As New York state’s Cannabis Social Equity Investment Fund halts its lending program following negative news reports, New York City is trying to fill part of the cannabis financing void with a social equity loan program of its own.
The New York City Economic Development Corporation (EDC) and the Department of Small Business Services (SBS) announced June 18 they hired New York City-based Tuatara Capital as investment manager of its Cannabis NYC Loan Fund.
Tuatara Capital will try to raise money for the fund, which is planned to reach between $20 million to $30 million. The city is contributing $9.4 million, and Tuatara is expected to bring in its own capital at some point.
The fund will initially make $2 million of city capital available to business owners with Conditional Adult-Use Retail Dispensary (CAURD) licenses in phase one of the program to be launched this summer.
Phase two, which is targeted to launch in the first quarter 2025, would make larger loans to more mature cannabis businesses, although CAURD licensees would still get preference, said EDC Vice President Brinda Gangly, who heads the EDC investment group.
Meanwhile, the Dormitory Authority of the State of New York (DASNY) has stopped seeking new leases through its Cannabis Social Equity Investment Fund amid critical news reports about its financing deal with Chicago-based Chicago Atlantic Group. And Gov. Kathy Hochul announced a $5 million loan program for CAURD licensees following a critical audit of the Office of Cannabis Management (OCM). Her program, run through the state’s economic development agency, would be separate from the new EDC/SBS venture.
Social equity cannabis program mired with problems
When New York legalized adult use in 2021, various state agencies attempted to place those people who were hit hardest by the war on drugs at the forefront of the legal marketplace.
The OCM started that effort by prioritizing provisional CAURD licenses while the New York Cannabis Social Equity Investment Fund was created in 2022 to help CAURD licensees get the funding they needed to open shop.
However, the final approval of CAURD licenses has been mired in lawsuits and other program delays that resulted in a scathing audit report of the OCM. Hochul, describing the licensing rollout a “disaster,” called for a complete overhaul of OCM, and Chris Alexander resigned as executive director.
After settling some of these lawsuits, the Cannabis Control Board has begun finalizing licenses. As of June 10, there were 288 active dispensary licenses in the state with another 717 pending, according to the CRB Monitor database.
Dasheeda Dawson, founding director of Cannabis NYC, a program within the SBS that offers borrowers access to small-business technical help and free one-on-one loan application assistance, said the state had provisionally approved nearly 500 out of 900 CAURD license applications by July 2023. One year later, less than 150 licensees have been able to begin operations.
“This seems to be directly connected with the injunction preventing OCM from processing/approving operational next steps of provisionally approved licensees, as well as the lack of financial and other resources that were promised by the state,” she said in an email.
Noting the recent leadership changes just as momentum for CAURD licensees began to pick up, Dawson said, “We can only hope that the new OCM leaders will prioritize seeing the CAURD program through to full implementation.”
Meanwhile, DASNY has come under fire in investigative news reports by THE CITY that claim the agency has kept secret a loan agreement with cannabis investment firm Chicago Atlantic that benefits the company at the expense of taxpayers and dispensary owners who take out loans.
How the state program works
Chicago Atlantic committed $50 million in financing to the fund last June. As of May 1, $27 million of that has been funded, Chicago Atlantic partner Peter Sack told CRB Monitor News. An immaterial amount has been funded since then, he said.
Under New York’s program, the Social Equity Cannabis Investment Fund directly leases retail spaces and hires contractors to build out the properties into cannabis stores. The fund then matches spaces with CAURD licensees who apply for the program.
The fund subleases the space to the licensees and loans them the money to cover the construction costs. Construction work is done by 10 firms DASNY has pre-selected through a request-for-proposal process. Four of them have specific experience designing and building cannabis dispensaries, DASNY said on its website.
The goal was to support 150 licensees. However, the fund signed leases for only 24 properties by the end of December and hasn’t signed any more since. THE CITY reported June 11 that 16 businesses have opened.
That news report highlighted emails between state officials raising flags about the program and how the loan terms could hurt borrowers with expensive leases and high construction costs.
Dawson said that through Cannabis NYC’s work with New York City-based CAURD licensees, some of the challenges they faced with the state program included:
- Not knowing the final lending rate before being expected to accept a DASNY location or sign on to the fund
- Not being allowed to select the location’s build-out details, costs, contractors or bank
- Lack of visibility to the scope of work or an itemized list of expenses the loan funds covered
Sack, however, stands by the program. “We’re very proud of what we were able to put together,” he said in a May 1 interview.
“These terms compare well to the non-cannabis lending market for start-up businesses and are, to the best of our knowledge, unmatched in the market for cannabis debt financing,” Sack said.
Sack said THE CITY’s reporting on the loan agreement with the state was based on draft materials he did not review. The firm, in an emailed statement, called THE CITY’s reporting “speculation.”
“While aspects of the Fund’s execution can and will be improved, we are very proud to support operators, and we believe the market has been made better by the efforts of the Fund to date,” the statement said.
Sack said the loans to dispensary operators are at a 13% interest rate. The 10-year, unsecured loans cover 100% of the cost of construction. They require no personal guarantees or equity investment from the dispensary operator and no credit score.
The interest rate compares to fixed-rate federal Small Business Administration7(a) loans greater than $250,000, as of June 1. Variable-rate SBA loans above $350,000 could cost less. However, cannabis businesses can’t take out SBA loans by law.
Dispensary owners are not required to pay back the loan until the business is operational, according to DASNY. However, it’s unclear whether interest accrues in the meantime.
“Chicago Atlantic is not party to any of the agreements between the Fund and license holding entities,” Sack said in an email, referring the question about interest accrual to DASNY, which did not respond.
State still on the hook
However, as the final CAURD licensing approvals stalled, the state was still responsible for paying back the $27 million funding it secured from Chicago Atlantic at a 15% interest rate.
Sack said funding is provided on a rolling basis as sites are located for leasing. “The lawsuits which slowed OCM also slowed this progress, as we paused finding new sites,” Sack said in an email.
DASNY spokesman Jeffrey Gordon also told THE CITY in a May 21 article that the agency will stop seeking out leases or overseeing construction of dispensaries.
“The transition is from the lease side of the Social Equity Investment Fund program to the purchase side of the program,” THE CITY reported Gordon said in a statement.
Chicago Atlantic has also committed $150 million to develop properties that would be leased to the fund. As of June 28, the investment firm has not deployed any capital yet for this initiative, said Sack, who is also co-CEO of Chicago Atlantic Real Estate Finance Inc. (REFI), the firm’s cannabis mortgage REIT.
Gordon did not respond to repeated requests for comment from CRB Monitor News.
Chicago Atlantic was selected as the investor last year after previous efforts to raise capital for the fund in a public-private partnership with former NBA star Chris Webber and shoe mogul Lavetta Willis failed.
State senators Liz Krueger and Gustavo Rivera, responding to THE CITY’s June 11 article, called on the inspector general to investigate the deal with Chicago Atlantic.
“The details revealed through this article show why oversight of contracts, where private contractors stand to make staggering profits off of public endeavors, must be subject to transparency and public reviews,” they said in a joint statement.
How the NYC program works
Instead of focusing on real estate, the Cannabis NYC Loan Fund’s loans will be for operating expenses, and the city won’t be involved with the borrower’s operations, EDC’s Gangly said in an interview.
“Borrowers didn’t have as much control as they may have had if they negotiated the lease themselves,” she said about the state’s program.
Gangly added that the city benefits from Dawson’s expertise. “She has really brought the borrower’s perspective to our attention,” she said. “We’ve been really aware of the social equity aspect of this fund.”
With a “fairly robust pipeline” of cannabis businesses, Gangly said, “There is a significant amount of need.”
Dawson said in the email, “Two of the top barriers to success for social and economic equity licensees in the legal cannabis industry are financing and real estate. The Cannabis NYC Loan Fund is the first step towards closing the gap on the barrier for a demographic that has been historically excluded from traditional financing. In addition to the loan fund, we will continue to provide education, outreach, and technical assistance to those interested in pursuing opportunities in the legal cannabis industry.”
Gangly said phase 1 of the Cannabis NYC Loan Fund program will be available to very early-stage and pre-operating CAURD licensees. It will provide $100,000 loans to support start-up and ongoing operating expenses, with limited use restrictions.
The interest rate on the three-year loans would be capped at 9.5%, with six months of interest only payments. The loans are senior secured by the fund. Dawson said interest starts accruing after the licensee accepts the loan.
Gangly said they plan to launch the application process later this summer.
The remaining $7.4 million of subordinated city capital will be used to leverage additional funding from outside investors sourced by Tuatara Capital. Gangly said the fund is looking for any type of capital, either senior or subordinate, as the city’s funds are.
She said what phase two will look like will depend on Tuatara’s success. The plan is to finance early-stage and more mature cannabis businesses, with CAURD licensees still having priority. Loans would be between $175,000 to $500,000. Terms would be three years with six months of interest-only payments. The target rate would be prime plus 3% to 5%, Gangly said.
She said these senior secured loans would require additional underwriting, such as a leverage ratio.
Gangly said Tuatara Capital was selected because it has been an investment manager in the cannabis space for 10 years and manages $400 million in committed capital. “It’s all they do.”
She and Dawson also said Tuatara Capital is experienced working with cannabis start-ups.
The city is paying Tuatara Capital an investment management fee, said Gangly, but she did not provide the amount.
One fund managed by Tuatara Capital, Tuatara Capital Acquisition Corp., is a $200 million special-purpose acquisition company with cannabis marketing company Springbig, launched in 2021. It has lost 97% of its value in the last two years, plunging from $4.50 a share to 14 cents, as of June 28.
Gangly said she could not speak to their performance.
“We did do quite a bit of due diligence. We feel very comfortable with their capabilities,” she said about Tuatara Capital.
“We’re very excited about this program. And we’re very excited to be working with Tuatara Capital. We do believe they are the best partner out there to help us with this fund.”
Efforts to reach the partners at Tuatara Capital were unsuccessful.
