The scramble to profit from legal pot

The Empire State’s most popular illegal drug is poised to become its hottest legitimate business opportunity.

Gov. Andrew Cuomo’s rapid conversion on marijuana legalization – from chief obstacle to chief advocate – has triggered a gold rush mentality among marijuana entrepreneurs, who are investing deeply in what could quickly become one of the world’s most important emerging markets. Even though how, exactly, the state plans to regulate the drug remains nebulous.

“It’s unbelievable for entrepreneurs,” said Hadley Ford, CEO and director of iAnthus Capital, a marijuana company operating in New York. “It is a free market, entrepreneurial, capitalism-at-its-best opportunity for anyone that’s got a passion for the world of cannabis. It’s fantastic.”

While total potential marijuana sales are hazy, the estimates are impressive. People spent an estimated $61.2 billion on illegal marijuana purchases in North America in 2018, according to a recent report by Arcview Market Research in partnership with BDS Analytics that was provided to City & State. New York state’s tightly controlled medical marijuana market, with just 30 dispensaries, pulled in nearly $264 million last year according to the report, and analysts project total marijuana sales could jump to more than $1.5 billion by 2022 with full legalization of the drug that is expected to come this session.

“There’s always a chance that as one of the biggest states in the country, it could quickly become one of the biggest markets in the world,” said Tom Adams, managing director and principal analyst of industry intelligence at BDS.

Some industry experts go even further. “New York is going to be one of the most consequential cannabis markets not just in the country, but in the world,” said John Kagia, chief knowledge officer for marijuana market analysis firm New Frontier Data. Given the state’s large population, its Wall Street money as well as its magnified influence as a tourist mecca and role in “defining global cool,” Kagia said, “that nexus will make New York phenomenally influential in shaping tastes and trends for the industry.”

New York is going to be one of the most consequential cannabis markets not just in the country, but in the world.” – John Kagia, New Frontier Data chief knowledge officer

Much of the political chatter about legalization has centered around a social justice imperative to, as Cuomo said in his State of the State address, “create an industry that empowers the poor communities … not the rich corporations who come in to make a profit.”

The governor’s vision appears poised to become a reality as part of the state budget, due by April 1, as long as it can be reconciled with Assembly Majority Leader Crystal Peoples-Stokes’ and state Sen. Liz Krueger’s existing marijuana legalization bill. Their languishing proposal is designed to benefit communities of color who have disproportionate incarceration rates for marijuana-related crimes by aggressively decentralizing marijuana production and boosting small businesses.

Still, it’s far from certain how that can be achieved when so many well-organized corporate players are already poised to profit from legalization. Rhetoric about social justice has often been a part of the sales pitch in the 10 states and the District of Columbia that have preceded New York in legalizing the drug for recreational use.

“As we’ve seen places implement legalization around the country, the issue of racial and economic equity is not something that anyone has gotten right yet,” said Robert Galbraith, senior research analyst at the Public Accountability Initiative in Buffalo. In fact, he said at this point records show that familiar power players in New York are well-positioned to reap the benefits of legalization.

Galbraith noted that several wealthy Cuomo donors are busy locking up market share in the burgeoning cannabis industry – both to sell it as a legal drug but also to capitalize on its usefulness as hemp.

Richard and Robert Sands, who have donated more than $300,000 to the governor and own major alcohol distributor Constellation Brands, spent $4 billion to buy 38 percent of Canadian marijuana giant Canopy Growth shortly after New York state health officials endorsed marijuana legalization last summer. In turn, Canopy announced plans in January to invest up to $150 million in a hemp processing center in Binghamton. The Falcone family, which owns real estate firm Pioneer Companies, announced it will build a hemp processing facility with the help of a $650,000 state grant. The family and its companies have donated at least $180,000 to Cuomo’s gubernatorial campaigns. In Buffalo, Brad Termini, son of real estate developer and Cuomo donor Rocco Termini, has plans to build a $200 million marijuana growing and processing operation on the waterfront.

“From the way it looks now, you have the same economic actors that have benefited wonderfully from the status quo are the ones who are currently best situated to capitalize and profit from legalization,” Galbraith said.

Beyond those deep-pocketed donors capitalizing on infrastructure projects, the medical marijuana companies that have the state’s 10 distribution licenses may also be among the best situated to profit – particularly those with the most influential political connections and the thickest wallets, analysts note. Acreage Holdings certainly fits the bill, with Wall Street backers and former House Speaker John Boehner on its advisory board. But that doesn’t mean the company feels warmly welcomed.

“I think the governor and Assembly has spoken: They’re very anti-big business. Message heard loud and clear,” said Acreage Holdings President George Allen, adding that his company will find a way to work within the state’s forthcoming rules.

Marijuana executives told City & State that taxes and licensing requirements were among their chief concerns.

“There are some elements that are navigable but challenging, but the one thing is this grab for tax dollars,” Allen said. “In New York City specifically, we have the most rampant underground cannabis market in the world, and if you want to keep it that way, keep taxes high.”

Amid talk of using new marijuana revenues to fund everything from the beleaguered New York City subways to communities targeted by stop-and-frisk policing, some in the marijuana industry are concerned by the prospect of overzealous taxation. They see a cautionary tale on the West Coast.

We have the most rampant underground cannabis market in the world, and if you want to keep it that way, keep taxes high.” – George Allen, president of Acreage Holdings

California’s legal marijuana market shrank last year as it failed to compete with black market marijuana that was significantly cheaper, Adams said. Legal weed was 77 percent more expensive in California thanks to state taxes, BDS found in its report.

“There is no doubt that what happened in California last year has caused many people to tap the brakes and say, ‘Wait a minute. This might not be as straightforward as we thought,’” Adams said. The conundrum is setting taxes and regulations at a level that brings in tax revenue and controls quality, but does not raise the cost of legal marijuana so much that the thriving illegal market sails on unharmed as it undercuts legitimate businesses.

While Krueger is sensitive to keeping prices low for consumers, she is far less sympathetic to concerns over company profits. “I’m a little cynical about the industry’s hysteria that they won’t be able to price and make a reasonable profit,” she said. “I have not seen a study about the baseline cost of producing recreational marijuana. I think it’s a lot lower than these companies are trying to claim.”

The state senator added: “They dost protest too much. It’s just a plant you grow.”

While some medical marijuana executives expressed concerns that efforts to broaden access to historically disadvantaged communities could result in lax regulations that may endanger quality and safety, others agreed that New York was likely to err on the side of tight controls.

I’m a little cynical about the industry’s hysteria that they won’t be able to price and make a reasonable profit.” – state Sen. Liz Krueger

Amid all the frenetic energy from eager executives, it’s easy to lose sight of the fact that marijuana remains an illicit Schedule I drug – alongside heroin, LSD and ecstasy – classified by the Drug Enforcement Administration as a drug with no accepted medical use and a high potential for abuse. As 33 states have now legalized marijuana for medical use and 10 states have legalized it for recreational use, some influential proponents – like Acreage – believe Congress could legalize the drug nationally in 2019. After all, Republican lawmakers legalized hemp production in the 2018 Farm Bill. Full cannabis legalization is the logical next step, they argue.

Still, some key Albany legislators – currently in the throes of passing landmark liberal legislation on a near-daily basis – say they are not in a hurry to legalize marijuana.

“I have a lot of colleagues coming to me saying that it’s rushing it to do it in the budget,” said Krueger, sponsor of the state Senate’s marijuana legalization bill. She doesn’t mind that a looming budget deadline of April 1 is pressuring legislators to examine the details of the issue, but it doesn’t matter to her whether a legalization bill passes in the budget or later this session.

“I will say some areas weren’t fleshed out in the governor’s proposal. I might even add that some of it’s missing,” Krueger said. “Their pricing and tax section was not complete and I think they’re even privately admitting that.”

Given the money at stake, the state’s emerging marijuana magnates will be watching carefully to see how those blanks are filled in.

“Regulatory at the local level is always a concern,” said Ford, the head of the marijuana company iAnthus. “You’ve got to be a part of the process, not opposed to it. You’ve got to kiss the rings and make your appropriate donations so you have access, be a part of the dialogue and advocate your position on behalf of your patients and staff and shareholders. But I don’t lose sleep over that. It’s a natural process.”

The bigger concern, Ford said, is staffing up: He’s already recruiting “top talent” to fill 1,100 new positions he expects to open up soon at iAnthus.