Illinois’ marijuana social equity program labors to become operational

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Illinois, once lauded for creating a potential social equity blueprint for the marijuana industry, continues to struggle to get its program off the ground.

Recreational marijuana sales launched nearly 2½ years ago.

But the coronavirus pandemic, licensing lawsuits, financing challenges and bureaucratic red tape have combined to bog down a program that Illinois lawmakers created to make the state’s cannabis industry more diverse.

State regulators are in the process of awarding 60 additional craft cultivation licenses under the social equity program, according to industry officials.

That’s on top of 174 conditional licenses that have been issued to social equity qualified applicants since last summer, according to recent state data.

That includes 40 craft growers, 52 infuser/processors and 82 transport operators.

But social equity cultivation and processing licensees are still developing their businesses and raising money, with some awaiting low-interest loans from the state’s equity fund.

And with 185 social equity retail licenses held up in litigation since last summer, the cultivators and processors, once they do become operational, face the prospect of relying on existing operators such as multistate marijuana companies to buy their products – rather than social equity licensees.

“Illinois has gone from being the poster child of social equity to this cautionary tale,” said Amber Littlejohn, executive director of the Minority Cannabis Business Association (MCBA).

“Two years post-rollout – yes they are issuing licenses. But getting those licensees operational and ensuring that they are set up to be profitable and have marketable businesses is also essential.”

The MCBA recently issued a sweeping study that illustrated the lack of an operational social equity program in Illinois and other states.

Scott Redman, president of the Illinois Independent Craft Growers Association, gave a similar assessment, noting that additional hurdles seem to arise every time there are signs of progress.

“One step forward and two steps backward is really the theme of social equity in Illinois,” Redman said.

The association heard May 13 that the state was notifying winners of an additional round of 60 craft cultivation licenses. But state officials didn’t immediately respond for to MJBizDaily‘s request seeking confirmation.

While that’s a good sign, Redman told MJBizDaily via text, the existing 40 craft grower and 52 processing license holders “are still not getting the responses from the state that are needed to make progress on various issues. Now that there are 60 more licenses, that is only that much more work for the state. Our hope is that they are able to be more timely and we all don’t end up failing.”

Promising beginning

When Illinois lawmakers legalized adult-use marijuana in 2019, they did so with the belief that the state had developed a gold standard for social equity.

The intent was to give licensing priority to socially and economically disadvantaged groups in so-called “disproportionately impacted areas.”

That included areas with high rates of marijuana arrests and convictions as well as areas of high poverty and joblessness.

Another distinguishing point was a state social equity fund bankrolled by existing medical marijuana operators.

In exchange, the existing operators got first crack at the recreational marijuana market.

The market launched with a roar on Jan. 1, 2020.

Twenty-nine months later, those operators – many of them large multistate operators – still have the market to themselves and together have recorded more than $2.5 billion in sales in the process.

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Initial licensing rounds for social equity applicants were delayed by the coronavirus pandemic and then stalled by litigation.

A recent blow came when existing industry players led an effort to kill a bill that would have allowed craft cultivators to immediately expand from 5,000 square feet to 14,000 square feet.

The craft cultivators said they needed the additional space to make their operations sustainable in a changing and more costly environment.

“The expansion effort was firmly quashed by the MSOs,” Redman said.

For their part, MSOs maintained that they support minority businesses. But they opposed the measure out of concern the license winners would just flip the more valuable 14,000-square-foot permits to other companies, including out-of-state businesses.

Redman called the position hypocritical.

Equity retail stalled

Currently, one of the biggest concerns in Illinois is that the craft cultivators and processors might be operational way ahead of social equity retail stores.

The judge in that court case has indicated that it might be 2023 before the lawsuit involving the 185 retail licenses is resolved, Redman said.

“I can’t really say that Illinois is in a better place than on Day One of legalization because there’s still no social equity businesses operating,” said Akele Parnell, a former civil rights attorney and partner in the adult-use marijuana equity group 11th Level.

Parnell, whose day job is head of equity partnerships for Lantern, a Boston-based marijuana delivery and e-commerce platform company, said 11th Level won one of the 40 craft cultivation licenses from the first round and a conditional license in a retail lottery through an affiliate entity.

But without knowing how the retail litigation will be resolved, “it’s difficult to structure our business and our capital stack,” he added.

Then there’s financing.

“It’s been tough to raise enough capital given craft grows limited flowering canopy,” Parnell said. “State law requires us to start at 5,000 square feet and then ask to increase to 14,000 square feet, while MSOs get 210,000 square feet.”

He estimated that it might take $8 million-$10 million to get 11th Level’s operation running at full speed: “We don’t have all the money we need, but we’re pushing forward.”

Parnell said the capital markets clearly have changed, not just because of current economic challenges, but also because Illinois’ retail licenses are still held up in court and investors have turned their sights from Illinois to the emerging recreational marijuana markets in New Jersey and New York.

Illinois does have a low-interest loan fund for social equity businesses, but Parnell said 11th Level’s loan is still in process.

“That’s another thing,” he added, “it’s difficult to get those funds. There’s a lot of administrative paperwork.”

Parnell said 11th Level secured property for a retail store in the affluent Lincoln Park neighborhood of Chicago.

He said his group is paying for an option on a lease, “but we can’t hold that forever.”

Redman, in addition to his role with the Illinois Independent Craft Growers Association, is part of a social equity business called Drecisco Farms that won a grower and processing license and plans to build its operation 70 miles northwest of Chicago.

He said a dozen or so craft growers or processors as well as his own company “are making progress toward construction and being operational. It’s a slow process, and it’s very costly.

“And there’s a lot of groups unable to move forward with any sort of gusto because they are still finding financing.”

Funding still in process

Redman also characterized the state’s loan program as “still in the works.”

He said the state has approved 10 loan applications so far, but that really means only that those businesses are now qualified to receive the loans.

“Applicants now have to go through a regular loan application” with one of the state’s two designated commercial lending institutions, Redman said.

That lender then will make the loan at a below-market rate and receive compensation from the state fund, Redman said. The state also can participate in the loan.

Said Littlejohn: “When the funding is not timely and meaningful, it really is nothing but bells and whistles. We still don’t have a single state that on the day the market opens provided funding to social equity applicants.”

Craft growers and processors that are moving forward are finding they need to submit detailed facility blueprints and specs in hard copies to the state for approval, Redman said.

As the businesses build out their facilities, they are almost certain to encounter supply-chain issues, according to Redman.

“We haven’t cracked the surface yet (on that issue),” he added.

For example, he said he’s heard that water chillers for HVAC systems have a 35-week backlog.

Then, there’s the retail licenses that remain in limbo.

The Illinois Independent Craft Growers Association issued a statement last week urging that issue to be resolved as soon as possible out of concern that craft growers “will not have sufficient retail outlets for their products.”

After all, existing operators – many of them MSOs – currently control the retail chain.

“I’m sure they will carry some craft cannabis,” Redman said, “but I think we all feel that the independent dispensaries will be our real distribution channel.”

Jeff Smith can be reached at jeff.smith@mjbizdaily.com.