By Martin Tillier
When New York passed its adult-use cannabis legislation in 2021, the state allowed a period of time for municipalities to pass local laws regarding the adoption of retail outlets and/or consumption lounges. They basically had three options. They could opt in, opt out, or do nothing, in which case they would be assumed to have opted in. That time expired on December 31st 2021, so we now have the data on which municipalities did what. It makes interesting reading and, in some ways, seems like fairly good news for the cannabis industry in the state.There are, however, some things that must be borne in mind that could present as issues over the next few months.
The Numbers
At first glance, the numbers at the deadline are not that encouraging. Sourced from OBEDIO data and analytics by thcregs.com, only 33 of New York’s 1500+ jurisdictions actively opted in, with 708 passing local laws banning cannabis businesses. However, 767, or 50.1% of municipalities, took no action, meaning that they will be opted in by default. That brings the total of effective opt-ins to 800, representing 52.25% of the total.
Even that, though, underestimates the potential of the New York cannabis market in one way. The mean population of the 708 opt-outs was only 9,220 versus 25,618 for those that actively opted in, and 29,318 for those opted in by default. It appears that, as you might expect, the majority of opt-outs came from small, rural towns, while the major population centers in the state are on board with the idea.
The Existing Legislation
The Marijuana Regulation and Taxation Act (MRTA) came into effect on March 31st 2021, legalizing the use of cannabis by adults in New York state. The act largely devolves the decision making about the licensing process to the newly created Office of Cannabis Management (OCM). The OCM will devise, issue and adopt the regulations around the cultivation, processing, shipping and retail sale of cannabis and, as of now, the exact nature of those regulations and recommendations is unknown.
What we do know, though, is that there will be some restrictions to the issuance of licenses. No person can own more than one license to cultivate, process or distribute the product, nor can they own more than three retail or on-site use licenses.
That is an understandable attempt to avoid a monopolistic situation in the young market, and is similar to restrictions seen in other states that have passed adult-use laws. The problem is that as so often happens when governments try to regulate markets, while the intent is admirable, there are also unintended consequences. The intent is to have an industry made up of many small concerns, but that makes it less attractive for any licensee to plow profits back into their business. Still, as has already been proven elsewhere, such as in Massachusetts, even a forcibly fragmented marijuana market can grow rapidly given the level of demand, so that in itself is not a major obstacle to outside investment.
Timing
The deadline has passed and we now know where everybody stands, but that doesn’t mean that cannabis businesses will be popping up in New York immediately. The OCM has yet to publish the regulations around implementation and then, once they do, they will start taking applications for licenses. Hopefully, those regulations will give some clarity as to the rules around where the businesses will be located. If they don’t there will be further delays as each jurisdiction will have to set its own rules and limitations.
By creating the OCM and leaving much of the detailed regulation to them, the MRTA added a layer of bureaucracy that ensures that things will move quite slowly, and we don’t expect the first retail outlets to be opened until 2023.
Possible Obstacles
Even if the OCM does clarify the regulations regarding location, there may still be some additional holdups and obstacles as the law is actually implemented at the local level. They have issued guidelines for local authorities that ban them from retroactively denying or restricting licenses once opted in, whether by choice or default, but that those guidelines also say that localities are “...permitted to pass local laws and regulations governing the time, place and manner of adult-use retail dispensaries and on-site consumption licenses, provided such laws and regulations do not make the operation of the license unreasonably impracticable.”
That could well lead to a series of local impact assessments and public hearings that will confuse the issue of location. The MRTA includes the usual restrictions on licenses granted for locations close to schools and churches but when local populations are consulted, there could be objections to proximity to parks, museums, libraries, or almost anything. Add in the right of the local governments to pass zoning laws and there are significant opportunities for opponents of the cannabis industry to create some serious roadblocks to implementation of the law at the local level.
Applicant Approval Process
On the positive side for the industry, the New York law is more streamlined than some of its precursors, in that it does not require municipalities to approve licensees or locations before submitting them to the state for approval, as most others do. However, applicants must notify the local authority of their application and intention to open a business, giving them at least 30 days notice of their intent to apply. It is not clear whether these notifications will be part of the public record or not, nor is there any indication that they would prompt any mandatory public meetings or other consultation processes.
We believe that they can, should, and will hold such meetings, however. There are public meeting requirements for other land use proposals, and exempting the new cannabis businesses from the standard practice would create problems. Allowing for consultation would also result in a greater degree of buy-in from local populations and minimize future protests and complaints.
What’s Next?
Clearly, even though the deadline for opting in or out has passed, New York is still some way from implementing its adult-use cannabis law. The next step will be for the OCM to write and publish their specific regulations and recommendations around implementation. It would be useful if those regulations could be quite specific in as many ways as possible, because a lack of clarity could easily result in drawn out litigation from both license applicants and local residents’ groups that would cause further, avoidable delays.
Once those regulations are published, it will be up to local governments to hold whatever hearings they deem necessary, then to issue zoning ordinances where they believe them to be needed or desirable. Those ordinances are important to the towns and cities, because they are their way of controlling how many locations exist under their jurisdiction. The fact that applications are made at the state level rather than local means that they could not do that in the normal way, by approving only a preset number of applicants. Zoning restrictions will give them back that power.
Conclusions
New York is now one step closer to having a viable, vibrant cannabis industry, but the process is really only just beginning. The OCM will now issue rules, the local authorities will consider zoning, and there will inevitably be fights and lawsuits that follow that. The simple fact, though, is that the vast majority of the population of New York are effectively opted in to the establishment of marijuana businesses and, whatever the problems, those businesses are coming.
About The Author:
Martin Tillier has nearly forty years of experience in and around financial markets. He started in the London interbank forex market, then worked in dealing rooms in Tokyo, Warsaw, and Moscow before moving to the States, where he focuses on analysis rather than trading. Martin now lives in Connecticut and writes a daily market commentary for Nasdaq.com.
