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Marijuana regulators in Oakland, California, have begun referring a handful of social equity licensees to the city’s collections department after they defaulted on loans intended to help get their companies started.

The situation illustrates both how difficult it has become for mom-and-pop businesses to succeed in California’s legal marijuana industry and the tenuous nature of social equity companies, industry insiders said.

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“We can’t send our most vulnerable, impacted people into debt, and this is exactly what this is doing and exactly what we were fearful of,” said Amber Senter, the CEO of Oakland-based Makr House, who has worked for years with Oakland on crafting its social equity program.

According to a report shared with the Oakland Cannabis Commission on Oct. 7, 59 social equity license recipients have secured $3.7 million in loans from the city that were issued beginning in late 2018.

About 60% are “in compliance” with the terms of the loan, according to the report.

In May 2020, the city – realizing that some of those recipients were already having trouble repaying the loans – authorized modifications to the terms “to assist equity loan borrowers who have become delinquent on their loans,” according to the report.

So far, about 12% of loan recipients have had their repayment terms modified.

But that apparently wasn’t enough.

According to the report, at least 7% of loan recipients – or four license holders – has “fallen so far out of compliance and not pursued a loan modification that they have been forwarded to collections.”

In addition, the report noted, another 34% – or 20 license holders – are considered “out of compliance” with their loan repayment schedules.

About half those are “only one or two payments behind,” the report states.

City will consider loan forgiveness

An Oakland spokesperson wrote in an email to MJBizDaily that “staff will continue to work with the Cannabis Commission and City Council on whether and how to forgive loans of cannabis equity applicants.”

The spokesperson declined to answer other MJBizDaily questions about what caused the loans to be sent to collections and what might happen next for those in default.

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Senter expects the number of social equity license holders getting sent to collections to increase, based on the report and what she’s seeing firsthand in the industry.

“Of course, that number is going to increase,” Senter said, adding that many if not most social equity businesses are having a hard time turning a profit and – by extension – repaying the loans in question.

“They’ve definitely been struggling,” she said. “We all know cannabis is capital intensive, and the biggest barrier to entry for any Black or brown or small social equity business is access to capital.

“People are just trying. We look and we see these other big cannabis companies operating at a loss. … We don’t have that luxury.”

Jason Rosell, a San Francisco attorney who specializes in corporate restructuring and financial distress, said borrowers sent to collections don’t have many options because corporate bankruptcy protections are unavailable to cannabis businesses. That’s because marijuana remains illegal under federal law.

Expect ‘aggressive’ collection process

“It’s not going to be any different than folks that are chased down by bill collectors from credit card (companies),” Rosell said.

“These collection agencies, I would expect them to be aggressive, I would expect them to call incessantly the borrowers and harass them until they can reach an agreement as to what can be repaid.”

If that doesn’t work, Rosell added, the next step would be “to file a lawsuit and get a judgment against that individual, and then they will go enforce that. … It could get down to garnishments. It could get down to attaching liens to properties and liquidating their assets.”

Oakland might need to lower its expectations regarding repayment of social equity loans, Rosell said, because of “the old adage that most small businesses fail; the cannabis industry is no exception.

“It’s highly competitive, highly capital intensive, and most of these companies, at the end of the day, they are going to fail,” Rosell added.

Jason Horst, another San Francisco attorney, represents one of the four license holders sent to collections.

Though Horst asked that his client not be identified in this story, he said the licensee wound up closing shop toward the end of 2020 after being robbed multiple times. That left the licensee unable to keep doing business or repaying Oakland.

Horst said the situation is hard to believe, primarily because anyone who would have qualified for the social equity program had to show they were affected by the war on drugs and unable to launch a cannabis company without assistance.

“I was in genuine disbelief at this,” Horst said. “Sending operators that have gone out of business to collections over loans that the city knows they can’t afford to pay back, it really goes against the principles on which the equity program was built.”

Senter and Horst said they’re optimistic, however, that city authorities will find a solution so that social equity license holders don’t face ongoing financial repercussions.

“I think Oakland hears what the community is saying,” Senter said, “and they’ll make adjustments.”

John Schroyer can be reached at john.schroyer@mjbizdaily.com.