The Cannabis License Application Process in New York

January 03, 2022

In this episode of CannaCast, Eric Altstadter, Partner and leader of EisnerAmper’s Cannabis and Hemp Group, speaks with Elizabeth Kase, the Co-Chair of the Cannabis Law Group at the Law Firm of Ruskin Moscou Faltischek about the license application process in New York State.


Transcript

Eric Altstadter: Thanks for tuning in to this episode of CannaCast. I'm your host, Eric Altstadter, EisnerAmper's national cannabis and hemp practice leader. Please welcome our guest, Elizabeth Case, the co-chair of the cannabis law group at the law firm of Ruskin Moscou Faltischek. There, her practice focuses on providing counsel to businesses and individuals regarding New York's Marijuana Regulation and Taxation Act. She is also a member of the firm's White Collar Crime and Investigations practice group and the Health Law department. Prior to that, she served as assistant district attorney in New York County, where she prosecuted hundreds of cases pertaining to narcotics, street crime, domestic violence, white collar crime and sex crimes.

Welcome, Liz.
Elizabeth Kase: Thank you so much, Eric. It's a pleasure to be here.

EA: Liz, what licenses are expected to be available in New York?
EK: So, New York is opening a terrific opportunity and a vast marketplace, where there will be approximately nine licenses available some time during 2022, with the expectation that doors will open in early 2023. You will see varying licenses that relate to cultivation, processing, distribution, retail. There will be a micro business license, there will be a hybrid medical registered organization retail license. And, they'll be some hybrid license within that vertical.

Unlike other states though, Eric, New York is not looking to be a seed to sale model, which means that there will be several different entry points for the applicants. And, New York is looking to keep licenses separated. So, most licenses or license applicants will not be able to have financial interests from license to license.
EA:Now, is the licensing for an individual or for a business?
EK: It is for a business or an individual, depending upon how the applicant states their intention. Most applicants will probably be in the name of an LLC. They may be single member LLCs, but they'll most likely be company named.
EA: Now, how is the cultivation licensing in New York expected to compare to other states? For example, Massachusetts.
EK: So New York has not yet issued its regulations. We're expecting those to come out some time in quarter one of 2022. What we have right now is a legal framework in the Marijuana Regulation Taxation Act, otherwise known as MRDA. And in that law, it is not so specific as to indicate how cultivator licenses will be granted.

In Massachusetts, for example, cultivation licenses are in a different canopy leveling. So you'll have a smaller scale grower, a middle scale grower and a large scale grower. I believe there are six different levels of canopy growth where there would be applications for entering into the cultivation space at any of those particular levels. And in Massachusetts, for example, those different levels have different application fees associated with it, as well as different license fees. So depending upon your canopy or square foot growth, you would have a more expensive license.

I think New York will have something similar to that, although we don't have the regulations yet. And, I believe that to be the case because of the background and progressive intention of the Marijuana Taxation and Regulation Act. It's a progressive platform, where this law is trying to give opportunity to those that have been disenfranchised or disproportionately impacted by marijuana laws in the past. So for those reasons, this New York marketplace is looking to have various people from all sorts of different economic backgrounds have opportunity in the space. It cannot be expected, therefore, that a small time grower would have the same financial backing and opportunity as a larger MSO, multi-state operator, that might already exist in other states.
EA:Under the New York State rules, local municipalities have the option to opt in or opt out of allowing adult use retail dispensaries or onsite consumption lounges. With those that opt in cannot then opt out, and those that opt out can change their mind and opt in. How important is this and what effect does this have on the industry?
EK: It's really a fascinating nuance that's getting a lot of press in New York. The opt out provision is provided by MRDA, again, to say to the local municipalities, "You don't have to participate in the retail or consumption aspects of Marijuana Regulation and Taxation." So let me make that clear. The only two ways that a municipality can opt out is to opt out of a retail dispensary for adult use or for an onsite consumption lounge.

That being said, many municipalities right now are having a lot of attention, there's a lot of political robust debate happening in these local municipalities because the opt out provision expires on the 31st of December of this year. So we're getting down to the finish line. And as of right now, I didn't check right before our podcast interview, but approximately 400 municipalities have opted out. It's hovering somewhere in the 28 to 30 percent of municipalities.

What does that mean for business? Well, it's a couple of things. It means that, if you are a town or a local municipality that has decided to opt out, you are losing 4% of sales tax on these goods. This would be coming to the municipality directly. For example, out in Long Island where I sit, we're governed by a town system. We of course have a county government, but we have local towns and villages. By the law, the local town would receive 3% of the sales tax and 1% would go to the village for which or in which the dispensary or consumption lounge sits. By opting out, you are losing that tax base.

The sad thing, that I think that is not really recognized by most towns and municipalities, is that you are not opting out of adult use cannabis, per se. You're only opting out of the business opportunity for the retail dispensary and the consumption lounge. So you're missing a market share of tax revenue because the delivery services, the cultivation sites, the processors will still be allowed to exist within your town and municipality. So sadly, you're missing a tax grab that could otherwise go to support your local economy.

You're also missing an opportunity to allow small business entrepreneurship to exist within your town. One of the side effects and the sad side effects of COVID of course, is that a lot of local businesses have gone out and you're seeing a lot of empty storefronts. Now, not everybody wants to see a retail or consumption lounge in their town, however, there would still be an opportunity for zoning restrictions, time place and manner restrictions, even on those retail and consumption sites, if they did not opt out. So if they decided not to opt out, it's a double negative and they existed, they could still further zone the locations for those businesses. By completely opting out, they are banning them at the beginning of this law, at the beginning of this opportunity.

Why is that important? Because right now, businesses across New York State are trying to figure out where they want to land. What town do I want to sit in? Where is my market share? How do I make predictions about my real estate? It is becoming very difficult for the retailer and the consumption lounge business person to locate a safe space for them to engage in negotiations for real estate, due to the fact that this is still in a deciding point within those local municipalities.

But, January 1st is around the corner so there should be a lot more clarity. But to your original point, if you opt out by December 31st, which is your right for a local municipality. And then, January 1st, scratch your head, turn around and say, "You know what, we've decided to opt back in," that is an opportunity for those local municipalities.

One of the big arguments and reasons why municipalities have decided to opt out or are having this debate is that the regulations for the Marijuana Regulation and Taxation Act have not yet been issued. So there's a little bit of confusion as to what do the regs really look like. My argument would be that it's not really relevant to the retail dispensary or the consumption site because the regulations relate a lot more to the application process, the canopy growth site for a cultivation site, for example. We already know that a person seeking a retail license will only be allowed to have three locations.

There's a lot already known about retail and about consumption so I'm not following the logic to opt out. But many, many, many towns and villages on Long Island already have. I expect that will change in reverse, once the regulations come out, and that this was more of a political optic than a real business decision by the towns.
EA:So the opt out is really not so much for the residents to opt out of use of the product, it's to opt out of the businesses setting up shop in the municipalities.
EK: Exactly right. And to that end, the idea that cannabis, adult use cannabis will be allowed to participate in a delivery service, kind of like a GrubHub or a DoorDash for cannabis. You are not really in any way eliminating cannabis consumption within your local town, but you are losing that tax basis for that opportunity.
EA:The preliminary rules in New York and a lot of other states, there's been a lot of discussion about social equity. Can you discuss a little bit about the social equity rules that are being contemplated in New York?
EK: Sure. Again, as I said earlier, New York's law was really piggybacking on a progressive appreciation for writing the wrongs of the past that relate to enforcement of criminal laws for people of color, primarily, but also for others that have been disproportionately impacted by prior enforcement and criminalization of cannabis.

So they decided to build into the Marijuana Regulation and Taxation Act, or MRDA, a social equity opportunity where 50% of licenses will be granted to a social equity applicant. Well, who is a social equity applicant? First and foremost, a social equity applicant is a person who's been convinced of a marijuana related crime. Secondly, it could be a person who is of color, a Veteran or a female. So there are opportunities within MRDA to distinguish yourself in that way, as you're making applications. And, there will be some advantages for that, of course.

Like I said earlier, too, the idea that New York's marketplace will not be a vertical system really does also lend itself to the premise that there will be so many different opportunities and so many different price points for people with various backgrounds to get into the cannabis marketplace under MRDA.
EA:How does the social equity aspect of these rules affect the medicinal marketplace? Because that seems to be dominated by large MSOs now.
EK: Right. We have 10 registered organizations that are in the medical marijuana space in New York. They've existed for a long time. Originally, there were five, it doubled to 10. Those registered organizations are very large enterprises. That is a side of cannabis that is undeniable. And, as state to state, across the country, laws are changing to allow for adult use cannabis, and even in the medical space, you're seeing larger conglomerates start to build. Where they are getting their licenses in various states, and then starting to monopolize the cannabis space.

New York does not wish for that to be the only way that cannabis exists in the adult use space. So that is part of the reason that they are looking towards this non vertical integration, first of all. Second of all, I believe that our retail space and our consumption and our small scale cultivation will be dominated by non MSO applicants. Another example of that could be one of the only vertical licenses in the adult use space, which is the micro business.

The micro business is a seed to sale license. Again, not specific yet as to the full scale of the canopy growth of what a micro business is. But, a micro business is meant for the smaller scale owner-operator to have a vertical enterprise, that is much like the medical marijuana system that we have in place in New York, where the same company grows it, processes it, distributes it and sells it. But, it will be on a much smaller scale. And the thought being, if we allow the small-time person, or the smaller type of enterprise, to go for that micro business, they could have a niche practice, a niche business. I liken it to a small batch bourbon or a micro beer, where they would have the opportunity to build a niche market that isn't really governed and dictated by the larger scale MSOs that are presently in New York State.
EA:Do you expect there will be caps on the number of licenses New York State will issue?
EK: The sigh is intentional. And, not because it's getting late in the day. The short answer is, most probably. That is for a couple of reasons.

Caps are interesting because caps create competition. Caps also allow a marketplace to develop and not be over-developed too quickly, where they want to scale the development of the market. And, caps are tricky because this is such an unknown business. New York is so over-regulated to begin with. And, having so many non vertical license in the space, to cap the number of cultivators, or processors, distributors, delivery service, retail, consumption, just thinking that this whole enterprise would be limited on day one to a magic number that is made up by New York State regulators, that's a tough pill to swallow for myself. Because we really believe that it should be an open, capitalist society, a marketplace that's dictated by ... Let everyone get out there and let everyone try and win.

But, I think New York State especially, because of their progressive agenda wanting social equity applicants to be so successful, as we all do, might try to limit the number of licenses available to garner more support and assurance that those smaller businesses from the get-go have more of an opportunity to galvanize, and really grow and become part of the fabric of our society.

I see it both ways. I see it from the strictly capitalist front of everyone should be able to get a license, and everyone should be able to try and develop their brand and their opportunity. On the other hand, if that happens, you know as well as I do that the better financed companies that come from potentially the multi-state operators, those that have the wherewithal in Arizona, and Colorado, and California will obviously have a jumpstart on the knowledge base that will be preferable to really have a go at it in New York.
EA:Liz, one last quick question. Look into your crystal ball. When, and notice I said when not if, when will we have Federally legal cannabis?
EK: That's a very, very, very interesting question and a lot of people in our field are really questioning why it's taken this long when so many states have already capitulated to this. On the other hand, these states that have gone ahead of the descheduling are really developing these economies where, if cannabis were to be descheduled at this point, that might break some of the opportunity within the states. So I'm, frankly, not a proponent of rushing descheduling. I am a proponent of banking regulations changing to allow for more opportunities in the banking space. But, that's a personal aside.

My crystal ball says not soon because we've just seen, again, that Congress took a pass on passing the Safe Bank Act. I just feel as though I don't see this happening in a very short period of time. I think Biden, I think he's got other things to do.
EA:Well, thanks for joining me today, Liz. And thanks for listening to CannaCast, as part of the EisnerAmper Podcast series. Visit eisneramper.com/cannabis for information and podcast. And, join us for our next CannaCast podcast, where we'll discuss other budding issues.

Transcribed by Rev.com

About Eric Altstadter

Eric Altstadter CPA is an Audit Partner and Chair of the firm's Cannabis and Hemp practice with over 30 years of experience working with public companies and privately held businesses


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