Funding from the Cannabis Social Equity Fund of New York
With little fanfare or notice, the New York State Dormitory Authority (“DASNY”) issued a Request for Information (“RFI”) last month to determine interest and solicit information from parties qualified for an investment fund to fund “the establishment and development of adult retail cannabis (“RCD”) dispensaries” for social and economic equity seekers. This is the Social Equity Fund of $200 million (the “Fund”) which is referenced in the Marijuana Regulation and Taxation Act that New York Governor Kathy Hochul announced on January 5, 2022.
News had been circulating about what the fund would look like: funds earmarked for adult clinic applicants, a mix of private and public funding, and so on. Now we have the RFI itself, which is full of insightful information on the mechanics of the Fund as well as CCB and CMO planning for the cannabis industry in New York. Let’s dive in:
Public and private funds would be used
The expected launch date of the Fund would be in spring 2022 (soon!), with a duration of 10 years from full capitalization. During the term of the Fund, all capital would remain committed, meaning that investors would not be able to withdraw their funds. Up to $50 million of the Fund would be invested by New York State from revenues deposited in the Cannabis Revenue Fund (from tax revenues).
Financing to RCD operators = loans
During the first 2 years of the Fund’s existence, interest will accrue on the Fund’s notes (i.e. without amortization of principal), with repayment being the RCD’s sole obligation. The RCD would be required to sign a loan agreement with the Fund, acting through an affiliate of DASNY as the servicing agent for the loans.
Loans to RCDs would be used for “direct and indirect expenses associated with the procurement, leasing, planning, design, construction and equipping of the RCD”. Important Note: Each loan will take the form of a general unsecured, non-recourse debt obligation of the RCD operator (i.e. no personal guarantee is required).
An interesting nugget, the Fund is not intended to be a profitable venture for investors: “As the primary objective of the Fund will be to advance the public objective of providing social and economic applicants selected and approved by the CCB with a commercially viable RCD operation, the ultimate return provided to investors in the Fund may be limited and at risk.”
The funds would be used to advance candidates selected by the CCB
On that note, the wording of the RFI indicates that the CCB will select RCD applicants for the program, presumably based on applications submitted by applicants. There is a chicken-and-egg problem when it comes to submitting applications, with the MRTA’s real estate requirement (which may not apply to social equity applicants), but it seems to indicate that the CCB will be heavily involved in the selection of RCDs that will receive loans from the Fund.
Target investment of $750,000 to $1.5M per DCV
RFI tells us that the CCB and OCM predict that it will take between $750,000 and $1.5 million to open a retail dispensary for adult use. Given the stated use for the loan proceeds, this gives us a clear indication of what New York regulators think about the start-up costs of cannabis. It should be noted that this is a “request” for information whereby DASNY and the OCM expressly seek public comment on whether its plans make sense or need adjustment.
DASNY would become the largest cannabis tenant in New York
It seems that DASNY will do the rental for the RCDs themselves:
“The leases and sub-leases associated with each RCD constitute the assets of the Fund. DASNY. . . will have exclusive authority. . . to select all sites of all RCDs and negotiate all rental conditions. »
Mechanically, this means that DASNY would lease real estate and sublet it to RCDs, with DASNY responsible for collecting the rent from the RCD and paying it to the landlord.
Aside from the fact that this would be a massive undertaking for DASNY, it also raises the question of who would be responsible for notifying the local municipality or community council of the intended request. It also raises the question of when RCDs will be selected for the scheme, given the MRTA’s requirement that applicants for adult-use retail dispensary licenses must notify the local municipality.