A cannabis cultivation facility (Richard T/Unsplash)

Prospective social equity cultivators in Connecticut may struggle to enter the emerging adult use market due to regulators considering a cap on aggregate allowed canopy as well as steep up-front capital requirements, said one operator hoping to be among the few that do survive.

“What makes it challenging is the fact that you have to have $3 million to buy the license,” said Justin Frytz, CEO of White Oak Apothecary. “The way that they set up social equity in this state is they capped income at $74,000 a year and then they expect you to come up with a bunch of money to set up these licenses.”

About a year after the planning for White Oak Apothecary had begun, six months after adult-use was legalized in the state, Connecticut’s Social Equity Council decided that cultivation licenses would be exclusively available to social equity candidates, for which Frytz does not qualify.

This meant the company would have to find a partner that qualified, provide them with a 65% stake in the company, and then guarantee they would retain that stake for at least three years.

“We had to completely redo our model and our business plan to incorporate bringing on a social equity partner,” he said.

The state opened its application window for cultivators in the first week of February, which will last through April. Those are the only licenses in the state not chosen by lottery, but exclusively available to social equity applicants.

Frytz does not personally qualify as a social equity candidate, but he was able to secure a social equity partner after he found out that his company would need one in order to get a chance at a license.

Although the state has not set a cap on the number of cultivation licenses it will allow, there has been some discussion of setting a state aggregate canopy limit of 1.25 million square feet. Frytz estimates that existing medical cultivators in the state, who will have the opportunity to convert their licenses to adult use-medical hybrids, already account for about 20% of that proposed total, further tightening the market in the event that the state does decide to cap its total allowable canopy.

“If that’s the case, it seems like that would be anywhere between seven and ten new licenses,” said Frytz. “That makes those licenses very valuable.”

Frytz also said that he expects there to be a lot of competition for a limited canopy space. A limited supply of cannabis has been facing an increase in demand over the last few years, which could be exacerbated with the emergence of the adult use market.

“They stopped issuing new licenses in 2018, but continued to issue medical cards, so the medical inventory has continued to dwindle as more users came online,” said Frytz.

There are 53,313 licensed medical cannabis patients according to the state’s medical cannabis program website. Those patients are served by 18 dispensaries and four cultivation sites.

Frytz, who also operates a real estate sale company, said he decided to start planning to enter the legal cannabis market when Connecticut Governor Ned Lamont pledged, in January, 2021, to pass legalization by the end of the year. The state legislature sent a bill to Lamont’s desk in June that year, which he signed.

He eventually decided that cultivation would be the most viable option for him.

“We originally looked at going after a dispensary, because that’s the lowest margin of entry, but it has the highest operating margin,” he said. “We didn’t want to be in a situation where we open and couldn’t get any inventory.”

Frytz also explained that considered seeking a micro-cultivator license, which would be granted through a lottery, but he decided that it would have to be tied to a retail business in order for it to work financially.

With the clock ticking on the application window, Frytz is in the process of securing a location and enough investors to meet the $3 million fee.

Frytz said that they were fortunate enough to find a social equity partner with the background to help run the business, but he questioned how many other social equity applicants would be successful in the industry while there is an incentive for large companies to exploit social applicants’ need for capital.

“We can’t speak for everyone else trying to get those licenses, but the situation that the state is putting these individuals in is not setting them up for success,” he said. “We’ve heard stories of people just running around with bags of cash and the capital trying to find someone that qualifies, but we don’t know if it’s accurate or not.”

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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...