Vacant commercial properties such as this one in Camden, NJ are few and far between for aspiring cannabis operators. Credit: Carol Highsmith / Library of Congress

As the first deadline in New Jersey for final license awards looms, the holders of over 300 conditional cannabis licenses are still scrambling for capital and real estate.

The state began accepting license applications for its adult use market last December and then began issuing conditional licenses monthly to, starting last March. Meanwhile, in April the state’s existing medical cannabis dispensaries were allowed to begin selling in the adult use market.

The list of medical operators who got first crack at the Garden State in 2019 reads like a who’s who of top multi-state operators. Verano Holdings, Ayr Wellness, TerrAscend, Green Thumb Industries, Curaleaf, Columbia Care, Ascend Wellness Holdings, and Acreage Holdings were all on the list of early participants in the market.

Thus far, conditional licenses have been awarded to those who qualify for priority status, those put in the front of the line because of their social equity, veteran, or other similar circumstances. One an applicant receives a conditional license, they must apply to convert to an annual license within 120 days.

This means that the vast majority of prospective adult use license holders, particularly those who qualify for social equity status, are still searching for the resources they need to enter an already active market.

For an aspiring operator with a conditional license to obtain an annual license, they must then secure a permanent location for their operation, gain municipal approval and submit acceptable operating, environmental impact, workforce development and security plans to the Cannabis Regulatory Commission in order to get the annual license, which allows them to officially open up shop.

The CRC awarded its first round of conditional licenses on March 24 to 50 cultivators and 18 aspiring manufacturers.

Between then and July 28, the date of the most recent CRC meeting, the state has issued 130 cultivation, 68 manufacturing and 110 retail licenses, though all are currently conditional.

Now, conditional license recipients have to contend with a limited real estate market and an investment market that is difficult to traverse for seasoned pros, let alone the average applicant.

Steve Ernest is currently a part of investment firm Chicago Atlantic and has years of experience raising capital for cannabis operators across the supply chain. He is attempting to directly enter the cannabis market as a cultivator, but has found that there are very few financing opportunities.

“Now that I’m in the driver’s seat and have a license that I can raise money for and try to get operational, it’s never been harder to raise capital in the cannabis space,” he said. “Without money, it’s kind of a big circle jerk of people talking about their dream brand.”

Ernest noted that he has seen data that indicates that there has been constant decrease in private equity investment that is available within cannabis.

“Year-over-year there has been a 97% reduction in private equity investments into cultivation and retail,” he said.

Investors are favoring established multi-state operators (MSOs) over smaller start ups, because there is far less risk with the MSOs while the rewards between the two options are comparable, according to Ernest.

“Why wouldn’t I just go buy the top MSOs when you’re telling me that we have to build up a facility and wait 18 months until it’s ready and three years until it’s profitable and then you’re going to get the exact same premium that I can get in the liquid public markets right now,” he said.

With consideration of these financing hardships retail license holders will likely face fewer hurdles than would- be cultivators. This is partially because of the relatively lower amount of startup costs for retail compared to cultivation.

“The number of folks who have a hundred grand or a quarter million to invest in a cannabis company is exponentially larger than the number of folks who have ten million dollars of liquid capital,” said Ernest.

That said, even aspiring retailers are struggling to get up and running, especially since only 78 out of the state’s 564 municipalities allow adult use retailers.

“I think that the case for so many other businesses like my own is we are incredibly limited by where we can be,” said Steve Cassidy, owner of Daylite Cannabis.

Cassidy was among the first round of retail conditional licenses winners during the CRC’s May 24 meeting. His particular license is for a microbusiness, which carries the added stipulation that the license holder must live in or one town over from the municipality the business operates out of. Cassidy happens to live in a town that declined to opt-in to adult use, though there are four surrounding towns that opted-in.

Even with those options, Cassidy has determined that his best shot at finding a home for his business is in a property that sits 70 feet too close to a residential zone. The municipality requires cannabis businesses to operate at least 500 feet away, so Cassidy’s fate could land in a zoning board meeting in a few weeks.

“The real estate thing is the damn near impossible challenge,” said Ernest. “You have 30% of these municipalities who opted-in and you’ve got less than one percent of real estate that’s available in New Jersey, which means it’s extraordinarily expensive.”

Ed DeVeaux, president of the New Jersey CannaBusiness Association (NJCBA) said that he thinks normalization of the use of cannabis is crucial in convincing greater sources of capital to consider investing. But that would require an established cannabis market that is even more difficult to enter for newcomers.

In the meantime, DeVeaux said that his organization is currently working with numerous municipalities in the state to convince them to consider opting-in to adult use cannabis.

“We’re still less than 30% of municipalities that have opted-in, so that makes real estate a real challenge,” he said.

As the state continues to dole out conditional licenses, many of those recipients are social equity candidates who all have comparatively tougher hills to climb than MSOs and operators coming from banking and finance backgrounds.

The law that legalized adult use in New Jersey, which passed in February 2021, mandated that at least 30% went to women, people of color or veterans, along with 25% that were to go to people from communities that had been disproportionately impacted by the War on Drugs.

DeVeaux said that while appreciates that the social equity applicants are being prioritized, there is still work to be done  to level the playing field.

“For a long time, people were unjustly and unfairly punished for being part of the industry,” he said. “I think we focus so much on it that we forgot to remind people who are interested that this is the private sector and that this is not a socialized industry. Government does not provide you with real estate, government doesn’t necessarily provide you with the capital that you may need to to get into this business. So with that being said, yes, it’s a challenge.”

Toward that end, the NJCBA has been working on networking events that can pair up neophyte cannabis entrepreneurs with liquid cash.

“We have been networking, not for the sake of just celebrating cannabis, but we’ve been networking to make sure that if you want to get into this industry than at least we can begin to give you a fighting chance, networking with people in finance or real estate,” said DeVeaux.

Ernest agreed that the general nature of social equity status makes it difficult to succeed amid cash flow needs.

“You’re looking for an oxymoron. You’re looking for a rich, poor person, right?,” said Ernest. “It’s like, ‘I need you to be punished by the war on drugs, and live in a poor area. I also need to have connectivity to somebody who’s going to give you ten million dollars.”

When that’s the situation, you are likely going to get a lot of what Ernest called “Trojan Horse” deals, where the people who already have the cash find a social equity applicant and give them 51% ownership on paper, only to reclaim most of the company several years later through operating or management agreements.

“If you’re a person of color, or a woman, or someone from an economically disadvantaged area, you already know what it’s like not to have access to traditional sources of capital,” said DeVeaux. “If you’re from an urban area, you may be a renter which means you don’t have home equity, you don’t have the collateral that traditional sources of capital look for.”

The other major factor is the ever increasing speed in which state cannabis markets are evolving into cross-state investments opportunities. Instead of buying and selling weed, the real cash comes from buying and selling weed businesses. Operators are going to have to plan for this.

“The last thing you want is to be a small piece of infrastructure that nobody wants to acquire,” said Ernest. “Because as the market commoditizes, which it does in every single state, what you realize as an operator is that very few people make money off running a cannabis business. Many, many more people make money selling their cannabis business.”

Thus far, the state has granted 130 conditional licenses for cultivation. At the same time, the state is limiting the number of annual licenses for cultivation to 37 at least until next February.

Which begs the question: How much failure is the state anticipating? 

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Zack cut his journalistic teeth covering high school sports in the south before spending a decade covering local government, politics and the courts in the Boston, Massachusetts area. He's previously written...