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A public-private fund for New York City’s cash-strapped cannabis businesses, which lagged in getting off the ground, was finalized Tuesday and will disburse money as soon as this summer.
An inter-agency task force composed of the NYC Economic Development Corporation and the department of Small Business Services selected Tuatara Capital, a cannabis-oriented private equity fund, to manage a pool of cash that will support social equity businesses within the five boroughs.
The fund aims to bolster the state’s equity goals at a time when the regulatory body for cannabis – the Office of Cannabis Management – has come under fire for lagging revenue projections.
The Cannabis NYC Loan Fund, which was supposed to disburse money by the first quarter of this year, will open its loan application process by the end of the summer, according to a briefing at the NYC EDC Executive Committee Meeting on Tuesday.
“The commitment here has been to make sure that the fund is non-predatory and is really focused on the needs of the entrepreneur,” said Dasheeda Dawson, founding director at Cannabis NYC, a part of the city’s Small Business Services. “It’s the first effort we’ve made to provide entrepreneurs with access to affordable financing in an environment that typically lacks access for cannabis entrepreneurs.”
New York City and the state as a whole has been slow to meet its cannabis revenue goals after a previous public-private fund backfired and cut off a highway of cash flow that regulators had hoped small businesses would utilize to get operational.
That fund, known as the DASNY fund, planned to fully bankroll the first 150 Conditional Adult-Use Retail Dispensary licenses and offer separate micro loans. The fund was ultimately suspended after reports of predatory lending schemes, exorbitant build-out costs, and high interest rates.
“It’s very important that the economic development of the program is built, and we are happy to see there are agencies out there willing to help their immediate community,” said Jayson Tantalo, VP of operations at the New York Cannabis Retail Association and co-founder of Flower City Dispensary, which is awaiting a retail license. “Any below-market rate, low-interest rate loans will be much more substantial than the DASNY fund that was offered in the beginning.”
The New York City fund will operate in two phases, according to officials.
In the first phase, the city will provide $2.4 million of subordinated capital to disperse to around 40 CAURD licenses with loans averaging around $50,000 but with the option to go as high as $100,000, according to officials.
Those loans will be capped at a 9.5 percent interest rate.
The state will provide an additional $7 million in loans for the second phase at a zero percent interest rate in order to attract third-party partners to invest in the city’s cannabis fund. In total, the fund can range from as little as the city’s initial investment of $9 million to as high as $39 million.
Tuatara Capital will receive a management fee for administering the fund and is responsible for bringing on future investors.
While the fund has a large gap between its city-backed amount and its targeted goals, its completion is a promising sign for businesses within the five boroughs that have been struggling to find capital, according to Zach Gordon, founder of Red Five, an accounting and advisory firm that represents a number of cannabis companies across multiple states
It also serves as a bellwether and entrance point for larger investors who may have been eyeing New York’s market but have yet to deploy capital.
“New York isn’t even close to its economic potential from its cannabis market,” said Gordon. “There have been jokes for a long time that NYC is the cannabis capital of the world and we haven’t seen that yet –– but that’s probably a good thing.”
“It means that there is so much potential and opportunity left, and if the parties involved are able to get something like this done, that means they are able to see the potential and opportunity,” he said.
The fund’s second phase will lend to all license types, with an emphasis on social equity license holders, but will carry larger loan amounts that range from $175,000 to $500,000 with interest rates between 11.5 percent to 13.5 percent – rates that are slightly above prime but below typical private loans to cannabis companies.
Any defaults on loans will come out of the city’s initial $9 million investment before default agreements between loan contributors come into play. Those default agreements were not immediately made public. The DASNY fund came under fire after reports that risky loans would be covered by taxpayer money.
License holders around the state have been desperately seeking startup cash and can often fall victim to predatory lending schemes as they try to find an injection to get their business off the ground, with the hope that the potential revenues would outweigh predatory lending costs that are typical in the cannabis market, according to Tantalo.
“It’s a tremendous step in the right direction,” said Tantalo. “The initial investment along with the other tiers is a good entrance point.”
But the money is limited to businesses within the five boroughs, leaving a funding gap for businesses upstate who originally planned to rely on the DASNY fund, according to Tantalo, who wishes “there was something for the upstate region, because it’s important that all New York applicants get access to the same amount of resources.”