In 2023, Roland Conner became the first person with a criminal conviction to open a licensed cannabis dispensary in New York, making him the face of a $200 million effort to turn people once prosecuted for marijuana offenses into flagship sellers.
Retailers like Mr. Conner, who already owned profitable businesses like gyms and restaurants, were recruited by state regulators with the offer of a head-start reaping legalization’s windfall. Gov. Kathy Hochul had promised that the initiative, to be financed primarily by private investors, would provide 150 businesses with turnkey storefronts, low-interest loans and extensive support.
But that didn’t happen. Just 22 stores have opened, financed by loans that cost more than officials told borrowers to expect and that came with unusual terms stripping owners of control over key business decisions, like construction costs that they’re now on the hook for. In interviews, the owners of nine shops said they were pressured into a debt trap.
Now, the state inspector general’s office is investigating the program, called the Cannabis Social Equity Investment Fund.
The situation exposes how an experiment in reparations that sought to lift people disproportionately harmed by prior enforcement against marijuana not only failed but also helped derail the rollout of legal cannabis in New York.
Essentially, Governor Hochul made big promises based on an unrealistic expectation that investors would be willing to take lopsided risks even as the cannabis industry struggled elsewhere. Instead, the rush of investors never materialized, causing the legal market in New York to lose ground to the rapid proliferation of illicit dispensaries. And even when the fund attracted a sole lender, Chicago Atlantic, the restrictions attached to the investment served to strangle the fledgling market, shop owners said.
Mr. Conner, who owns Smacked Village in Manhattan, said he racked up bills after the fund rushed him to open the store temporarily before it was renovated and before anyone knew the loan terms. He defaulted on his $1.9 million loan last year, though he worked out a payment arrangement with the fund to keep his store.
Mr. Conner, 53, and the owners of five other businesses recently sent a letter asking the governor to shut down the program and to refinance their debts. She has not publicly responded to their request, but some lawmakers have called on her to bail the retailers out.
“It’s making it impossible for us to survive,” Mr. Conner said.
Kassandra White, a spokeswoman for the governor’s office, did not answer detailed questions from The New York Times but said that the Hochul administration remained committed to prioritizing social and economic equity even though the fund program never reached scale.
More than 300 legal recreational dispensaries have opened since 2022, and sales have surpassed $1 billion despite the rollout’s problems. But the fund’s failings struck at the heart of New York’s intentions, said Eric Olson, a corporate and finance lawyer at Cleary Gottlieb, a white-shoe firm helping some licensees to develop their businesses pro bono.
“This population suffered because of the drug war, and this was meant to recompense them for what happened,” he said. “It seems like both state actors and private actors are just extracting value from them on unfair terms.”
Thomas Butler, a publicist representing the fund, dismissed criticism of the program as “absurd.” He said that no other lenders would extend credit to people starting highly regulated businesses with limited retail experience, a criminal record and sometimes a negative credit rating.
“A license in hand without access to capital is NO social equity program at all,” he said.
After New York legalized recreational cannabis in 2021, regulators sought to help people of color and small businesses compete with deep-pocketed companies that dominated other markets.
At the same time, Mr. Conner was wrestling with a suggestion from his son, Darius Conner, to apply for a retail license. After a string of convictions for selling marijuana in the 1990s, he was skeptical of the government.
In Illinois and Massachusetts, states that legalized recreational cannabis before New York, lawmakers sought to assist people they once arrested with grants or forgivable loans. But the help arrived well after legalization, and too late for many people. New York officials wanted to help future retailers up front to avoid the same pitfalls.
Reuben McDaniel III, then the head of the State Dormitory Authority, which oversees public construction projects, pitched a plan to underwrite the first 150 licensed dispensaries with $50 million of state money and $150 million raised from investors, then pass the cost on to retailers in the form of loans.
The aim was to eliminate two of the biggest obstacles for cannabis sellers, who struggle more than typical retailers to get the money and property they need to get started. Cannabis entrepreneurs face higher costs, stricter rules and more limited resources than typical small businesses largely because marijuana remains illegal on the federal level. As a result, most banks, small business programs and landlords won’t work with dispensaries.
Governor Hochul put the plan in her first budget in January 2022 as officials were still hammering out the details. She said its goal was “setting right historical wrongs.”
In the spring of 2022, the Legislature approved $50 million to start the fund, and the Dormitory Authority selected a management team and contractors to build out dispensaries.
Mr. Conner applied for a license after his son agreed to come home from Florida, where he said Darius Conner was selling marijuana illegally, and join him in a legal business. They thought they would be selling so much weed that it’d be like “printing money,” he said.
But when Mr. Conner won one of the first licenses that November, he had no idea that he would be the first test of the plan. It turned into an ordeal that strained his finances and his family.
Peter Su, the director of specialty banking at Hanover Bank, said the fund’s structure was “fundamentally unsound” because New York was asking investors to take most of the risk on businesses that they had no proof could succeed. By December, the fund had missed two deadlines to raise the rest of the money from investors and it only had a handful of stores leased.
Officials also did not foresee thousands of unlicensed shops opening across the state as the fund struggled to its feet. (Just 15 percent of cannabis consumers in the state shopped at legal dispensaries last year, according to an estimate by Whitney Economics, a research firm.)
Anger spread among broad factions, including farmers sitting on the first legal crop, and veterans and medical cannabis companies suing over being left out. Regulators also issued more licenses than initially planned, since it had become unlikely that all of the first 150 businesses that received them would be able to open, frustrating people who hadn’t applied.
The issues fueled tensions between the Office of Cannabis Management and the Dormitory Authority that peaked in the spring of 2023 as the state was finalizing an investment deal with Chicago Atlantic.
The final contract allowed the private equity firm to reap a 15 percent return on a $50 million investment and to buy up to $100 million in property for future dispensaries. The City first reported its details.
The loans to retailers carry a 13 percent interest rate over 10 years, and contain covenants limiting how much revenue can be spent on costs like rent, payroll and goods for sale. The fund can tack on an unlimited amount of administrative fees, and most licensees are required to pay interest on the full term of the loan even if they pay it off early.
Cannabis regulators raised concerns. The fund’s terms made it impossible for borrowers to repay the loans, said Matt Greenberg, a former analyst in the cannabis program.
In an email on May 25, 2023, Damian Fagon, the cannabis program’s chief equity officer, urged its lawyers to push back against an approach that “converts our licensees to A.T.M. machines for landlords, investors, fund managers and contractors before inevitably bankrupting them.”
Regulators also pressed their concerns in a call on June 14, but the governor’s aides in the meeting said the deal was going forward, Mr. Greenberg recalled. Governor Hochul announced the deal with Chicago Atlantic two weeks later. By then, the fund was almost 10 months and 140 dispensaries behind schedule.
Smacked Village had been open for four months in 2023 when it closed in the spring for renovations. An army of contractors chosen by the state worked to transform Mr. Conner’s store. He said he had little say over the work and the fund wouldn’t tell him how much it cost — not even the cost of a nail — though he’d be billed for it later in his loan.
Mr. Conner went from bringing in $400,000 a month to almost nothing, but he was still paying employees and accumulating bills. Within a few months, he was $700,000 in debt.
Mr. Conner received his loan paperwork that August, just before his store was to reopen. Mr. Olson, of Cleary Gottlieb, and Katherine Hughes, the firm’s director of pro bono work, balked at the “onerous” terms.
Against their advice, Mr. Conner signed the agreement. “We thought, if we say no to this, where do we end up? In a situation with no store?” he said.
Other retailers said they were treated like Mr. Conner: By the time they were presented with the loan agreement, they were too deeply invested to turn it down. They had little say in how their stores were designed, built and furnished, but the fund refused to break down the costs. When retailers pushed back, the fund threatened to take their stores.
To reassure licensees they’d be able to pay back the loans, the fund offered unrealistic sales projections, the borrowers said. Alex Ortecho, 40, said the fund’s estimates showed his store, Bronx Joint, making at least $330,000 in sales a month. But since opening last March, the store’s monthly sales have peaked at $290,000.
Cannabis businesses typically spend more than half their income on federal taxes alone because they cannot deduct common expenses like rent and payroll. After setting aside taxes and paying his bills, Mr. Ortecho said there is little money left to pour back into the business. He’s already had to cut prices to compete with an illicit seller around the corner. The city has stepped up efforts to close unlicensed cannabis shops, but Mr. Ortecho’s competition operates from a house. In addition to running the dispensary, Mr. Ortecho works full-time as an anesthesia technician.
“They just put in your ear that this is going to be life-changing,” he said.
Mr. Butler, the fund’s publicist, said the fund’s loans were more generous than federal small business loans, which are designed for disadvantaged borrowers but exclude cannabis sellers. (The loans carry similar interest rates, but unlike with the fund, federal borrowers retain control of how their loans are spent.) The financial projections were merely training tools, he added, though retailers and regulators say they were presented as realistic calculations.
Still, Mr. Butler blamed low sales revenue on the lack of enforcement against illicit sellers and the availability of higher-quality products from out of state. Ultimately, he said, the retailers’ success “will depend on the acumen and hard work of operators and the state’s success in crafting a robust marketplace.”
The governor called the rollout a disaster last year and initiated an overhaul that placed blame squarely on the cannabis office with no mention of the fund’s role. An exodus of top staff ensued.
Last June, lawmakers responding to The City’s reporting on the Chicago Atlantic deal called for an investigation. The inspector general’s office said an inquiry was ongoing in an email on Feb. 5 denying The Times’s request for related records.
Mr. McDaniel, the fund’s creator, resigned in September 2023 and did not return calls seeking comment. The Dormitory Authority suspended new loans to licensees on new properties.
The indebted retailers say New York should shift to a model like Illinois, where officials have issued nearly $28 million in forgivable loans to cannabis businesses at 4 percent interest. Borrowers are required to give quarterly updates to the state, and some may be required to put up collateral.
Mr. Fagon, the cannabis program’s chief equity officer, was pushed out in November. He said the failure of such a high-profile social equity program endangers efforts to make amends for the drug war beyond New York, because it gives ammunition to critics who say the initiatives don’t work and it discourages entrepreneurs and investors from participating.
“They didn’t just drop the ball — the ball was weaponized,” he said.
Mr. Conner said he started to believe the program was all “smoke and mirrors.” But he refused to give up.
“Our resilience and the willingness to try and fight and get to the other side of the problem is really why we’re still here,” he said.
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