Arizona social equity cannabis retailers set to miss key deadline to open

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Image of Arizona state flag with background of cannabis leaves

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More than half of Arizona’s 26 social equity retail licensees are poised to miss a key deadline to open their cannabis shops by Sunday, Oct. 8.

The group of operators – currently numbering 14 – could face penalties for failing to meet the state-mandated deadline.

Those sanctions could include having their licenses revoked.

But state regulators have indicated that they won’t go that far and will instead give the dozen or so social equity license holders more time to get their retail businesses up and running.

Arizona is the latest market where social equity license holders and applicants are facing uphill battles to launch their businesses due to a dearth of funding, lawsuits, competition from existing operators and other factors.

Other markets where social equity licensees are experiencing difficulties include Los Angeles, Illinois, Michigan and New York.

Arizona law permits 169 marijuana retail locations, so social equity retailers comprise a significant portion of the retail sector.

Yet this segment operates under more restrictive rules that have made it more difficult to compete with other state marijuana businesses.

For instance, social equity operators can sell products to medical patients, but medical patients who purchase the products are essentially treated as adult-use consumers.

That means they are required to pay 16% excise tax, plus applicable sales taxes, and are prohibited from purchasing edibles exceeding 100 milligrams of THC per package.

Customers of social equity operators also can buy just 1 ounce of flower per day, instead of up to 2.5 ounces if they purchase it at one of the state’s 130 or so medical marijuana retailers that were grandfathered into the adult-use market when it launched in January 2021.

After the Arizona Department of Health Services (ADHS) awarded the 26 social equity licenses through a lottery in April 2022, it established an 18-month deadline for the winners to be operational.

But a litany of challenges made it difficult for many of the newly minted licensees to meet the Oct. 8 deadline, including lawsuits, torpedoed legislation benefiting social equity license holders, statewide zoning restrictions, widespread municipal opt-outs and partnership squabbles.

To exacerbate matters, the state’s two largest cities – Phoenix and Tucson – have been effectively off limits.

Phoenix, which is home to nearly a quarter of the state’s population of 7.4 million residents, has yet to enact rules governing social equity retail operators.

Tucson adopted zoning exemptions late last year for all dispensaries – including social equity licensees – with the intention of making it easier for operators to secure real estate for their businesses.

But it wasn’t until late last month that Tucson’s city council approved the first social equity retailer.

“Anyone who’s not open right now, you’re really in a mad dash to the finish line,” said Jon Udell, a cannabis attorney and communications director for Arizona NORML.

Despite the social equity setbacks, sales in the limited license market are humming along for the approximate 150 retailers who’ve opened their doors.

Medical and adult-use retailers are on pace to hit about $1.2 billion in sales this year and top $3.3 billion in 2028, according to the MJBiz Factbook.

Potential ramifications and temporary solutions

Failure to comply with any cannabis regulation in Arizona – including the requirement for social equity licensees to open their stores by Sunday – may lead to enforcement action, regulators told MJBizDaily.

“However, the licensee has administrative appeal rights, including a hearing before an administrative law judge, and the opportunity to have an informal settlement conference with the department to determine if the matter can be settled through an agreement,” ADHS spokesperson Tom Herrmann said.

Social equity licensees who miss the deadline will be sent a letter to request a hearing and must respond within 30 days.

Hearings are typically scheduled within two to four months.

“The health department has gotten a lot of flak for certain decisions made during the social equity rulemaking and application process, but I really believe they care about making sure social equity folks have a reasonable chance of opening,” Udell said.

In contrast to other cannabis markets, Arizona regulators are allowing social equity retailers to establish temporary locations until they secure permanent properties.

So some license holders have secured a placeholder, of sorts, pending access to a better marketplace, industry sources told MJBizDaily.

However, many of the cities surrounding Phoenix – several with populations totaling more than 100,000 residents – have opted out of cannabis retail altogether, while others have halted license expansion, forcing some operators to locate in rural areas far removed from population centers and consumers.

“That access to better marketplaces is generally restricted behind the scenes by lobbyists and campaign contributions to politicians who have become friends with existing dispensary owners who are trying to keep their competition out,” Demetri Downing, founder of the Arizona chapter of the Marijuana Industry Trade Association, told MJBizDaily.

Unintended consequences

In June, Alicia Deals opened a Cookies dispensary in Tempe, becoming Arizona’s first Black social equity lottery winner to own and open a cannabis store.

While she partnered with the well-known California brand to launch its first Arizona location, the entrepreneur retained full ownership, a stake nearly every other Arizona social equity retail license winner cannot claim.

Bombarded with aggressive recruitment tactics, most social equity licensees found outside investors or linked up with multistate operators (MSOs), such as Mint Cannabis, Mohave Cannabis Co. and Nirvana Center, which bankrolled the initial, nonrefundable $4,000 application fees, according to MJBizDaily research.

Mohave Cannabis was part of the social equity ownership team that was recently approved for a recreational dispensary in Tucson.

In some instances, existing dispensary operators filed and funded hundreds of applications for social equity applicants willing to enter partnerships, the Arizona Center for Investigative Reporting first reported.

As part of the arrangement, some lottery winners ceded up to 49% ownership of the license – common financial terms in the retail segment of the industry, sources tell MJBizDaily.

“They originally applied, were processed and awarded with large company MSOs that basically cut them out from the beginning,” said Deals, who frequently talks with other social equity lottery winners.

“I was fortunate enough to partner with some big guys that didn’t want to take advantage of me. I’m still 100% license holder and owner, and extremely grateful for that,” she said.

Some of these early pacts have led to partnership squabbles and a few lawsuits, delaying the launch of a handful of dispensaries.

A golden ticket

When Arizona regulators established the state’s social equity program, they essentially created 26 golden tickets for applicants.

And because the state tied the total number of recreational retail licenses to the number of operational pharmacies (think CVS and big-box retailers like Walmart), dispensary licenses are essentially capped for years.

Under Arizona law, the ADHS is prohibited from issuing more than one adult-use retail license for every 10 registered and permitted mainstream pharmacies.

That equates to about 170 medical and adult-use retail licenses, including the 26 designated for social equity applicants.

In Arizona’s vertically integrated market structure, a marijuana business license entitles holders to establish cultivation, manufacturing and retail operations.

Mint Cannabis tasked a team of more than half a dozen employees to find qualified social equity applicants who are required to own at least 51% of the business and meet three of four criteria based on income, past marijuana convictions and residency in a community deemed disadvantaged.

The dispensary operator also hosted expungement clinics to attract applicants and clear their prior cannabis records.

In the end, Mint won two retail licenses through social equity partnerships.

The MSO paid about $7 million for its ownership stake in each license, co-owner Raul Molina told MJBizDaily in an interview last year.

“They understood it was a shot at a lottery ticket that Mint was willing to pay for,” he said at the time. “And we were going to split it later on.”

Chris Casacchia can be reached at chris.casacchia@mjbizdaily.com.