Pot Lots Part 1: Birth of a Marijuana Market

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1:19We're at Washington Square Park on a warm February day. Pigeons are cooing, dogs are barking, there's a guy playing piano, lots of people just walking around and talking. And then there's the weed. Everywhere you look, there are small fold-up tables that have been set up, which people are using to sell cannabis. There are packets of edibles, flour, pre-roll, all being sold out in the open. And people are smoking out in the open, too. There's a couple of NYU students that just bought and are smoking on a bench right now. Yeah, we're students at NYU. Yeah, so we're seniors, so we have jobs lined up in finance, actually after graduation.

1:56Oh really? Yeah. So when you first started at NYU, was pot decriminalized yet? No, not really. It was decrimmed. But people weren't like, they weren't selling at tables like they are now. No, it wasn't open, but like, I mean, here, like, you could always kind of live.

2:15Welcome to Pot Lots, our deep dive into what's going on with the legalized marijuana market in New York. We'll spend three episodes exploring what the birth of this market looks like, how the business is setting up, and finally how New York is trying to address the social inequities of the past. It's been a little over three years since recreational cannabis was decriminalized in the state. Lawmakers legalized the drug for adults 21 and older and expunged the records of thousands of people with pot-related convictions. But there's still some tension between the illicit market for weed and the new legal one.

2:46New York passed a first-of-its-kind law in March 2021 to allow people with previous convictions for cannabis-related offenses to get a foothold in a new legal industry, one where there will be licensed shops selling weed. And what New York is trying to do is different to places like California and many other states that have already legalized recreational pot. The idea is not just to go some way towards addressing past social inequities, but also to make sure that New York's legal weed landscape develops more organically with lots of small-scale growers and retailers rather than a few big dominant companies.

3:21It's a big change for a city that was heavily impacted by things like the war on drugs and stop and frisk. But there's still a big question mark about how this new market for legal weed will work exactly.

3:35Here in Washington Square Park, you could see the issue pretty clearly. Weed is supposed to be sold by licensed shops. You have to go to the state to apply to open one. But so far, there's not much appetite to crack down on unlicensed sellers. No one wants to be arresting people for selling weed illegally after the state just decriminalized it. They can if you ain't got no ID. If you ain't got no ID, yeah, they're going to arrest you, make sure you know who you are. And then after that, they leave you alone. But if you got ID, they just run your joint and whatever just tell you to pack up a leaf.

4:06You know what I mean? This ain't killing nobody, baby. Come on, you got liquor stores, man. Come on, you white folks get bread, man. Let us get some money, man. That's one of the cannabis sellers in Washington Square Park. We're not going to use his real name for obvious reasons, so we'll just call him Charlie. Charlie has a small fold-up table and is selling packets of flour and pre-rolled joints, and we asked him if he ever gets in trouble with the police for all that he's doing because selling pot without a license is still illegal. Everybody need weed to smoke, man. Everybody need their little weed to smoke to calm down.

4:37You know, it ain't a bad thing. All of this has left New York in a weird gray area. People are excited about a business that they think might be worth billions, but there's still a lot of uncertainty over how exactly this will all work and how much this new market will actually be worth. In this special Odd Lot series, we're going to be taking a closer look at the birth of a new industry. And if you walk around this city, you're going to see and smell and possibly even participate in the results of this new legalization. Yeah, that's kind of what happened to Charlie. He says he came back to New York after being in Atlanta for a few years.

5:12He saw what was going on in places like Washington Square Park, and he jumped right in. I was smoking a blunt, and I was walking through here, and I haven't been here in a while, and I seen everybody in this park. Everybody in this motherfucker. I was smelling weed. I see police walking around. I see motherfuckers at the table holding bags of weed. I'm like, hold up. I'm like, yo, this shit legal? He's like, yeah, like, this is real weed. Hell yeah, it's real weed, O.T. I said, man, don't play with me, man. I'm dead sitting my back against the wall. He said, O.T., I said, what, I got to get a license?

5:45He said, man, go get a table, man. Get you some weed and put it out here, man. Took my ass to the Bronx. Went to the, uh, Bornega store. Got me some cash. Went to see the first weed, motherfucker, that I ran. I was going to the Bronx. I just happened to run into a Spanish dude that had weed on. I swear to God. I'm like, hey, yo, I'm going to buy something. So I bought like$250 worth of weed, brought me some baggies, came here, put it in the pump, and I look back and say, basically I'm winning. And I don't know how long this is going to last. So that's why I have to take advantage. So that's why it's all about just getting what I got to get right now.

6:23And just that's my old fart. For Charlie, this is a big win. Charlie's black. He's part of a community disproportionately affected by policies like stop and frisk. He spent time in jail and had a hard time finding a job afterwards. He lived in shelters. But now he says he can make between$450 and$700 a day just by selling weed on the street. We asked Charlie if he'd ever consider setting up a licensed shop. I ain't got time for all that shit, man. All that red tape paperwork and all that, man. I put these up here. Got my little stand. You know what I mean? I ain't buying my little, you know, joints wholesale, put it out here, get my pre-roll.

7:03But y 'all see my joint? I put a stand in here. I make my money and I'm good. It's great news for him, but maybe not so much for anyone who's trying to sell cannabis legally or for municipal governments who are hoping to raise money by taxing legal weed sales. By the way, we asked the New York Police Department why they aren't arresting the weed sellers in Washington Square Park. And they say that the penal law, as it's currently written, does not provide a penalty for an unlicensed establishment that displays cannabis for sale. So the police are kind of hamstrung. They can bring what's known as nuisance abatement proceedings against some sellers, but it's not really an effective tool given that those types of proceedings can take weeks or months to play out.

7:47So for guys like Charlie, who no longer have to worry about getting arrested for selling pot, they're just filling a hole in a market. Because despite starting its licensing program several months ago, New York has approved just 165 retail dispensaries. And those are provisional approvals. The vast majority of those shops aren't up and running yet. One of New York's first legal pot shops, Housing Works Cannabis Company, is just a few blocks from here, actually. We're going to talk to them in a later episode, but it's worth noting that the first three retail dispensaries to start operating in the city were all set up within about 10 blocks of each other.

8:23They're all clustered around Washington Square Park and NYU in Manhattan. So people in the area have a few options. They can go to a licensed store and get regulated weed, or they can shop on the street in places like the park and buy from sellers like Charlie. But that's not the case everywhere. A case in point, almost 85 percent of municipalities in Long Island have opted out of allowing dispensaries at all. You can't even hit eight weed stores and nine boroughs. They say they hit eight weed stores and nine boroughs. So I'm like, nine boroughs? Like, all right, if you count Long Island, you know, Newer Shell, Yonkers and Mount Vernon and then the five boroughs, I guess you got nine.

9:03But come on, that's bullshit. shit. You're breaking, I mean, you're running up and taking them people weed. I mean, they ain't going to get no time for it. What is the fine? This was a point echoed by Jeffrey Schultz, who just might be the polar opposite of our cannabis seller in Washington Square Park. He's a corporate lawyer at a firm called Feuerstein Kulik, and he's been helping advise people that want to open weed dispensaries legally, plus people who want to invest in the industry or start bigger cannabis companies called multi-state operators or MSOs. He points out that even after the medical marijuana program, which started back in 2014, doesn't have that many licensed operators yet either, despite it being almost 10 years old.

9:48How do you get a license? You need to be issued a license from the state, whether it's adult use or medical. Those licenses don't come free. And, you know, there are exceptions to every rule. Every state has a different program. Florida, for example, let's take New York's medical market. New York's medical market. There are 10 licensed operators in the state of New York under the medical program, 10. That's it for a state of 19 million residents. It's very challenging to get your hand on one of those licenses. They've all changed hands at some point or are in the process of changing hands at the moment versus a state like Oklahoma, where you can show up.

10:20And if you have a heartbeat and I think probably$500, you can probably get yourself a license, but you walk into two very different economic situations and opportunities. In New York, if you're one of 10, you're an oligopoly. In Oklahoma, the challenge there isn't whether you can get the license, it's whether you can be competitive enough to make money. And that's really where it begins. I think what we're seeing as the industry matures, challenges particularly for brands and single state operators or generally not the large MSOs. That's one reason why it's hard to find brands that are popular in places like California, here in New York, legally at least.

10:59Also, New York specifically has written conditions that dictate the kind of packaging and branding allowed. And as the rules vary by state, it's hard to standardize the move into other states. It's very difficult to build your brand, to build brand equity. If you're a California brand, and I'm seeing it now every day, these California brands want to enter New York. They don't have a license yet. They may never get one. It's expensive. The license itself, the capex required to build the manufacturing or cultivation or both facilities in the state of New York or any state, it's very, it's capex heavy.

11:31And it could be several years before you see a return on that investment. But for Jeff, there's no gray market in weed in New York. What sellers like Charlie are doing is very illegal. Let me be very clear. None of those stores that are outside of the medical market, that you're seeing the bodegas and without naming names. Well, they're everywhere, quite honestly. There's no loophole. There's no loophole. It is illegal. It is illegal at the state level. It is illegal at the federal level. They're committing federal crimes. They're committing state crimes. The loophole is that there is no enforcement today.

12:03And it is, quite honestly, scaring away a lot of operators, particularly on the retail side. They know they don't want to compete with that. Why compete with that? And this is a story we've read before. This happened in California when we transitioned from Prop 215 to Prop 64, when we went from medical to adult use. It was a very, very bumpy ride. And to this day, there are thousands of unlicensed retailers in California. This is the result of decriminalizing something without simultaneously regulating it. This delay in the program and the rollout of the program is exacerbating this problem. With a lack of enforcement, it's clear that there's not much appetite in today's political environment to lock people up for selling weed illegally.

12:47Not only to not do it, but the optics of it are horrific. It appears that no one's really going to suffer criminal consequences of operating these stores. It's possible that they'll be disqualified eventually from applying for a license. But again, I'm not sure that's going to deter anybody. The state made what I would say a relatively weak effort at attempting to scare people away from doing this. They sent out a cease and desist letter, but that letter had no teeth. and it was sent to a very small fraction of the retailers that are out there that are operating. But look, when there are no consequences, really, what's the point?

13:23As of the date we're recording this episode, the state reports having sent out 200 cease and desist letters statewide. And in New York City, the total estimated street value of illicit product seized is$10 million. That includes over 75 unlicensed shops and about 20 mobile trucks. Why would they stop? Why would anyone do that? And I think it's very short-sighted. to remain or move into the non-licensed market right now. I suppose there's a cash grab opportunity. There's no question about that. We all see it. But the cannabis industry will evolve much like alcohol did when Prohibition ended in the 30s.

13:57And it took time. It took time for liquor stores to pop open. It's going to take time and it's going to take time to shut down the illegal stores. I don't foresee that happening until there's a sizable regulated industry that finally has had enough and says, it's enough, we can't compete, particularly right now when the state is about to finance the first 100, 150 stores, their primary competition. So the state is going to fund people who they have determined deserve a shot at having ownership in this industry. And their biggest competition is the illicit stores. So query whether the state is really going to let this continue for any period of time.

14:36I think that's the reason if it's going to end at some point, it's because the state is raising money and they're using tax revenue to support legal regulated stores and they can't have someone next door to them selling untaxed legal cannabis from California.

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16:51And when prohibition ended in 1933, there wasn't any real effort to unwind the criminal charges of the past decade. He'd gotten into trouble for bootlegging booze and tough luck. This analogy to the end of prohibition, an era in which the United States banned the import movement and sale of alcohol, is one that comes up time and time again in our conversations about the legal pot industry. And you can kind of see why. Selling booze in the U.S. was illegal for more than a decade. And then, just like pot, it was suddenly OK again. But there are some big differences. For a start, prohibition was ended at a federal level, although lots of counties and municipalities still decided to stay dry.

17:31What's unusual about New York's legalization of cannabis is the social justice component that comes with it. New York is reserving licenses to open retail dispensaries for people who've been convicted of cannabis-related offenses or have been impacted by aggressive cannabis-related policies like stop and frisk over the years. And for people like Jeff Schultz, the existence of the gray market in weed, all those sellers in Washington Square Park is a pretty big roadblock to creating a thriving legal industry that would fulfill those social equity goals. I think we need to heal a little bit. It's a little bit different than the alcohol industry in the 30s.

18:07We didn't have this restorative justice layer to an industry that was being brought into the light. But we have to deal with that as a nation. We have to deal with that as operators in this industry, as competitors with one another until we heal from the war on drugs and some of the issues that are very much front and center in New York City. I'm not sure we're going to see a whole lot of action there, but I think once the state realizes that they are enabling their largest competitors, it may add. There are some other tensions with the gray market as well. The weed that you're getting from a licensed shop in New York is regulated, but that doesn't necessarily mean that it's better quality.

18:47So even if you can get the capital you need to start a retail dispensary and even if you manage to get a license from the state of New York, you're still going to be restricted in what you can sell. I mean, the same way a ton of produce is grown in California and not necessarily in New York, it's similar. The climate there is, in certain parts, is more conducive. That's Jason Wild, executive chairman at Terrasend, a multi-state operator, or MSO, that cultivates and processes weed in places like Pennsylvania, New Jersey, Michigan, and California. He tells us that growing cannabis might not be as easy in New York as it is, say, on the West Coast.

19:24What's more, the illegal sellers, the guys on the street, they have a long history of securing product and a lot of experience with growing it. Like in California, you can get multiple cycles of outdoor product. In New York, depending on how far upstate you are, you're only going to be able to get one cycle. And just on top of that, there's just, back to, you know, talking about experience, there's just so much less experience in New York. You can't dial in the quality of your cannabis right away in those first two harvests. It actually takes years and years. New York has been a huge market, a cultural center in terms of delivery guys coming and bringing you stuff in your apartment or whatever over the years, more around New York City.

20:07But there's been practically no industry in New York of cultivators and manufacturers. On the other hand, California, that's been a big part of their economy even when it was illegal. And when they passed laws legalizing medical and then wrecking California, they were just trying to bring all of the illegal growers into the legal framework. But they came in knowing how to do this stuff. In New York, there's just like no experience on top of all the different climate issues and things like that. And you're also going to be competing with street sellers who have access to everything. Flower from organic weed farms in Florida or the most recognizable brands from California with very little overhead.

20:44That's what the illicit market's really good at, I guess. That branded product, and I hear there's counterfeit brands in New York City coming in from the West Coast. Water will find its way through those cracks and the like. So if you're buying illicitly in New York and it's a branded product, it is definitely not coming from those 10 medical ROs right now, registered operators. So how is it getting across? Same as it always has, quite frankly. it's being grown maybe out west being packaged and it could be being packaged in a legal state and then being sold off their books out of state that that has happened but at the end of the day that product you're buying might be 100 % illicit from where it's grown it might not have had a license to be grown might not have a license to be processed it certainly didn't have a license to get shipped from california to new york city and at the end of the day finds you like when you You used to go and find your plug and he'd give you a little sandwich bag of an eighth.

21:46Now they just got really fancy sandwich bags. That's Craig Wiggins. He used to lead a trio of analysts known as the Canalysts. Joe and I actually spoke to him on the podcast back in 2019. But now, four years later, he's wound the Canalysts down, but he still keeps a finger on the pulse of the cannabis industry. He describes the New York market as basically the Wild West. They're allowing pretty much everything to go on. There's people who have already built their infrastructure who are very effective at getting good quality cannabis from California East kind of thing. So I think that's always going to be there.

22:22But I think New York is a real interesting example. So New York legalized or was voted to legalize and it was signed off by the governor end of March 2021. Presently in New York, you have 10 what are called registered operators or RO. Those are the medical guys that got their licenses early on. Each one of those companies was allowed to open up four medical dispensaries. Now, with adult use coming in, they're going to eventually be allowed to open up four more medical dispensaries in underserved communities. And when they get those eight open, so the four existing plus the four more, and the underserved communities have not been defined yet, then they're allowed to take out of those eight stores, three are allowed to go dual.

23:06So adult use of medical. Those 10 companies that can have 40 stores amongst them, which is an awful lot for New York, can they deliver their product outside their store network? Or are they going to be required to sell through an independent third party? That's to be determined. So what has happened so far in New York? And retail is going first off. Those 150 stores will be social equity stores. So you've had to have an arrest in your family in the past. you've had to demonstrate that you've been running a profitable enterprise business for at least a year. So those 150 applications for retailer app, they've licensed 250 hemp and outdoor licenses.

23:47So at the end of this year's Croptober, which usually comes in October, that's Croptober, we will see a supply of adult use cannabis finally entering the processing system in New York. That's where we are with New York. So because of how the state's rolling out its adult use, the illicit market's operating pretty much with impunity right now.