When New York State awarded the first of 10 licenses to grow and sell medical marijuana in 2015, the winning bidders rejoiced at the opportunity to control a lucrative, untapped market — but they knew that greater spoils lay ahead.
If New York were to legalize recreational cannabis, the medical marijuana companies would be well positioned to dominate the market, much as they have in states like Illinois and Arizona.
But New York took a different approach, promising to put those who had been harmed by the war on drugs first in line for retail licenses, with the application process opening Thursday.
That approach has left the 10 medical marijuana licensees and those companies with an interest in their business — nearly all of which are large, multistate operators — scrambling. Some have donated to Gov. Kathy Hochul’s campaign, and nearly all have hired lobbyists, spending more than $2 million this year in the hopes that they can make the best of what some have projected to be a $6 billion market.
The focus of their campaign is a fee, required by the state’s cannabis law, that operators must pay in order to sell marijuana outside the medical program. Early discussions have touched on a potential fee of $20 million per operator; unsurprisingly, the medical marijuana industry wants to lower that figure.
“It needs to be grounded in the economic realities of the market,” said Ngiste Abebe, president of the New York Medical Cannabis Industry Association and an executive at Columbia Care, one of the medical operators in New York. While operators were “excited” to support social equity, she said she “would love to see the economic analysis that justifies $20 million.”
The decision to give preference to members of communities that have been affected by the nation’s antidrug laws shook players in New York’s struggling medical marijuana industry, many of whom were banking on the profits they would earn in the recreational space.
In the lead-up to the passage of the 2021 cannabis law, the industry lobbied the state hard to give it first shot at recreational sales, arguing that, as established operators, they were best positioned to quickly capture and convert the illicit market.
One industry-funded report even went so far as to project significant tax losses for the state if medical operators were held back.
But lawmakers held firm, insisting that social equity candidates — defined as women, minorities, distressed farmers, veterans and those affected by the war on drugs — should be given a real chance to prosper.
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The industry won a key provision, however: In exchange for a fee, each of the 10 medical operators would be allowed to open three recreational dispensaries, making them the only vertically integrated players in New York’s marketplace. The fee would then be used to seed the businesses of social equity candidates.
But New York’s cannabis law doesn’t say anything about how much the fee should be or when it should be set. And while officials have begun to release regulations focusing on other aspects of the emerging industry, the license fee remains largely a mystery.
The regulatory uncertainty is already taking a toll: The cannabis company Ascend Wellness recently announced it would abandon plans to acquire MedMen’s New York medical marijuana operations.
Medical companies are not without leverage in this fight, however: The state will need their weed to help fill the shelves of the first social equity shops.
While the state has licensed more than 200 hemp farmers to cultivate marijuana outdoors and in greenhouses, there are limits to the quantity and type of product that can be produced in that way.
If retail shops open without sufficient supply, some worry it could turn users off from the legal market for good — an existential threat. “We definitely need the supply coming from the R.O.s,” said Chris Alexander, the executive director of the state’s Office of Cannabis Management, referring to the 10 “registered organizations” that are licensed to distribute medical marijuana in New York.
Medical operators are more than happy to sell off some their wholesale product to the new retail shops in order to head off this problem. But any sale would be contingent on the setting of that special fee — an act that would signal an end to this rare period in which New York’s legal cannabis market is dominated by small entrepreneurs.
Mr. Alexander said that while regulators were “sensitive” to operators’ perspectives, the ultimate decision on the fee would largely be based on the needs of the social equity program.
“The only real guidance we have is the requirement that it’s a sufficient amount to fund the equity program, or at least the upfront needs,’’ he said. “So that’s kind of the guiding factor.”
He added that the medical operators’ entry into the recreational market would likely be conditioned on assurances that they continue to prioritize medical patients, perhaps by reserving a certain quantity or ratio of product for them.
Operators and patients have long complained of draconian regulations and taxes, which have made medical marijuana less accessible and more expensive than illicit market offerings. And while some of those restrictions have been loosened in recent years, New York’s operation has never seen the success of medical programs like Florida’s, which boasts 600,000 patients and growing (New York’s patient count is 124,000 and falling).
At the same time, the illicit market is thriving in New York, some of it in plain sight.
“The state needs to roll out a cannabis program that sets up its licensees, including the R.O.s, to meaningfully compete with the illicit market,” Ms. Abebe said.
“They need to set up an attractive marketplace,” she added. “To date, we haven’t seen that understanding or commitment.”
To account for these challenges, operators are pushing for a structure that would tie a part of the fee to the success of their businesses, so that the state would share in the industry’s profits. They are also hoping to pay over a matter of years, as opposed to upfront, to allow the market to stabilize. One such proposal would amount to roughly $3 million per operator, all told.
The question is not if the fee issue will be resolved, but when. And time is ticking: The fee will need to go through the full regulatory process and be approved by the state’s Cannabis Control Board, with enough time to raise and process a crop to meet demand.
“It is a lot of moving pieces,” Mr. Alexander said of the timeline. “I feel like sometimes I’m the bear at the circus with the plates.”