New York Marijuana Officials Repeatedly Raised Alarms To Governor Over Private Equity Loan Deal, Emails Show

“​​Personally, I believe we should have told the truth sooner.”

By Rosalind Adams, THE CITY

Last June, Joseph Thomas, an assistant counsel to Gov. Kathy Hochul (D), wrapped up negotiations on a $150 million deal that made investment firm Chicago Atlantic Group the major financier of the state’s cannabis legalization program.

Within the state’s Office of Cannabis Management, doubts about the agreement flared instantly and intensely.

“This is BAD,” wrote Matt Greenberg, a financial analyst at the cannabis agency, often referred to as OCM. “I would not advise them to sign this.”

Greenberg’s alarm was just one in a trove of more than 500 emails obtained by THE CITY that show agency officials repeatedly criticized many of the decisions that have shaped the troubled cannabis legalization program as they were being made.

In this instance, according to a state official with direct knowledge of the negotiations, top administration leaders agreed that the contract contained so many provisions benefiting the company at the state’s expense that it amounted to a sweetheart deal.

Nonetheless, after almost a year of failing to strike a better agreement with numerous other companies, Hochul’s top staff decided that the deal with Chicago Atlantic was the only way to fulfill a pledge, made by the governor in her 2022 State of the State agenda, to create a massive loan program through which New York State would allow people affected by years of racially discriminatory drug laws to flourish as owners of legal cannabis stores.

After THE CITY unearthed a near-final copy of the undisclosed contract in April, several state legislators and financial experts said it smacked of predatory lending by loading startup retail operators with steep costs and strict repayment terms that could quickly lead them to default. The details of the agreement revealed that the state had guaranteed the company a 15 percent return on its investment even if dispensary owners failed—a nearly risk-free proposition.

When Hochul called the cannabis rollout a “disaster” this January, OCM officials were privately stunned, since their repeated warnings had often gone unheeded by the governor’s office.

The emails reviewed by THE CITY, along with policy memos and reports, cover the critical period between July 2022 to July 2023, when the state was struggling—and failing—to open more than a handful of legal dispensaries as hundreds of thousands of pounds of licensed cannabis rotted in fields and warehouses for lack of a retail distribution system.

Individuals whom the state chose as dispensary owners because they had been victimized by decades of now discredited drug laws found themselves facing high-interest loans, high construction costs and wildly optimistic official revenue projections they stood little chance of meeting.

Meanwhile, thousands of illegal weed stores proliferated around the city and state, largely with impunity.

Amid this disarray, officials from OCM, one of two state agencies tasked with managing the program, were sending out their increasingly urgent red-flag emails to each other and to others in state government. Frequently the focus was the public-private investment fund that Chicago Atlantic is participating in, where the state is contributing $50 million and the company has agreed to provide a $50 million loan and a commitment to spend up to $100 million on real estate that the fund would then lease to retail licensees.

In one representative email from May 26, 2023, James Rogers, the Office of Cannabis Management’s current director of business development, wrote to his colleagues that it might be time to blow the whistle on their partner in the legalization rollout, the state Dormitory Authority: “Inflated construction costs are real; Inflated real estate prices are real; binding licensees to vendors that were procured outside the state’s procurement procedures is real.”

“We must issue a statement that is truthful about how the program was run,” he urged.

The officials were never more alarmed than they were in emails to each other before they sent an annotated copy of the Chicago Atlantic agreement to Hochul’s executive chamber advocating extensive changes.

Linda Baldwin, the OCM general counsel, worried that “the Fund might need an infusion of capital or face default under this agreement.” Underlying that concern, she wrote, was her observation that licensees faced “the potential for a series of defaults due to the high rates and costs associated with the buildouts of the Fund locations.”

The governor’s office declined interview requests to discuss the extensive materials obtained by THE CITY. In response to detailed questions, the office said, “New York is moving forward and taking the next steps toward building the strongest, most equitable cannabis industry in the nation. The Hochul administration will continue its work across agencies to transform the legal market by streamlining the licensing process, closing illicit stores, and making resources more accessible to those who need them.”

The Dormitory Authority acknowledged some of the challenges of working with OCM, in a statement to THE CITY. “Starting a new agency and fund are difficult, especially when plagued by numerous lawsuits and injunctions, but we are moving forward by working with our partners in government to take the industry into its next phase,” said Jeffrey Gordon, a spokesperson for the authority.

In the past nine months, the heads of both the state cannabis office and the Dormitory Authority have left and are in the process of being replaced. A report commissioned by Hochul singled out OCM as riddled with inexperienced leadership, inefficiencies in licensing dispensary operators and inadequate customer service for license applicants.

But some advocates, such as the Cannabis Regulators of Color Coalition, criticized the report and the governor’s decision to ask Chris Alexander, the founding head of OCM, to step down.

“Our top priority is implementing collaborative solutions to better serve New Yorkers and move forward in our shared commitment to building a thriving, equitable cannabis market that will set the standard for the rest of the nation,” said Jessica Woolford, a spokesperson for the Office of Cannabis Management.

The report, by the state’s Office of General Services, focused in particular on delays in a part of the program that began last October when the state said it would prioritize retail licenses from applicants who already had a location, whether or not they had been affected by the former drug laws. It did not discuss many of the issues that raged in the earlier emails reviewed by THE CITY concerning the set up of the private-public fund, the deal with Chicago Atlantic and costly requirements placed on licensees, such as one requiring them to use high-priced state-approved contractors to build out their stores.

As of today, a year after the period covered by the emails, the cannabis fund has signed 24 leases and opened only 16 of the anticipated 150 stores projected at its inception two years ago. Based on its current reserves, it is improbable that the fund will have the resources to launch even half the dispensaries anticipated when it was heralded as a way to create generational wealth for individuals and families affected by the old drug laws.

“​​Personally,” Rogers wrote to his OCM colleagues last May, “I believe we should have told the truth sooner.”

A Fractious Marriage 

In one way, the policy disputes and harsh internal critiques are characteristic of innumerable internal dustups in government. But this one involved arguably the most ambitious cannabis legalization effort in the country. It promised to legitimize a multibillion-dollar business that flourished in the shadows, generate millions of dollars in taxes and right some the wrongs of drug laws that disproportionately sent poor people of color to prison.

To support the program’s launch, Reuben McDaniel, the head of the Dormitory Authority, had pitched the governor on a plan to create a $200 million public-private fund that would finance the first 150 dispensaries. McDaniel, who was also appointed as a member of the Cannabis Control Board in charge of approving agency regulations, was confident that he could quickly find a private equity partner for the fund. The financing would provide critical capital to meet some of the social equity goals in the 2021 law.

The marriage of McDaniel’s agency and the Office of Cannabis Management was fractious almost from the beginning. The Dormitory Authority, commonly known as DASNY, is a decades-old agency that has operated as a construction and financing agent on major state building projects. The OCM was established under the 2021 cannabis law to execute the social mission of licensing store owners and farmers as a form of reparations.

The email trove obtained by THE CITY tracks not only a record of valid concerns largely unacted upon at the upper levels of government, but also a nasty interagency battle. In the end, the two agencies guiding the enormous undertaking were barely speaking to each other as the program stalled in its tracks, with the governor only belatedly ringing an alarm bell.

In June 2022, the Dormitory Authority selected a company to run the cannabis fund called Social Equity Impact Ventures, operated by former New York City comptroller Bill Thompson, retired basketball star Chris Webber and a Detroit sneaker entrepreneur named Lavetta Willis.

At its inception, the plan was for the fund to do the work of securing leases and building out the retail stores on its own so that dispensary operators would get the keys to a ready-to-open store. To do that, the Dormitory Authority, a partner to the fund, retained a team of private brokers and a roster of contracting firms. McDaniel began meeting with potential financing partners to raise the $150 million not provided by the state for the fund.

In summer 2022, the Office of Cannabis Management and the Dormitory Authority began negotiating the agreements that would enshrine how the two agencies would collaborate.

According to emails and draft documents, only $4 million of the state’s contribution was to be released initially, sharply limiting how quickly loans could be made. Between the construction costs and the hefty deposits required to secure the large retail leases the authority’s team of private real estate brokers focused on, the fund only had enough money to open a few stores.

“No wonder Reuben has been talking about four stores. That’s all we can afford here,” Greenberg, the OCM financial analyst, flagged to colleagues.

That was a huge problem, in part because following state legislation the cannabis agency had already started licensing hundreds of former hemp farmers as the state’s first cannabis growers. The law had been intended as a sort of bailout program for farmers who had lost money growing hemp with the state’s encouragement when it was seen as a potentially profitable crop.

The cultivators “are going to see this and freak out over the lack of retail,” Patrick McKeage, the agency’s current chief operating officer, wrote to colleagues in August. That summer, the OCM staff began discussing a plan that would allow licensees to break away from the restrictions of having to use one of the fund’s dispensary locations.

McKeage wrote to the Dormitory Authority that the cannabis agency “wants to discuss options for building in any flexibility to account for a scenario where we have cannabis product being ready for retail sale before there are an adequate number of retail storefronts available from the Fund.”

The disputes mounted and deepened into a stalemate. Conflicts emerged over the number of stores needed and the process of approving dispensary sites. As the cannabis fund began missing the deadlines to secure funding and open stores, OCM officials warned the governor’s office that the fallout could lead to huge financial losses across the system.

OCM officials were nervous that the Dormitory Authority and the fund were focused on securing large and expensive leases for its “signature sites” that potentially would be too much of a financial burden for the licensees it was the program’s mission to help, the emails show.

The September 1, 2022, deadline for raising $150 million in private funding came and went. Private capital for cannabis had dried up. Prospect after prospect declined to jump on board while McDaniel continued to promise the governor’s office that the funding was coming.

Ultimately, the state authorized the release of $20 million into the cannabis fund. With that in hand, McDaniel told the Dormitory Authority board he expected to open 15 to 20 stores by the end of the year.

As time dragged on, the governor’s office often had to mediate between the two agencies, as they locked horns time and again. The office established regular calls between the heads of OCM and DASNY, Alexander and McDaniel. Neysa Alsina, the assistant secretary for cannabis at the time, often joined the calls. Kathryn Garcia, the governor’s director of state operations, also joined occasionally.

Another Blown Deadline

By early December 2022, the cannabis fund still hadn’t signed any leases or secured private investment. The Dormitory Authority sent a memo to the governor’s office that they were having trouble securing locations and admitted they wouldn’t hit the target of at least 15 leases by year’s end. The Authority asked the state to transfer an additional $20 million into the fund to bolster its ability to make loans and display its “financial wherewithal.”

“Lease negotiation has taken longer than expected,” said the memo, which cited a legal challenge to the program as well as “rampant unenforced illegal sales and other recent negative press. This has slowed progress.”

The Office of Cannabis Management had awarded its first 36 retail licenses a couple of weeks earlier, and with the fund missing deadline after deadline on attracting private financing and store openings, it decided to go its own way. OCM decided to allow licensees to begin delivery sales before opening a location as a way for them to jumpstart sales.

“This approach enables product to begin flowing through the supply chain, and retailers to start serving customers as DASNY secures the retail locations,” Kagia, the OCM policy director, wrote to McKeage, the operations officer. McKeage sent along the memo to the governor’s office, emails show.

The governor’s office was growing frustrated as well, said a state official with knowledge of the negotiations. The official said McDaniel had promised he could get financing ready within 60 days before Hochul announced the plan for the fund in January.

“And something did not happen after 60 days and then 90 days and then 120 and then 180, and so on and so forth. The frustration from the chamber side was really building,” the state official said.

OCM officials were also wary of relying on the fund to set up ready-to-open dispensaries for its licensees. After first discussing a back-up plan in the summer, the cannabis agency won approval from Hochul’s office in early December to allow licensees to secure their own dispensary locations, a break with the fund’s tight grip on licensees.

A week later, the cannabis agency’s policy team prepared a PowerPoint for the governor’s office showing just how badly the state needed stores. According to a survey of cultivators, the agency expected to have 234,000 pounds of cannabis flower—the dried, smokable part of the plant—ready that season.

In order to sell that amount, the state would need 80 stores operating seven days a week between January and the end of May, according to slides reviewed by THE CITY. If enough stores didn’t open, losses could soar to as high as $400 million for that growing season alone.

“The cultivators aren’t the only ones affected here, the losses would be systemwide, including taxes and sales performed by retailers,” Greenberg, the agency analyst, wrote to colleagues explaining the magnitude of the problem.

James Katz, the governor’s undersecretary of economic development, responded to cannabis officials, pushing back on their findings. He pointed out that the Dormitory Authority and the cannabis fund were developing large, flagship stores. “If we open several ‘big’ stores that move lots of product in the initial phases (e.g., Fifth Avenue/Flatiron, 125th), isn’t that more important — and potentially much more important – than having a large number of stores?”

The policy team worked through an analysis and responded before the end of the day.

“Any way we look at the data, in order to process the tens of millions of products that are in the supply chain we need 80 very ‘big’ stores working 7 days/week starting on January 1 to work through the inventory,” Axel Bernabe, the cannabis agency chief of staff, wrote Katz.

‘Interesting Shapes‘

Although licensees could now secure their own locations, they didn’t know that the Dormitory Authority had carved out huge swaths of the state that were off limits, meaning their sites wouldn’t necessarily get approved.

After the cannabis agency announced that retail licensees could find their own locations, Dormitory Authority officials wanted to approve sites to ensure that they weren’t too close to potential locations they were scouting. The governor’s office permitted the Dormitory Authority to reject potential licensee sites in response.

This set off a clunky process where licensees emailed the Office of Cannabis Management with their proposed locations, officials reviewed them to make sure they met regulations that barred them from proximity to schools or places of worship, and then forwarded the locations to the Dormitory Authority for their approval, emails show. But OCM officials didn’t know how they were deciding to approve or deny locations either.

Frustrated by the process, both agencies approached the governor’s office for a solution, according to interviews.

In early February 2023, McDaniel, the head of the Dormitory Authority, emailed a folder of maps labeled “DASNY protected areas” to Alexander, the head of the cannabis agency. The folder, reviewed by THE CITY, contained maps of the state with heavily blocked out areas, which the cannabis agency referred to as “no fly zones.”

“Interesting shapes indeed,” Bernabe, the OCM chief of staff, wrote. “Seems like they covered all viable business districts. That these may be tied up for years without a dispensary is a bit worrisome.”

As licensees submitted locations to OCM for approval, its staff started to check that they weren’t in the protected areas carved out by the Dormitory Authority, emails show.

Bernabe, the agency chief of staff, complained that cannabis officials were waiting to hear from the Dormitory Authority on seven different sites, at one point. At least a couple of times that cannabis officials submitted potential retail dispensary sites to the Dormitory Authority on behalf of licensees, the authority’s brokers later made competing offers, according to the emails.

Last spring, Sohan Bashar, a retail licensee, had settled on a potential site for his dispensary in Rego Park, Queens. To get location approval, he submitted a letter of intent from the landlord to the cannabis agency. But soon after, Bashar’s broker informed him that DASNY’s own team of brokers had offered the landlord higher rent and better terms to lease the space. On April 7, 2023, Bashar emailed the cannabis agency complaining about the competition.

When the email was circulated, Greenberg responded that it was at least the second time something like this had allegedly happened. “Regardless of whether it is coincidental or not,” he wrote, “I wanted to ask: should we be taking further measures to insure the privacy of our licensees in their business transactions, given that they are directly competing with DASNY for stores?”

Bashar ended up losing the location—and the Dormitory Authority never signed the lease. “They totally blew up my entire plan,” Bashar told THE CITY in an interview. He later opened a store in Jamaica, Queens.

At the time, a handful of stores had opened across the state. And the two agencies were having trouble coordinating even that tiny number of rollouts.

Freeman Klopott, the cannabis agency’s communications director at the time, asked cannabis officials to tell the fund and DASNY that openings need to be better coordinated.

He gave an example of the cannabis fund telling a dispensary in Ithaca the date of an opening that was two days before its final state inspection. A second dispensary, Smacked on Bleecker Street in Manhattan, was “even worse” he said. For weeks they were told they’d be opening “three days from now.” When they finally got an official opening date the dispensary had only one day to prepare.

“There is absolutely zero coordination happening with these openings. It’s a complete mess,” Klopott wrote in an email. “What the fund is doing to these licensees is not right.”

Set Up for Failure?

By April 2023, OCM officials were growing increasingly concerned about how the disagreements between the agencies over fund-supported leases would affect their dispensary licensees.

In response to a lease in Soho that the Dormitory Authority sent to the cannabis agency for review, Greeenberg, the financial analyst, wrote: “This is the 5th dispensary within a mile of this location; the traffic will not support this rent roll + the presumably multi-million dollar buildout that’s coming.”

“Have we ever detailed to the Fund in writing our concerns regarding the economic viability of the dispensaries they are building out at these locations given the terms of these leases?” Patricia Heer, an agency lawyer responded. “We could make it a privilege document sent by counsel” to the fund, she added.

Meanwhile, cannabis agency officials started learning new details about the cannabis fund from its licensees. Keith Dalessio, a licensee who had been offered a fund-supported dispensary location in Astoria, emailed the agency he had been charged $125,000 just in design expenses. When his email was forwarded to state officials, they grew alarmed at the burden of the costs for licensees.

“DASNY contractors are fleecing licensees – this is horrible – 125K for design is literally insane, let alone the rest of the proposal, “ Greenberg, the agency financial analyst, wrote to colleagues.

Kagia, the policy director, responded that he was in favor of allowing licensees to choose their own contractors.

By May, many of the state’s retail licensees had lost patience with the progress of the cannabis fund, the Dormitory Authority and the Office of Cannabis Management. They wrote a letter addressed to state officials highlighting the high rents and buildout costs as well as the secrecy and delays in location approvals.

Publicly, the Dormitory Authority and the Office of Cannabis Management were still a united front. But privately, state cannabis officials grew incensed when the governor’s office forwarded them the Dormitory Authority’s draft response to the letter that included what officials said were a number of errors. Among them: denying that any secret no-fly zones were real.

Officials debated how to respond, if at all.

Soon, Jim Rogers, the agency’s Director of Business Development, wrote to colleagues that they might have reached the point of making a public statement opposing many of the program’s policies.

At the end of the month, an OCM official internally prepared a PowerPoint that outlined his concerns in a presentation called “The DASNY Delusion” reviewed by THE CITY. The title of the first slide in the presentation put his analysis succinctly: “The Fund’s ‘Flagship Stores’ are Setup for Failure.” He pointed to the loan’s interest rates and the pricey rents that agency officials had flagged for a year.

“We expect that 75% of these locations will fail to generate a profit,” he predicted.

A Partner Arrives

A year after Social Equity Investment Ventures was brought on board to manage the cannabis fund, and nine months after the state set its first deadline for reaching a deal with a private partner, a potential deal was finally at hand with Chicago Atlantic Group, an investment firm focused on cannabis lending across the country.

The talks between Chicago Atlantic and state officials had been going on for a few months before an initial draft of the potential loan agreement was forwarded by the governor’s office to OCM in mid-June 2023. Until then, the cannabis agency had been largely shut out of the negotiations that McDaniel, the head of the Dormitory Authority, had largely been handling. When they finally reviewed the proposed terms, they expressed their doubts.

Kaglia, the office’s policy director, wrote that the document “underscores how imbalanced the agreement is in favor of the lender at the potential expense of licensees and the state.”

Cannabis officials worked late, compiling a list of questions and issues that they shared with the governor’s office.

A dozen experts reviewed the loan documents, at THE CITY’s request, who pointed out that terms of the agreement were potentially predatory for licensees.

“OCM, very understandably, was like, ‘This doesn’t work,’” an state official with direct knowledge of the inter-agency negotiations told THE CITY. “How do you expect someone who has no resources—which is why we’re trying to help them in the first place—to agree to terms that any, any cursory assessment would determine to be incredibly predatory?”

Their concerns were exacerbated after officials reviewed the details of the financial projections that the cannabis fund was sharing with licensees, which vastly misrepresented each dispensary’s earning and profit potential. One official prepared a memo debunking the financial projections and others agreed.

The projections “exposes an approach that converts our licensees into ATM machines for landlords, investors, fund managers and contractors before inevitably bankrupting them,” wrote Damian Fagon, the agency’s Chief Equity Officer.

Despite weeks of back-and-forth discussion, Hochul’s office pushed for the deal, according to interviews. Cannabis officials told THE CITY that they were under pressure and needed to get the deal done. The governor’s office said that they did make some changes to the final document based on OCM’s feedback.

On June 29, the Public Policy Committee, made up of Tremaine Wright, the head of the Cannabis Control Board, as well as Alexander and McDaniel, voted on a resolution to borrow the money from a financier but not on the final agreement itself.

The state celebrated that Hochul had fulfilled her commitment from her 2022 State of the State agenda.

On June 30, the governor announced the funding deal with Chicago Atlantic. “New York has always strived to lead the nation in providing opportunities for those who have been unjustly denied privileges and opportunities,” Hochul said.

“Today’s announcement reinforces New York’s commitment to building partnerships that benefit New Yorkers and setting right the wrongs of the past,” she said.

This story was first published by THE CITY, a nonprofit newsroom that serves the people of New York. Sign up for our SCOOP newsletter and get exclusive stories, helpful tips, a guide to low-cost events, and everything you need to know to be a well-informed New Yorker. DONATE to THE CITY

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