” he said. Phan and his partner opened the CBD shop in the hopes of upping their chances of winning a license for THC, which has always been their end goal.

He and his business partner initially opened five Manhattan stores, but closed all but one when Covid hit, as the rent was too much to sustain. They kept the East Village storefront, but the location doesn’t get enough foot traffic, and Phan’s on the hunt for a new one.

Even if business owners find a space that they hope will fit the regulation’s criteria, the money needed to secure it can be daunting. Landlords that recognize the value of their properties often try to negotiate a hefty premium for cannabis tenants, according to a handful of license hopefuls.

High-risk bets
The question marks looming over the New York market mean the financial risk is real, says Gregory Tannor, a principal at Lee & Associates whose team has vetted over 500 locations for retail dispensaries in the city.

In other states, industry veterans have watched as would-be dispensaries became distressed assets while entrepreneurs held onto empty spaces, waiting for a license. Many go broke before their doors ever open.

In New York, entrepreneurs like Phan are opting to sign binding “letters of intent” that are contingent on winning a license, which allows them to lay claim to space without putting money down so early in the process. Under this arrangement, the entrepreneurs start paying a fraction of the rent only when applications open. Until then, landlords can continue to market the space to non-cannabis businesses.

Yet others see the risk of losing out on prime real estate as a greater concern than the possibility of losing money in the short term. Tannor said some of his clients have already put down hard cash to lock down multiple locations; depending on how desirable the location is, that could mean anywhere from $100,000 to $500,000 per storefront. In some cases, they’ve started paying monthly rent. He expects to see more firms put down money over the next two months in the lead-up to the board’s regulations.

Erich Rubio, co-founder of Cannabis Real Estate Consultants, expects that once the draft regulations are out, another round of operators will move on properties. When the ordinance is finalized after a public comment period, “then the sharks are in the water,” he said. ​​At that point, the price of eligible properties — especially in sought-after neighborhoods — will skyrocket, and bidding wars will take off.

That may leave some applicants who don’t have a past conviction on their record, but don’t have the capital and connections either, in the lurch.

Another policy proposal to nix the prerequisite of securing real estate before granting a license could change the equation. Columbia Care, one of the MSOs already registered in the state with a medical license, has thrown its weight behind that idea, according to Adam Goers, senior vice president of corporate affairs at the firm.

“We’re hopeful that in the regulatory package that is soon to come out you’re going to see that exact policy that we’ve been advocating for,” Goers said. “That could turn the tables.”