The Marihuana Regulation and Taxation Act (“MRTA”) provides for the award of a variety of licenses for the production and sale of adult-use (i.e., recreational) marijuana. While the regulations for such licenses have yet to be issued, there are a variety of steps a prospective licensee can take now to maximize the chances of being awarded a license.
1. Potential applicants should act now to nail down their supply chains, from cultivation to sale and delivery, so as not to be caught short once sales begin.
The MRTA sets forth different types of licenses for different steps in the production process. They include licenses for (1) nurseries for immature plants; (2) cultivation licenses for mature plants; (3) processor licenses for the processing of marijuana into end products, such as flower and edibles; (4) distributor licenses; (5) retail dispensary licenses; (6) delivery; (7) on-site consumption locations; (8) microbusinesses; and (9) cooperatives. A general overview of the MRTA can be found here: New York Passes Law Legalizing Marijuana (cmrlaw.com).
The MRTA seeks to hinder vertical integration – and the domination of the industry by large multi-state marijuana companies – by making licensing categories exclusive, meaning that holders of one kind of license may not hold other types. Limited exceptions exist for marijuana microbusinesses, cooperatives, and registered medical marijuana dispensaries, which are allowed to make and sell their own products. The general scheme, however, is meant to replicate the regulations governing the alcohol industry, where manufacturing, distribution, and retail sales are siloed off from one another. There are also requirements for having leases in place at the time of application or slightly thereafter for retail dispensaries and consumption lounges. Given these hurdles, applicants need to map out the entire supply chain from start to finish, from cultivation to delivery, to make sure they have all bases covered.
2. Figure out your financing.
It is illegal under the federal Controlled Substances Act to lease any property for purposes of the sale, manufacture, or distribution of a controlled substance; this understandably makes many financial institutions squeamish about extending financing for such purposes, and may render any owners of leased premises in default under the terms of mortgages. Clear ownership of unencumbered property offers the most secure solution, although a few community banks have shown an interest – especially given the lack of competition – of lending in the space. (Cannabis financing will be the subject of a future article in this series.)
3. Potential “social equity” applicants should gather their paperwork now, even though the regulations haven’t yet been issued.
It is expected, though by no means certain, that the number of licenses available will be limited. The legislation has a target of half the licenses going to “social equity” applicants: women- and minority-owned businesses, MWBEs, distressed farmers, service-disabled veterans, low-income applicants, applicants from communities affected by the war on drugs, and those who have had, or have a close relative who has had, a cannabis-related conviction. Potential applicants who fall into these categories should assemble documentation to support a claim to “social equity” status. (Note there are restrictions on the sale of businesses by such licensees, to prevent “straw man” purchases.)
Be prepared to discuss how your business will promote diversity in personnel, and the overall goals of justice and equity set forth in the MRTA. Carefully consider the advantages of networking with organizations and other social-equity applicants to advance this agenda.
4. Line up your political support!
Political muscle will be needed on several fronts:
a. Lobbying the Office of Cannabis Management (once its members are selected) regarding the content of the regulations that will be issued.
b. Participating on the municipal level to defeat any resolution to restrict or prohibit retail or consumption sites, as permitted under the MRTA’s municipal “opt-out” provisions. If, nonetheless, such a resolution passes, gathering signatures to hold a “permissive referendum” to overturn such an ordinance. Note that the opt-out provisions only apply to retail sales and consumption lounges; other licenses cannot be prohibited.
c. Zoning is also an important issue. Even municipalities that don’t opt out can make life difficult for proprietors of retail establishments through zoning them and other licensees to remote places. The legislation provides that municipalities can regulate the “time, place and manner” of dispensaries and consumption lounges – such as locating them away from residentially zoned areas, schools, churches, and each other (to mitigate the effect of a concentration of such establishments) -- but may not make them “unreasonably impracticable,” meaning such that the risk, money, and time of operating the establishment is not worthy of being carried out be a reasonably prudent businessperson.
d. Assemble political support for your application! Even if a municipality does not opt out, you may need its support in order to gain a license. While applicants in New York City must go before local community boards, other cities and towns may establish their own processes for procuring community input. Assemble letters of support from community leaders and politicians. The more allies willing to speak up for you, the better!
e. Be prepared to discuss the impact your proposed establishment will have on the character of the municipality, the tax base, traffic, and the stability of the neighborhood. Also, evaluate and be prepared to discuss the environmental impact of your operation, including water and energy usage, and carbon emissions.
Of course, every situation is different, but we at Catania, Mahon & Rider, PLLC, stand ready to assist you in navigating this new terrain, with our robust transactional, land use, and municipal teams.
The foregoing is not intended to constitute legal advice. If you are interested in pursuing cannabis microbusiness opportunities or have any questions regarding the new MRTA, please contact the author or any other attorney at Catania, Mahon & Rider, PLLC.
Jonathan S. Berck is Special Counsel to Catania, Mahon & Rider, PLLC, and is a member of the firm’s Cannabis Practice Group. His practice focuses on business transactions of all sorts and services to companies of all sizes on topics as diverse as employment matters, mergers & acquisitions, and business succession, among others.