Yves here. The New York City publication THE CITY and reporter Rosalind Adams deserve a round of applause for their in-depth reporting in State Cannabis Officials Repeatedly Raised Alarms to Hochul’s Team Over Private Equity Loan Deal, Internal Emails Show. The headline undersells many of the findings in this article, which covers a wildly-botched public-private partnership for New York out in front nationally in launching large-scale cannabis distribution, to benefit both growers and neighborhoods harmed by racially-based cannabis policing.

Details include New York State guaranteeing a private equity firm a 15% return on loans to cannabis entrepreneurs and the agency in charge of finding store sites and renovating them apparently being scammed. Reading between the lines, and the article’s sightings are consistent with this assumption, the newbie businessmen signed or were otherwise responsible for overpriced leases, leading them to borrow more than should have been necessary, and it appears on poor terms too (which should not have been the result if the state was subsidizing the lending; you’d instead expect reasonably prices loans extended too casually/generously, with high default rates). So it looks as if the private equity firm at the center of this story, Chicago Atlantic, was squeezing everyone every way it could.

This reporting still has some gaps given that THE CITY worked from over 500 e-mails, supplemented by interviews. Given the lack of a mention FOIL (New York’s FOIA) suggests they came from a whistleblower. For instance, there are big questions of agency. Who negotiated and reviewed the terribly one-sided deal with Chicago Atlantic? Who was in charge of cannabis-store siting and fix-up at New York’s Dormitory Authority, into whose lap this part of the initiative fell? The Dormitory Authority, one of the two key agencies leading this initiative (the other was the newly-formed Office of Cannabis Management) looks to have been wholly on board with the classic private equity looting scheme of pulling profits out of a deal via overpricing the real estate, here the renovations and the leases (the entrepreneurs were expected to get a turnkey situation as far as the stores were concerned; it isn’t clear whether this scheme was intended to be a franchise-like operation, with the state providing other support, like free retail store software licenses).

A guess as to who had a lot to do with this project becoming a fiasco:

To support the program’s launch, Reuben McDaniel, the head of the Dormitory Authority, had pitched the governor on a plan to create a $200 million public-private fund that would finance the first 150 dispensaries. McDaniel, who was also appointed as a member of the Cannabis Control Board in charge of approving agency regulations, was confident that he could quickly find a private equity partner for the fund.

It is a super bad idea to have an agency head also sit on the board of a regulator responsible for some of his operations. And then have him in control of finding the money, as in almost certainly controlling the relationship with the private equity firm?

Another probable monster conflict of interest:

Amid this disarray, officials from OCM, one of two state agencies tasked with managing the program, were sending out their increasingly urgent red-flag emails to each other and to others in state government. Frequently the focus was the public-private investment fund that Chicago Atlantic is participating in, where the state is contributing $50 million and the company has agreed to provide a $50 million loan and a commitment to spend up to $100 million on real estate that the fund would then lease to retail licensees.

So if I connect the dots correctly, Chicago Atlantic is lending to the retail store operators and to acquire and fix up the real estate that will then be leased to these store owners. So it is on both sides of the deal, with a profit guarantee from the state. This is either criminal or criminally stupid.

Oh, and the Dormitory Authority had the monopoly on where the cannabis stores would be located, until OCM got a green light to distribute cannabis to licensees who’d snagged their own retail locations. But the OCM was in hot water too, since it had been licensing cannabis growers, and their output was going to considerably exceed the licensed distribution capacity, resulting in big losses.

I suspect readers will have more to add based on their knowledge of this initiative and rollouts elsewhere.

By Rosalind Adams. Originally published at THE CITY on June 11, 2024

Last June, Joseph Thomas, an assistant counsel to Gov. Kathy Hochul, wrapped up negotiations on a $150 million deal that made investment firm Chicago Atlantic Group the major financier of the state’s cannabis legalization program.

Within the state’s Office of Cannabis Management, doubts about the agreement flared instantly and intensely.

“This is BAD,” wrote Matt Greenberg, a financial analyst at the cannabis agency, often referred to as OCM. “I would not advise them to sign this.”

Greenberg’s alarm was just one in a trove of more than 500 emails obtained by THE CITY that show agency officials repeatedly criticized many of the decisions that have shaped the troubled cannabis legalization program as they were being made.

In this instance, according to a state official with direct knowledge of the negotiations, top administration leaders agreed that the contract contained so many provisions benefiting the company at the state’s expense that it amounted to a sweetheart deal.

Nonetheless, after almost a year of failing to strike a better agreement with numerous other companies, Hochul’s top staff decided that the deal with Chicago Atlantic was the only way to fulfill a pledge, made by the governor in her 2022 State of the State agenda, to create a massive loan program through which New York State would allow people affected by years of racially discriminatory drug laws to flourish as owners of legal cannabis stores.

After THE CITY unearthed a near-final copy of the undisclosed contract in April, several state legislators and financial experts said it smacked of predatory lending by loading startup retail operators with steep costs and strict repayment terms that could quickly lead them to default. The details of the agreement revealed that the state had guaranteed the company a 15% return on its investment even if dispensary owners failed — a nearly risk-free proposition.

When Hochul called the cannabis rollout a “disaster” this January, OCM officials were privately stunned, since their repeated warnings had often gone unheeded by the governor’s office.

The emails reviewed by THE CITY, along with policy memos and reports, cover the critical period between July 2022 to July 2023, when the state was struggling — and failing — to open more than a handful of legal dispensaries as hundreds of thousands of pounds of licensed cannabis rotted in fields and warehouses for lack of a retail distribution system.

Individuals whom the state chose as dispensary owners because they had been victimized by decades of now discredited drug laws found themselves facing high-interest loans, high construction costs and wildly optimistic official revenue projections they stood little chance of meeting.

Meanwhile, thousands of illegal weed stores proliferated around the city and state, largely with impunity.

Amid this disarray, officials from OCM, one of two state agencies tasked with managing the program, were sending out their increasingly urgent red-flag emails to each other and to others in state government. Frequently the focus was the public-private investment fund that Chicago Atlantic is participating in, where the state is contributing $50 million and the company has agreed to provide a $50 million loan and a commitment to spend up to $100 million on real estate that the fund would then lease to retail licensees.

In one representative email from May 26, 2023, James Rogers, the Office of Cannabis Management’s current director of business development, wrote to his colleagues that it might be time to blow the whistle on their partner in the legalization rollout, the state Dormitory Authority: “Inflated construction costs are real; Inflated real estate prices are real; binding licensees to vendors that were procured outside the state’s procurement procedures is real.”

“We must issue a statement that is truthful about how the program was run,” he urged.

The officials were never more alarmed than they were in emails to each other before they sent an annotated copy of the Chicago Atlantic agreement to Hochul’s executive chamber advocating extensive changes.

Linda Baldwin, the OCM general counsel, worried that “the Fund might need an infusion of capital or face default under this agreement.” Underlying that concern, she wrote, was her observation that licensees faced “the potential for a series of defaults due to the high rates and costs associated with the buildouts of the Fund locations.”

The governor’s office declined interview requests to discuss the extensive materials obtained by THE CITY. In response to detailed questions, the office said, “New York is moving forward and taking the next steps toward building the strongest, most equitable cannabis industry in the nation. The Hochul administration will continue its work across agencies to transform the legal market by streamlining the licensing process, closing illicit stores, and making resources more accessible to those who need them.”

The Dormitory Authority acknowledged some of the challenges of working with OCM, in a statement to THE CITY. “Starting a new agency and fund are difficult, especially when plagued by numerous lawsuits and injunctions, but we are moving forward by working with our partners in government to take the industry into its next phase,” said Jeffrey Gordon, a spokesperson for the authority.

In the past nine months, the heads of both the state cannabis office and the Dormitory Authority have left and are in the process of being replaced. A report commissioned by Hochul singled out the OCM as riddled with inexperienced leadership, inefficiencies in licensing dispensary operators and inadequate customer service for license applicants.

But some advocates, such as the Cannabis Regulators of Color Coalition, criticized the report and the governor’s decision to ask Chris Alexander, the founding head of OCM, to step down.

“Our top priority is implementing collaborative solutions to better serve New Yorkers and move forward in our shared commitment to building a thriving, equitable cannabis market that will set the standard for the rest of the nation,” said Jessica Woolford, a spokesperson for the Office of Cannabis Management.

The report, by the state’s Office of General Services, focused in particular on delays in a part of the program that began last October when the state said it would prioritize retail licenses from applicants who already had a location, whether or not they had been affected by the former drug laws. It did not discuss many of the issues that raged in the earlier emails reviewed by THE CITY concerning the set up of the private-public fund, the deal with Chicago Atlantic and costly requirements placed on licensees, such as one requiring them to use high-priced state-approved contractors to build out their stores.

As of today, a year after the period covered by the emails, the cannabis fund has signed 24 leases and opened only 16 of the anticipated 150 stores projected at its inception two years ago. Based on its current reserves, it is improbable that the fund will have the resources to launch even half the dispensaries anticipated when it was heralded as a way to create generational wealth for individuals and families affected by the old drug laws.

“​​Personally,” Rogers wrote to his OCM colleagues last May, “I believe we should have told the truth sooner.”

A Fractious Marriage 

In one way, the policy disputes and harsh internal critiques are characteristic of innumerable internal dustups in government. But this one involved arguably the most ambitious cannabis legalization effort in the country. It promised to legitimize a multi-billion dollar business that flourished in the shadows, generate millions of dollars in taxes and right some the wrongs of drug laws that disproportionately sent poor people of color to prison.

To support the program’s launch, Reuben McDaniel, the head of the Dormitory Authority, had pitched the governor on a plan to create a $200 million public-private fund that would finance the first 150 dispensaries. McDaniel, who was also appointed as a member of the Cannabis Control Board in charge of approving agency regulations, was confident that he could quickly find a private equity partner for the fund. The financing would provide critical capital to meet some of the social equity goals in the 2021 law.

The marriage of McDaniel’s agency and the Office of Cannabis Management was fractious almost from the beginning. The Dormitory Authority, commonly known as DASNY, is a decades-old agency that has operated as a construction and financing agent on major state building projects. The OCM was established under the 2021 cannabis law to execute the social mission of licensing store owners and farmers as a form of reparations.

The email trove obtained by THE CITY tracks not only a record of valid concerns largely unacted upon at the upper levels of government, but a nasty inter-agency battle. In the end, the two agencies guiding the enormous undertaking were barely speaking to each other as the program stalled in its tracks, with the governor only belatedly ringing an alarm bell.

In June 2022, the Dormitory Authority selected a company to run the cannabis fund called Social Equity Impact Ventures, operated by former New York City comptroller Bill Thompson, retired basketball star Chris Webber and a Detroit sneaker entrepreneur named Lavetta Willis.

At its inception, the plan was for the fund to do the work of securing leases and building out the retail stores on its own so that dispensary operators would get the keys to a ready-to-open store. To do that, the Dormitory Authority, a partner to the fund, retained a team of private brokers and a roster of contracting firms. McDaniel began meeting with potential financing partners to raise the $150 million not provided by the state for the fund.

In summer 2022, the Office of Cannabis Management and the Dormitory Authority began negotiating the agreements that would enshrine how the two agencies would collaborate.

According to emails and draft documents, only $4 million of the state’s contribution was to be released initially, sharply limiting how quickly loans could be made. Between the construction costs and the hefty deposits required to secure the large retail leases the authority’s team of private real estate brokers focused on, the fund only had enough money to open a few stores.

“No wonder Reuben has been talking about four stores. That’s all we can afford here,” Greenberg, the OCM financial analyst, flagged to colleagues.

That was a huge problem, in part because following state legislation the cannabis agency had already started licensing hundreds of former hemp farmers as the state’s first cannabis growers. The law had been intended as a sort of bailout program for farmers who had lost money growing hemp with the state’s encouragement when it was seen as a potentially profitable crop.

The cultivators “are going to see this and freak out over the lack of retail,” Patrick McKeage, the agency’s current chief operating officer, wrote to colleagues in August. That summer, the OCM staff began discussing a plan that would allow licensees to break away from the restrictions of having to use one of the fund’s dispensary locations.

Mckeage wrote to the Dormitory Authority that the cannabis agency “wants to discuss options for building in any flexibility to account for a scenario where we have cannabis product being ready for retail sale before there are an adequate number of retail storefronts available from the Fund.”

The disputes mounted and deepened into a stalemate. Conflicts emerged over the number of stores needed and the process of approving dispensary sites. As the cannabis fund began missing the deadlines to secure funding and open stores, OCM officials warned the governor’s office that the fallout could lead to huge financial losses across the system.

OCM officials were nervous that the Dormitory Authority and the fund were focused on securing large and expensive leases for its “signature sites” that potentially would be too much of a financial burden for the licensees it was the program’s mission to help, the emails show.

The September 1, 2022, deadline for raising $150 million in private funding came and went. Private capital for cannabis had dried up. Prospect after prospect declined to jump on board while McDaniel continued to promise the governor’s office that the funding was coming.

Ultimately, the state authorized the release of $20 million into the cannabis fund. With that in hand, McDaniel told the Dormitory Authority board he expected to open 15 to 20 stores by the end of the year.

As time dragged on, the governor’s office often had to mediate between the two agencies, as they locked horns time and again. The office established regular calls between the heads of OCM and DASNY, Alexander and McDaniel. Neysa Alsina, the assistant secretary for cannabis at the time, often joined the calls. Kathryn Garcia, the governor’s director of state operations, also joined occasionally.

Another Blown Deadline

By early December 2022, the cannabis fund still hadn’t signed any leases or secured private investment. The Dormitory Authority sent a memo to the governor’s office that they were having trouble securing locations and admitted they wouldn’t hit the target of at least 15 leases by year’s end. The Authority asked the state to transfer an additional $20 million into the fund to bolster its ability to make loans and display its “financial wherewithal.”

“Lease negotiation has taken longer than expected,” said the memo, which cited a legal challenge to the program as well as “rampant unenforced illegal sales and other recent negative press. This has slowed progress.”

The Office of Cannabis Management had awarded its first 36 retail licensees a couple of weeks earlier, and with the fund missing deadline after deadline on attracting private financing and store openings, it decided to go its own way. OCM decided to allow licensees to begin delivery sales before opening a location as a way for them to jumpstart sales.

“This approach enables product to begin flowing through the supply chain, and retailers to start serving customers as DASNY secures the retail locations,” Kagia, the OCM policy director,  wrote to Mckeage, the operations officer. Mckeage sent along the memo to the governor’s office, emails show.

The governor’s office was growing frustrated as well, said a state official with knowledge of the negotiations. The official said McDaniel had promised he could get financing ready within 60 days before Hochul announced the plan for the fund in January.

“And something did not happen after 60 days and then 90 days and then 120 and then 180, and so on and so forth. The frustration from the chamber side was really building,” the state official said.

OCM officials were also wary of relying on the fund to set up ready-to-open dispensaries for its licensees. After first discussing a back-up plan in the summer, the cannabis agency won approval from Hochul’s office in early December to allow licensees to secure their own dispensary locations, a break with the fund’s tight grip on licensees.

A week later, the cannabis agency’s policy team prepared a PowerPoint for the governor’s office showing just how badly the state needed stores. According to a survey of cultivators, the agency expected to have 234,000 pounds of cannabis flower — the dried, smokable part of the plant — ready that season.

In order to sell that amount, the state would need 80 stores operating seven days a week between January and the end of May, according to slides reviewed by THE CITY. If enough stores didn’t open, losses could soar to as high as $400 million for that growing season alone.

“The cultivators aren’t the only ones affected here, the losses would be systemwide, including taxes and sales performed by retailers,” Greenberg, the agency analyst, wrote to colleagues explaining the magnitude of the problem.

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