How A Chicago Investor Is Reshaping New York's Cannabis Real Estate Market

As New York’s recreational cannabis market has sputtered through a tortuous rollout, the investor putting $150M up to support the fledgling industry is adopting a new approach.

An affiliate of Chicago Atlantic Group committed $150M in June to the state's Cannabis Social Equity Investment Fund, created to provide financial support to prospective dispensary operators with a social equity license. The fund initially targeted potential storefronts to lease, but now Chicago Atlantic will also look to buy properties itself and lease them to the operators, Bisnow can first report.

Chicago Atlantic Managing Director and co-President Peter Sack told Bisnow in an interview how the direction of the fund's real estate strategy is shifting and how the Chicago-based firm, which invested the money through a publicly traded mortgage REIT it operates, expects to get paid back.

The fund is operated by the Dormitory Authority of the State of New York, the state’s public finance and construction authority. New York state put up $50M of a total $200M investment, with Chicago Atlantic providing the remaining $150M.

A third of Chicago Atlantic’s committed funding will help DASNY lease spaces from building owners and sublease them to cannabis dispensaries, while the remaining $100M will be used to acquire real estate directly, then lease the spaces to DASNY, which will sublease them, Sack told Bisnow.

This split differs from the original strategy laid out when DASNY issued its request for proposals for investors to provide the $150M. The RFP says that the fund will provide “the financing for the construction, equipping and leasing” for retail dispensaries but doesn't mention acquisition or purchase.

In response to Bisnow's questions about this change, DASNY spokesperson Jeffrey Gordon confirmed details of the agreement with Chicago Atlantic.

“Chicago Atlantic’s (CA) extraordinary commitment — up to $150M — includes support for construction loans on Fund-secured locations as well as a purchase program where CA secures the location,” Gordon wrote in an email. “In both cases, the Fund will execute lease and loan agreements with the licensee, and licensees will pay market rent and a loan agreement for construction.”

This is a shift from how some working in New York’s cannabis industry believed the fund would work.

“My understanding was that those funds were not going to be used to acquire real property in connection to New York’s adult-use program,” Cole Schotz member attorney Robert DiPisa told Bisnow, adding that it previously seemed like the investment would be used for leasing.

The fund was established after the state legislature passed the Marihuana Regulation and Taxation Act in March 2021. New York state reserved the first batch of cannabis dispensary licenses for individuals whose lives had been adversely affected by marijuana charges, known as Conditional Adult-Use Retail Dispensary, or CAURD, licensees. The state knew those individuals would be unlikely to have the access to capital needed to get a store off the ground, so it set up the fund to find, lease and build out spaces for applicants.

Just weeks after Gov. Kathy Hochul’s office announced that Chicago Atlantic had committed $150M to help these CAURD licensees get their businesses off the ground, a state judge issued an injunction blocking the social equity license program and throwing the approval process into uncertainty.

Just a handful of licensed retail stores are open and operating following the injunction. Meanwhile, the majority of the 463 individuals granted social equity licenses have been asked to submit another application to the state and are waiting to find out if they can proceed — despite some having sunk tens of thousands of dollars in preparation to open stores after New York state issued their licenses.

In the interview with Bisnow, Sack discussed how the injunction affected Chicago Atlantic’s investment outlook, changes to debt and equity structures, loan agreement details and what the presence of unlicensed stores means for the future of New York’s cannabis industry.

This interview has been lightly edited for length and clarity.

Bisnow: When did Chicago Atlantic first start talking with New York state about getting involved with the DASNY fund?

Sack: We started pretty soon after they launched the endeavor. We were really impressed with the ambition of what the state and the legislator had come up with. And so yeah, from the get-go, we started speaking with Lavetta Willis and Chris Webber, who are leading the administration of the fund, along with [former NYC Comptroller] Bill Thompson. And so at the beginning, it was really just brainstorming.

Chicago Atlantic is a large lender in the cannabis space. We've deployed close to $2B in capital, anywhere from single-state small operators to large, multistate publicly traded businesses. We typically don't invest in funds. And so from the beginning, this was really: How can we help? How can we brainstorm? Who can I introduce you to, to support you guys? Not under the expectation that it would even lead to Chicago Atlantic’s participation necessarily.

Bisnow: What made it attractive for Chicago Atlantic to come on board and participate? What was the investment opportunity that you saw with the fund?

Sack: One, it was the commitment that the regulator and the state was going to make to support these CAURD licensees and to support the success of the locations that the fund would put in place. The second thing for us that was important was that at some point, we said, “Look, this is a really important program. If we're going to do this, we don't want to be one of a dozen investors. If we're going to do this, we want to lead it and we want to provide at least the majority of the capital to do it.” And so when we came to that realization, we said, “OK, let's go back to the fund and propose some thoughts on what it would take for us to do the whole thing.” And that's when it transitioned into a very specific partnership.

Bisnow: Chicago Atlantic was in discussion with New York state for a long time before choosing to come on board as an investor in DASNY’s fund. What made this an appealing venture for Chicago Atlantic?

Sack: It was only maybe three months between the first seed of this idea and signing a term sheet. That's certainly not slow for one of this complexity and with this type of public-private partnership. It was the transition from an equity partnership fund to one that would be debt and equity. 

Bisnow: Can you say more about what that means in this context?

Sack: For this first group of dispensaries, Chicago Atlantic is a lender to the fund. We're providing capital. This paired with the state's equity to build out dispensaries, and so Chicago Atlantic cash is not a party to any agreement with any of the dispensary operators. We are a lender to the fund. We've got about $50M that were dedicated to this initiative, so the first batch of funding will be dedicated to that structure.

We’re also supporting a structure whereby we're acquiring and developing properties across the state. We’ve found — in New York and elsewhere — that oftentimes it's difficult to get into retail sites that are leased from third-party landlords. So we also wanted to provide the space as an option whereby we could acquire properties, develop them, and then lease them back to the fund.

Bisnow: So if $50M is going toward leasing, does that mean there’s $100M for this acquisition structure?

Sack: Yep.

Bisnow: How much capital has Chicago Atlantic deployed so far?

Sack: Chicago Atlantic has deployed a little less than $20M toward the first part of the agreement. I don't have an exact number of what the state has put in.

Bisnow: Can you tell me more about the second structure, where Chicago Atlantic will invest $100M into acquiring and developing properties to lease to the state?

Sack: There's not much to say right now. Unfortunately, when we finalized our agreements late in the second quarter — and then we deployed our first less than $20M, and then we began construction on a number of those sites — then the court process put a stop to some of our activities, because we didn't know when the injunction might be lifted. So we haven't executed on the acquisition strategy yet.

Bisnow: How did the injunction affect your investment outlook?  

Sack: It's disappointing, but not surprising. We've been deploying capital in cannabis for a long time, and we've invested through a number of transitions of cannabis markets from medical market to adult market. Every step in every state is plagued with delays, lawsuits, injunctions. New York's injunction is not particularly unique in that regard, and so we were not surprised. I wouldn't be surprised if there's something else that comes up in two years that creates uncertainty. But that's sort of par for the course in this industry.

So we remain optimistic that it's going to get sorted out, simply because there's so many stakeholders. Even the parties in the court case themselves want to get it sorted out so that everyone can transition towards growing the industry, building businesses, hiring employees and satisfying customers.

Bisnow: You’ve previously said that Chicago Atlantic is visiting every site selected by the state. How closely is Chicago Atlantic working with CBRE on site selection for retail locations? And will Chicago Atlantic work with a broker to find sites to acquire?

Sack: CBRE is contracted to work with DASNY, so we work in coordination with them. We’ve probably visited north of 50 locations, and we've signed leases on a little less than 20. We expect to have those ready to be operated in the next month or two. We haven’t started looking for locations to acquire yet, but I imagine we will work with a broker for that — the geography is just too large. We're looking across the entire state, so it requires a disciplined and organized approach.

Bisnow: What happens to Chicago Atlantic’s investment if a retail operator defaults?

Sack: We are providing our capital from a publicly traded company, Chicago Atlantic Real Estate Finance Inc. The loan from the funds to the operator carry a 10-year maturity, and our facility to the fund has a 15-year maturity. So this is a long time horizon and long-term commitment to both its operators and to the funds.

Bisnow: Sure, but what happens to Chicago Atlantic’s returns if an operator defaults?

Sack: That is the risk.

Bisnow: So Chicago Atlantic is willing to swallow that loss?

Sack: We are in the business of making loans to operators in the cannabis industry. We’ve made a loan to the fund, and the state has made an investment in the fund that’s junior to our loan, and the fund is making loans to operators. We're confident that this market is going to support the loans and the investments that we've made to support these operators.

But we're in the business of taking calculated risks, and it's a very diversified portfolio of investments across the entire market. We have a lot of confidence in what this market is going to produce and how these operators will be able to perform.

Bisnow: Do you have anything else you’d like to add?

Sack: I’d say people should visit the stores and check them out. They are pretty wonderful spaces, and they're great places to buy product, and they're run by some extremely ambitious and competent management teams that are really excited to show people around their stores. Here in the city, the Bleecker Street location is beautiful. Union Square is opening soon. The Harlem 125th Street location just opened a couple of weeks ago. There are some really, really great spaces.

Bisnow: What do you think makes these spaces so great?

Sack: Professionalism, the range of product selection and reasonable pricing. We spent obviously a lot of time thinking about competition from the illicit market when we considered making this investment, and we spent a lot of time surveying and understanding the character of the illicit market as it stands today. In the illicit market, we found that product selection is quite poor, pricing was noncompetitive, selection was and is inconsistent, and product availability is inconsistent. And the prevalence of counterfeit goods is also quite high. I think the results of our research in the space is one of the things that gave us confidence to support this program and gave us confidence in the thesis that when there are legal channels to acquire cannabis through licensed dispensaries, those licensed dispensaries are going to outperform the black market. We're excited to see it in action as the stores actually get open.

Bisnow: Has the unlicensed cannabis retail market been a concern for Chicago Atlantic?

Sack: It was. We spent a lot of resources and time — I spent a lot of time literally walking the street and surveying budtenders in these illicit stores — to come to these conclusions. In order to make this investment, we had to have conviction that the legal market in New York would be able to fundamentally outcompete the illicit market. And it sure seems like that today.

Bisnow: Following the injunction, the state recently opened up the license application process to anyone who wants to apply. How does that affect your investment? And do you see that potentially complicating matters for social equity licensees?

Sack: It certainly creates competition earlier for social equity licenses. But that was always going to come. It's not a surprise.