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On Friday afternoon, June 30, 2023, as most of us were popping into firecracker mode for the July Fourth holiday, New York Governor Kathy Hochul released news of an investment of $150 million from Real Estate investment Trust (REIT) Chicago Atlantic for the state’s beleaguered Social Equity Investment Fund (SEIF).
Strike up the band and hand out the party favors. The remaining 200-something CAURD licensees should be getting keys to their dispensaries by Christmastime.
Not so fast.
The devil is in the details of the announcement. Note that the governor’s announcement calls the $150 million an “investment” in the headline, but in the very first line of the press release, backpedals to call it a “commitment up to $200 million.” The other $50 million is from the state, “which will be funded from state cannabis industry revenues.”
I’ve seen this show before, and they lost me halfway through last season’s episodes.
For starters, the $50 million from the state will be a heavy lift. Cannabis taxes are not hitting their performance indicators. We were supposed to have approximately $56 million in taxes this year. That’s ambitious, considering that we are now into the third quarter of 2023 and we still have only 16 licensed retailers.
The support for SEIF at $50 million is in addition to the cost of running the Office of Cannabis Management at $70 million. Even if we hit the projected mark of $56 million in sales tax revenue, the numbers don’t add up. Of course, there is the piggy bank of application fees that should soon start rolling in. (Sidebar: I still want to give voice to the idea that if someone applied for CAURD and didn’t get a license, they should be allowed to apply for a Social Equity license at no cost.)
Secondly, it seems that we don’t have a $150 million wire transfer from investors, but rather, a “commitment” from a debt-based fund. Is that very different from what we had before?
The idea of a social equity fund was born in January 2022, swaddled in mystery, and then draped in an invisibility cloak.
At first, it appeared that DASNY would manage the fund. A request for information (RFI) released by DASNY in February 2022 made no mention of third-party involvement. But in June 2022 (slightly more than a year ago), the governor announced a partnership with Chris Webber and Lavetta Willis to manage the fund. By “manage,” we thought that meant that Webber and Willis would pound the pavement to find investors. They raised a grand total of Zero Dollars.
Despite many questions from the press and from CAURD licensees, there has been little transparency from or about SEIF.
And now, the biggest news in New York cannabis is from Chicago, complete with an instagram photo of Chris Webber, Lavetta Willis, and Chicago Atlantic’s Peter Sack, smiling proudly about their “groundbreaking initiative.” Webber and Willis appear in the photo to be oblivious to the full impact that their failed social equity impact fund has had on the development of the state’s conditional adult-use retail dispensaries.
It seems that the more things change, the more they stay the same.
Peter Sacks and Chicago Atlantic have allegedly pledged “up to” $150 million for the state’s social equity fund. New York State’s SEIF is now one of apparently several cannabis investments that the REIT has. If SEIF were an applicant, this arrangement would run afoul of the rules on true parties of interest (TPI), which limit the number of businesses an investor may participate in.
I suppose we could call it the Do-As-I-Say-Not-As-I-Do Fund.
The Chicago Atlantic branding on New York cannabis only gets worse when you read the motto on the firm’s website: “We search for investment opportunities where risk is fundamentally mispriced.”
My mind explodes over the idea that a few slick carpetbaggers from out of state think that they can come into our New York cannabis market and call us an “investment opportunity” that is “fundamentally mispriced.” Excuse me – it just doesn’t sit well with me to be called “fundamentally mispriced.” And another thing – more than one person has called my unlicensed clients “opportunists.” This deal makes my guys look like boy scouts!
Friday’s announcement leaves us with so many questions.
Why would New York State leadership continue in a relationship with Webber and Willis after they went radio silent within weeks of arriving on the scene? Is the state continuing to compensate them, either in the form of a salary or a commission? Will this loan from Chicago Atlantic have a premium placed on it as it is then “managed” by Webber and Willis? And if so, what is that management fee?
Has anyone seen a term sheet from Chicago Atlantic? What is the interest rate? How many years will we be paying this off? Is this like a revolving line of credit? What are the trigger points at which more of the “up to” $150 million that has been “committed” gets transferred to a bank under the control of either Webber and Willis or DASNY?
Where will this money, whenever it arrives, be banked?
What’s the timeline? If a CAURD licensee has been hanging on since November 2022, can they expect their paperwork to fall into place in the next 30 days? After all, we’ve been hearing that DASNY has deals in play all across the state. Just ask someone who has inquired about a location and run into the no-fly zone.
What if Chicago Atlantic, which operates debt-based investment funds similar to those that caused the 2008 global financial meltdown, spirals downward in what is generally considered to be a near-future downturn in the real estate industry? Does New York state’s social equity simply get dropped? After all, it’s not like the state will be considered a secured creditor with priority rights to collect. New York would be among the first to go if the company has to restructure.
What is the stress test on defaults from the other side? We have a REIT, which is a debt-based instrument, lending money to the state, which then lends money to justice-involved individuals to then pay for their dispensary buildouts, at an unclear interest rate and term sheet. How many dispensary owners would have to miss payments in order for the state to be forced to pull from other sources to make the payments on the loan from Chicago Atlantic?
I’m not just whining here. (We get admonished by our state leaders when we whine.) These are real questions that every New Yorker who pays taxes should be wondering, since ultimately the state coffers will have to open up to make payments back to Chicago Atlantic. Now that will be a tough headline! And it won’t land well amongst conservative naysayers who disfavor social equity programs to begin with.
For now, it seems like Chicago Atlantic owns us. We need the money, and we really need for the bottleneck of CAURD paperwork to loosen up so we can open more dispensaries. But before you pawn your Yankees and Mets gear to get a Cubs cap, realize that, so far at least, it doesn’t look like a single dollar has crossed the Great Lakes and come up the Erie Canal.
I just hope that at least one provisionally licensed CAURD recipient is able to secure a location and open doors before we lose the excitement of this announcement.
Hope springs eternal. Someday, somehow, we will overcome these and other uncertainties in New York cannabis. Lady Liberty is still in New York Harbor, and her torch still glows.