New York's Cannabis Industry Enters 2024 With Fewer Hurdles But Plenty Of Headwinds

Would-be recreational cannabis vendors in New York City may have pulled past an industry-halting injunction last year, but a long, complicated list of difficulties remains ahead in 2024.

Proposed changes to federal and state legislation could turbocharge New York’s cannabis sector, but any potential changes are more distant than many in the industry would like, experts said at Bisnow’s Tri-State and Real Estate Conference last month.

That leaves vendors in New York’s cannabis industry facing a series of costly obstacles when securing a space or a loan for their business. And one way or another, for cannabis real estate, cash flows are dictating the industry’s course. 

“Lenders often influence things in the cannabis space, I'd say more so than people think, unless you're actually in it,” Robert DiPisa, Cole Schotz member attorney, said at Bisnow’s event. “Lenders are the bane of my existence.”

It took nearly two years between when the sale of adult-use recreational cannabis became legal in New York state and when the first sales took place. By the end of 2023, the legal market hit $150M in sales across the 40 licensed dispensaries, Crain's New York Business reported.

State bureaucracy and legal challenges have made the rollout of the market slower than anticipated, but all operators are now permitted to apply for licenses, and more than 6,000 have. But lenders remain one of the trickiest obstacles for most of the individuals who were given a license to grow or sell cannabis by the state, panelists said at the event, held at @Ease 1345.

While a 2014 amendment to the Appropriations Act stopped the Department of Justice from being able to seize medical cannabis from vendors — which is still a Schedule 1 drug under the Controlled Substances Act — the same amendment hasn’t been applied to recreational cannabis, DiPisa said. So lenders are hesitant to act on cannabis despite its legality in New York because, theoretically, federal agents still have legal grounds to seize property that a borrower may have in place as loan collateral.

“Leasing is where you see this issue most,” DiPisa said. “[Lenders] want to see language in the lease that permits the landlord to terminate that lease in the event there is a threat of civil asset forfeiture.”

Lender trepidation also comes from federal banking regulations, with many federally chartered banks keeping a distance from cannabis businesses because of the drug's legal status and the potential for its use in money laundering. That also translates to hesitation on the part of landlords with mortgages from national banks because they could then lose their buildings if their lender isn’t comfortable with the source of their capital. 

“Landlords are not friendly towards any type of cannabis use, even office space, because our money comes from the sale of cannabis,” said Kristin Jordan, founder and CEO of cannabis real estate brokerage Park Jordan.

Even how loan agreements are structured becomes more complicated in the face of federal legislation, Hinman Straub principal Matt Leonardo said. Typically, loan collateral would be done via a UCC agreement, but the protections that the arrangement offers are canceled out by cannabis’ federal illegality.

Those complications could be eliminated in the coming months or years. Federal legislation, known as the Secure And Fair Enforcement Regulation Banking Act and designed to ease the difficulties that cannabis businesses face in obtaining financing, advanced in the Senate in September.

The legislation could make it easier for landlords to lease properties to cannabis businesses, due to provisions in the bill that would count rent from legally operating marijuana businesses in relevant states as identical to any other business in the state.

“Safe banking would change the industry,” said Joseph Lustberg, managing partner at small-business lender Upwise Capital. “But I think it's still far away.”

Other proposed federal action could also create bright spots for the industry, experts said.

In August, the Department of Health and Human Services recommended that the Drug Enforcement Agency designate cannabis as a Schedule 3 substance rather than Schedule 1, reducing the severity of legal consequences for cannabis businesses. If approved, that change would affect a provision in the federal tax code known as 280E that prevents businesses from deducting expenses from gross income associated with Schedule 1 and 2 substances.

“I think the picture is going to look a lot brighter in New York and for the industry in general because we're on the cusp of federal reform,” said Matt Karnes, founder of GreenWaves Advisors.

Even if changes under consideration by the DEA take a few years to materialize, the timing could work out well for New York, he added.

In the meantime, the industry is agitating for other legal changes that could result in smoother functioning for cannabis businesses. One area of activism is a lawsuit against the federal government brought by operators and investors, Karnes said.

“They're alleging that the federal government has allowed state programs to continue for so many years that they've given up their right to enforce the Controlled Substances Act at the state level,” Karnes said. “If they win that case, then that obviously is going to change a lot of things.”

Another issue on the table is the elimination of taxes based on the substance’s potency, rather than its weight, proposed in the New York Legislature — something that is “critical” to the industry’s ability to function, Hinman Straub’s Leonardo said.

“We represent half the farms in the state, and the biggest problem on the supply side is the potency tax,” he said. “There's farmers going out of business.”

The overlapping layers of federal and state legislation, coupled with how municipalities in New York are approaching cannabis retail, will continue to add to headaches for potential vendors trying to set up their businesses, Windels Marx, Lane & Mittendorf partner Karl Frederic said.

“The first rule of fight club: Don’t talk about fight club. The second rule: Don't talk about fight club. In cannabis, the first rule is: Don't forget, it's federally illegal,” he said. “Second rule: Don't forget, it's federally illegal.”

The way around that is a well-versed series of advisers, from accountants to lawyers and financial professionals, although all that expertise adds yet another cost for license holders already facing high startup costs, panelists said. 

As a result, the New York City Economic Development Corp. is chipping in to New York’s cannabis sector by creating its own fund for social equity-based license holders, NYCEDC Executive Vice President and Head of Investments Brinda Ganguly announced at Bisnow’s event.

“What we are trying to do at EDC is that we are trying to use the capital that we have to really lower the risk of other capital providers and to bring them into this fund with us so that we are able to address at least part of the need within this market,” she said.

The fund, which hasn't yet been set up, will be formed in conjunction with the NYC Department of Small Business Services and will be just shy of $10M, she said.

The fund is also seeking to partner with the private sector and hopes to provide borrowers with repeat access to capital to meet operational milestones, in the hopes that newly available financing will help New York’s cannabis sector to bloom more quickly — and more fairly — in spite of existing difficulties. 

“The federal prohibition and the litigation and policy changes that are associated with this space obviously impact the amount of capital that's available,” Ganguly said. “At the risk of stating the obvious, the individuals who are most acutely affected by that confluence of facts are social equity applicants who are starting up new businesses.”