New York Cannabis Retailers, Landlords Left In The Lurch After Judge Blocks License Rollout

Beau Allulli was arrested twice before New York legalized marijuana, but the founder and CEO of Mighty Lucky — a cannabis dispensary with a license to operate but that isn't yet in business — said he is far more anxious about his future today than he was when he was being handcuffed. 

That is because last week, a judge issued a temporary restraining order preventing New York from issuing operating permits to cannabis licensees like Allulli after a group of disabled veterans sued the state, claiming discrimination.

“This has probably been the most stressed I've been in my life,” Allulli told Bisnow. “This could end me financially if it doesn't work out.”

After the lawsuit challenged how the New York state Office of Cannabis Management runs its licensing program, a potential injunction is hanging over all recreational cannabis businesses. All operations are now on pause until Aug. 25, when an Albany County judge is expected to rule on whether a preliminary injunction will be put in place.

The consequences could be huge for cultivators and retail license holders like Allulli who have invested hundreds of thousands of their own dollars into startup costs for retail storefronts.

This month, a pair of disabled veterans sued the OCM, as well as the New York State Cannabis Control Board, over the creation of the Conditional Adult-Use Retail Dispensary program. While the state law permitting recreational adult-use marijuana allows it to offer social equity licenses, the plaintiffs argue that the OCM created the provision for “justice involved” individuals that isn’t present in the law. The state was also supposed to release all of its licenses at once, instead of in batches, the plaintiffs argue.

“The state has identified certain groups that should be given priority in licensure,” David Feder, founder of legal and consulting firm Weed Law, said in an interview. “They created a licensing application window that did not exist.”

Days after the suit was filed, Albany County Judge Kevin Bryant granted a temporary restraining order, halting the program. All operations are suspended until after next Friday's hearing, meaning that the OCM can’t approve any more licenses or sign off on items — including leases or business plans for existing license holders. The agency is still working to help license holders as it waits, a spokesperson said. 

“The Office of Cannabis Management is aware of the Court’s Order and is adhering to its requirements,” Trivette Knowles, OCM's public affairs press officer and community outreach manager, said in a statement. “We are actively communicating with CAURD applicants and provisionally approved licensees to inform them of the impact of the Court’s order on OCM operations.”

Those impacts could be far-reaching, Cole Schotz member attorney Robert DiPisa said. He said the plaintiffs have a strong argument. 

“The CAURD program was not entirely in line with the statute and the regulations,” he said. “I think the judge gave them the time to settle, and strongly encouraged them to settle, because the judge does not want to make a ruling where there would be a more permanent preliminary injunction imposed.”

That ruling would put CAURD licensees in a difficult position, DiPisa said. An injunction would mean deciding whether to break a lease, whether to carry on with build-outs and hiring, whether to keep seeking investors — or to decide if “the money they've already spent is potentially going to be a sunk cost,” he said.

Allulli is one of the 463 justice-involved recipients. He was granted a CAURD license in April and started scouting locations with the help of specialized cannabis brokerages Park Jordan and Ripco.

Then he got lucky: A Manhattan landlord with OCM approval for his location called after another tenant backed out, offering space at the base of a residential condo building at 259 Bowery.

The usable space is 1,750 SF of ground-level retail and roughly 800 SF in the basement, Allulli said. The rent is $32K per month for the duration of the 15-year lease. Lease negotiations were almost finalized, he said, with a signing date set for late August, when the restraining order hit.

Allulli estimated that he has spent almost $200K setting up Mighty Lucky since being awarded the license. He said he is concerned for other license holders, many of whom he believes are in similar positions.

“Most of the CAURD guys that I know, they've all been investing their own money, as well as taking some money from investors, but we all thought this was going to go fairly smoothly,” he said.

Allulli plans to sign the Bowery lease whether or not an injunction is put in place, but other licensees are holding off.

“I'm not trying to throw any more money at it,” said Carl Anderson, another CAURD licensee, adding that he is more frustrated with the OCM’s communication than with the potential injunction. “I'm staying still and waiting to see what comes next.”

The temporary hold has already impacted landlords’ willingness to engage with cannabis tenants because the potential injunction drags out the leasing process for undetermined periods, Ripco Director of Cannabis Real Estate Colby Piper said.

“Ultimately, it has also halted landlords from wanting to sign with CAURD licenses because they don't know when the time is,” he said. “The landlord had a great tenant, and now, all of a sudden, this property’s got to stay on the market for another three months because of the injunction.”

The injunction’s implications may also spread to industrial and manufacturing facilities used by cultivators all over the state, DiPisa said. Cannabis growers were already sitting on piles of excess product last November because of the slow retail rollout, he said, and an even more limited supply of vendors to sell the product to could mean more lost revenue for cultivators.

“If you are a cultivator or manufacturer in the state of New York, that is your venue to sell your product,” DiPisa said. “We already have an issue with oversupply and not enough venues to actually sell the product.”

If licensees can hold on, they will recoup their investments, Piper said. But time kills all deals, as the saying goes, and an injunction issued next week could be a death knell for some operators' plans.

“What it does is prolong negotiations and prolong the process,” Piper said. “It's hurting both sides.”