Crains Chicago Business - Published November 28, 2019
By John Pletz
Twenty strangers squeeze into a small conference room in a River North loft on a Wednesday afternoon, anxious for tips and insights about how they, too, can get a piece of a marijuana industry that's set to explode after recreational sales become legal in Illinois on Jan. 1.
The would-be entrepreneurs, such as Kyrie Kirkland, a 32-year-old teacher, hope to apply for licenses under a "social equity" provision of Illinois' new cannabis law, aimed at undoing harm from the war on drugs and spreading the industry's wealth beyond the handful of companies—mostly owned by white men—that dominate the blossoming marijuana business today.
"I wanted to go start something on my own," says Kirkland, a recent MBA grad pursuing one of 75 Illinois dispensary licenses with her husband, Jose Marroquin, and three other educators.
They could qualify for extra credit as social equity applicants because Marroquin grew up in Pilsen and later lived in Archer Heights, areas designated as "disproportionately impacted" by poverty and the drug war's arrests and incarcerations. But applicants face a daunting array of challenges: lack of time, lack of expertise in an industry still in its formative stages, and lack of access to capital in a business where funding is both critical and in short supply.
With the Jan. 2 application deadline quickly approaching, armies of consultants-for-hire have stepped forward to assist applicants in getting past the first step. But Kirkland says the prices she was quoted—from $40,000 to $275,000—were beyond unaffordable.
"As a social equity applicant, I don't have it," she says. "How do you expect any of us as social equity applicants to have that kind of money?"
And that, she says, is nothing compared to how much they'll need from investors or lenders as part of the $750,000 she figures it will take to open a dispensary, should they win.
As the 11th state to approve recreational marijuana, Illinois has taken the concept of social equity to a new level. While other states scrambled to implement legal weed after it was approved in voter referendums, Illinois was the first to design legislation with the social equity goals in mind, something advocates promised in order to win enough votes for passage last spring after months of intense negotiations.
"I want to create millionaires in communities that have been left out and left behind," says Gov. J.B. Pritzker, an early advocate.
Social equity efforts have largely come up short in Colorado, Washington, California and other states that have tried before Illinois. And the state's own record of diversity with marijuana entrepreneurship has not been promising: None of the first 55 medical dispensary licenses awarded by Illinois is held by a minority-owned applicant. The same is true for cultivation licenses.
GETTING IT RIGHT
Illinois' social experiment is now being monitored closely across the nation as a chance to finally get it right. But skepticism abounds, and the early stages have faced the same criticisms as other states' efforts. The sponsors acknowledge the difficulties and posit that the new law ultimately will be judged on whether it changes the ownership equation, starting in May, when the state awards the first round of new recreational dispensary licenses.
"We're not going to know until the licenses are issued whether it worked and we really get the diversity we were hoping for," says Sen. Heather Steans, who spent two years working on the bill with Rep. Kelly Cassidy.
Says Pritzker: “There have been 10 states that legalized before we did. None of them did it in a way that was aimed at social equity. Our job is to try to get that right. Are we going to be perfect at it? No."
Even without the social equity component, marijuana has been a controversial issue from Seattle to Boston. In places like Chicago—as in Los Angeles, Baltimore and New York—it's shrouded in decades-old tensions around race and inequality, which now are bubbling to the surface as licenses are being granted at a time when those issues dominate political conversations.
Marijuana Business Daily, a trade publication, found in a 2017 survey that African Americans account for just 4 percent of cannabis business owners and founders, though they make up more than 13 percent of the population.
Even before there was talk of a social equity plan, a state license to grow or sell marijuana was seen as a golden ticket. With the recreational market estimated to generate $2 billion in annual sales, a single dispensary could bring in $5 million to $10 million a year in revenue, potentially making a license worth $5 million to $15 million.
"We're in an unprecedented era of trying to fuse the policy of reparative justice into an economic model," says Justin Strekal, national political director at NORML in Washington, D.C. "The biggest risk in Illinois is a mismanagement of expectations when it comes to ownership and employment numbers because so much of the program was sold on the equity component."
Meanwhile, there is no shortage of people who want to take the governor up on his making-millionaires offer. In an industry where knowledge and experience are key, there's been a frenzy of mentoring and how-to sessions, from community centers in Englewood and Bronzeville to convention centers in Rosemont and Schaumburg.
Since September, Green Thumb Industries, one of the largest growers and sellers in the marijuana industry in Illinois and across the nation, has been holding free information sessions to walk potential applicants such as Kirkland through the byzantine, tedious application that could take hundreds of pages to complete. And the pressure is on from communities that took the promises seriously.
"Members of the Black Caucus in the city and suburbs knew there was no participation from minority communities before, and they were not going to let that happen again," says Edie Moore, executive director of the Chicago chapter of NORML, the National Organization for the Reform of Marijuana Laws.
EQUITABLE OR 'RIGGED'?
During negotiations, advocates came up with a novel approach that says applicants who qualify for social equity status will get 50 points toward the possible 250 points available for a dispensary application, based on where the majority owners lived or a prior marijuana arrest record. But it doesn't set out a quota of how many of the 75 licenses they will receive.
Social equity applicants also will be charged an application fee of only $2,500, half of what the state will charge others.
Convincing community leaders that the formula will work has been a tough sell, given Chicago's fraught history when it comes to racial and economic equality.
One compromise in the 600-page marijuana law has been a particular flashpoint, especially in Chicago: It gave current medical marijuana license holders—companies largely led by white men—automatic recreational licenses for existing medical dispensaries plus a recreational dispensary. It was felt they were best positioned to get the lucrative Illinois weed business up and running most quickly.
The first new dispensary licenses won't be issued until May, and it could be a full year after recreational sales begin before they're operational. That gives incumbents a head start, especially when it comes to locations in the city, which are limited by zoning.
"How is this not rigged? It doesn't make sense," Jonathan Smith, a Chicago resident, said during a public hearing in October at Kennedy-King College in Englewood. "If it's just for some people, just say so."
Existing cannabis firms say they also understand the need for the law to work and are helping scores of social equity applicants. Like GTI, Chicago-based Cresco Labs, another major cannabis player, launched an incubator program to assist them.
"We want and need social equity to succeed," says Rich Park, a consultant who has advised several cannabis companies on retail strategy and is mentoring social equity applicants pro bono. "It's too important to the industry. We're not competing with each other. We're competing with illegal product."
There are several ways applicants can qualify for social equity status.
One is for principal owners to have resided for five of the past 10 years in an area that has high rates of poverty and unemployment and that was “disproportionately affected” by the drug war, in which for decades law enforcement targeted people of color for arrest and incarceration despite research showing that marijuana use is fairly equal among racial groups.
Such areas include vast swaths of the South and West sides of Chicago, along with cities such as Peoria and Rockford.
Another avenue to ownership includes those who have been arrested or convicted of a marijuana offense, or who have a family member who was.
The most controversial provision allows an applicant to qualify for social equity status if the business has more than 10 employees and more than half live in disproportionately impacted areas; have been arrested, convicted or incarcerated for marijuana charges; or have relatives who were. Critics see it as a loophole giving access to investors with no real disadvantage.
By definition, the people the law is designed to help, who come from poor communities or have previous drug arrests, are least likely to have the resources to win a license or build a successful dispensary.
"The reality is there are folks I talked with before Oct. 1 who were on the fence, saw the application and decided not to do it," says Ron Holmes, who lobbied on the legalization bill for the cannabis industry and formed a consulting firm, Majority-Minority Group, to help social equity applicants.
Most applicants who are pushing ahead, like those who pursued medical marijuana licenses, have been forming teams with the best mix of needed skills.
Ambrose Jackson, a hospital administrator, formed 4BC Cannabis with two friends he met at the University of Illinois at Chicago nearly two decades ago. Their team now totals eight, including people with experience in security, horticulture and the cannabis business. Jackson figures the application process will cost $100,000 by the time it's done.
"People realize if we don't step up so there's minority ownership in this business, it won't happen," says the 37-year-old, who participated in Cresco’s incubator.
But the biggest financial challenge for those who want to break into the cannabis business will come after they win a license. It costs $1 million to $1.5 million, on average, to build out a dispensary, which requires elaborate security systems, and to purchase inventory.
"I'm worried that people may not have the ability, with money and expertise, to follow through," says NORML's Moore, who was part of the lone minority team that won a medical license in Illinois six years ago, only to be forced to sell it.
"We started with $2.5 million, and we were out of money and weren't open," she says. "We spent too much on the front end. We spent so much money on attorneys and consultants. It was a mess."
The state has set up a fund to make loans and grants to social equity applicants, seeded with $12 million from existing medical marijuana tax revenue as well as future licensing fees. But it has yet to set out exactly how those funds will be distributed.
Existing medical license holders have the option to pay into the state fund or provide mentoring and $100,000 loans to individual applicants in exchange for getting early approval to begin growing and selling recreational marijuana.
Cresco and GTI plan to offer $100,000 loans to teams in their incubators that win licenses, but they have no plans to acquire ownership stakes in them. Cresco and GTI each will have 10 dispensaries, the maximum allowed in Illinois, when the state grants the recreational licenses that the companies are entitled to under the law.
"We intend to go beyond what the law requires," says Cresco CEO Charlie Bachtell.
Normally businesses would borrow from banks or the Small Business Administration. But the SBA and most banks won't lend to marijuana companies because marijuana is still illegal under federal law. That pushes applicants into a murky world of alternative financing.
INVESTORS OR 'SNAKE OIL'?
There is no shortage of investors coming forward to provide money to social equity applicants, says Dominique Coronel, a 23-year-old political science major at DePaul University who is part of a team of five participating in the Cresco incubator.
Coronel seems to be exactly the kind of applicant lawmakers had in mind. When he was a child, his family's Elgin home was raided by the Drug Enforcement Administration, and his father was sent to prison. Coronel also was convicted of a drug offense, as were two of his co-founders, qualifying them as social equity applicants.
He and his team already have been contacted by investors, including people who have cannabis licenses in other states and are looking to buy their way into Illinois.
"The question is the terms. We don't want to give up too much ownership," Coronel says.
Joshua Jacobs, 27, a tech marketer in River North who was convicted of marijuana possession as a teen a decade ago, says he recently pitched 14 investors he'd assembled by word of mouth. He's looking to raise $1.5 million.
There's cause to be wary of risky deals. Consultants say they've seen investors offering to cover the fees and buildout costs in exchange for 49 percent ownership. Others offer to also run the dispensary in exchange for a management fee taken out before any profits go to the license holder.
The worst deals allow a lender to take the license if the borrower falls behind on loan payments, says NORML's Strekal.
"In my experience, there's lots of snake oil salesmen," says Scott Lowry, CEO of New Leaf Cannabis Consulting in Rochester Hills, Mich., which charges $42,000 to prepare an application and has three clients seeking dispensary licenses in Illinois, one of whom is a social equity applicant. "There's a lot of room for people getting screwed."
Despite the unknowns and potential pitfalls, the opportunity is too enticing to pass up, says Jacobs.
"I don't know when in my lifetime I'll ever get the chance to be in an industry this new," he says. "This is like the dot-com boom."