Axel Bernabe Archives - Green Market Report

Axel Bernabe, the chief of staff and senior policy director for New York’s Office of Cannabis management, has been in the thick of cannabis policy development in New York state government for years.

There aren’t many other people as well-positioned to both influence and explain the direction the state has taken in its rollout of the recreational cannabis market, which has been at times both controversial and chaotic. The rollout has drawn at least two major lawsuits thus far, including one from several licensed multistate operator medical companies that want quicker access to adult use marijuana sales.

Bernabe connected with Green Market Report coincidentally just one day before that lawsuit was filed in Albany, for an hour-long discussion on the recreational rollout and to clear up some misunderstandings about policy changes OCM has made in the past few months.

The self-described policy wonk had much to share, including that:

• He expects as many as 100 new retail licensees will be named at the next Cannabis Control Board meeting, bringing the total number of retailers to 166. The CCB committed to issuing at least 300 dispensary permits.
• He envisions as many as 50,000 cannabis retail or consumption establishments in New York, including as many as 3,000 dispensaries.
• Out-of-state brands are being actively encouraged to partner with state-licensed processors.

Overall, Bernabe is enthusiastically proud of the system New York has created, though he acknowledges there are bumps that have yet to be smoothed out.

“We’re a bunch of wonks that are trying to make this the most competitive market within these guardrails,” Bernabe laughed during the interview.

The following has been edited for length and clarity.

How fast do you expect to have 300 cannabis stores open and operating in New York? And related to that, any updates you can share on the retail licensing injunction and that litigation?

That’s the caveat to how many stores. I can’t get into a lot of details, but I can tell you that we’ve fully briefed our appeal to the second circuit appeals court to remove the injunction while this lawsuit goes on. Assuming that injunction is gone, our estimate is that we could probably get close to two-thirds of the 300 by the end of the year.

We just doubled the number of CAURDs (conditional adult use retail dispensaries), so in our next board meeting, we’re going to be announcing another cohort, maybe as many as 100.

Don’t hold me to that, because that’s the licensing department’s job, so we don’t have the full final numbers. But that could mean that we have 166 (retail licensees) looking to open now, ASAP. And we have the ability for people to bring their own stores, (to) start delivery.

The biggest hurdles we are facing with getting shops open are hurdles the dispensaries are facing. One is the capital markets are pretty significantly constrained right now globally, not only in cannabis.

The local control, that’s worth an article in and of itself. We put out very aggressive state preemption laws, and so a bunch of jurisdictions passed local ordinances and laws that are in violation of our regulations when they come into effect. But that’s going to take a little bit of time to unwind, as some of them will have to be challenged in court.

And then just opening a dispensary and building in general has been harder since COVID. With the supply chain impacts, we’ve had a lot of people tell us that HVAC equipment and getting orders in, getting construction materials, has been slowed down.

How many retailers do you ultimately believe the state will allow?

When we think of our licenses, we don’t think of caps. We’re in the business of a planned rollout, a phased rollout.

The idea is – especially on two types of licenses, on growers and dispensaries – you just want to be really careful that you don’t license too many grows out of the gate, because then everybody comes into the market. Everybody comes in hopeful, and then the market crashes.

We’ve seen that in every single market, most recently, Massachusetts and Michigan. The price just comes down, collapses.

Over three to five years, the market stabilizes, demand is much more clear, the price of the cost of growing is clear, the price of weed is clear. And people can run pro formas and say, “Is it worth me entering the market? Is there a niche I should enter in, what’s the price? What’s the cost?”

The one caveat to that is, we do have a limit on the size. That’s how we control it: the size of the grows.

The retail tier, same concept. If you allow anybody to open a retail store, you get 1,500 illegal retail stores in Manhattan, including four or five of them on the same block. So we’re clearly not going to over-saturate the market out of the gate with dispensaries.

Looking at the alcohol model, it’s not unreasonable to project that at about 2,000 or 2,500 dispensaries, you’re going to start to hit probably saturation, in the sense that there’ll be a convenient, local alternative to the illicit market for anybody who wants to (buy marijuana).

Again, we’re not going to cap it, but you’re going to have restrictions relative to churches and schools and 1,000 feet from other dispensaries, that’s all going to start to limit the ability to go to go much quicker.

What’s the timeframe for when New York industry regulations will be finalized and done? 

The regulations that we filed for public comment, we’re really trying to get them done by our May 11 board meeting. If we get it done by then, we should be able to file final regs by the end of August. Then we can start opening the general application period within a couple months of that.

These are all tentative dates, but in the fall, after Labor Day, that’s when we can start to award more dispensaries.

But it’s not like we’re going be able to review a thousand (applicants) because we’re also having to review the growers and the distributors and all these other licenses (simultaneously). That’s the biggest obstacle, is just the time it takes to review everybody.

It allows for a phased rollout to a certain extent, so we don’t have a thousand people all looking for dispensaries at the same time. We have like 100, and then another 100, and then a couple months later, another 100. Then you don’t have 500 people descending on a county and all scrambling and fighting for space and bidding up the price.

Is OCM considering making changes to how existing medical operators can participate in the rec market? If OCM doesn’t make those changes, are you concerned about possible legal action by the medical licensees? That was something that Boris Jordan from Curaleaf floated in January. Are changes even being considered?

First of all, there’s that carveout (for the 10 medical marijuana licensees), where they have an exception (and can be vertically integrated), which makes it difficult to fulfill the mandate we have from the cannabis law. They have large production already ready to go. They know how to do the business, they’ve helped build the medical programs. So we’re 100% aligned with getting them in.

It’s always been three main variables: How big is your grow? How much will you pay for the privilege? And how quickly do you get your dispensaries into the market?

So we threw out a proposal, which was, what about waiting a bit to get in so people can build out? What about $20 million? What about 100,000 square feet? And we’ve gotten some comments.

I don’t think the R.O.’s like it very much, but we’re still going through the comments.

It’s a weird position to be in. Everything else is a competitive process for people to apply, and it’s all objective and accountable. Here, we’re supposed to kind of pick these numbers. So we’re still going through it. But absolutely, that could change. It should. It’s entirely meant to solicit public comment on it, and then and then respond accordingly.

What do you make of all the legal California products that are for sale on the illicit market in New York?

Burner distros are the bane of our existence. What you’re really asking about is enforcement. And there’s a long history to the difficulty we’ve had with enforcement.

It’s the usual growing pains of transitioning, and the fact that a bunch of illicit stores jumped in, disregarded waiting in line, and took advantage of the situation.

There are a number of enforcement bills going through (the legislature) that would significantly create more authority for the agency to be able to shut them down, including fining landlords that are renting to known illegal stores.

Most of them know it’s a finite period of time. They’re in that window for a couple of years it takes to rollout the legal stores, and then they pretty much know that they’re going to shut down. That’s my view of it.

We have a very strong enforcement strategy already started. We’re being a lot more aggressive. We sent letters and told them, “You’re going to forego your ability to participate in the legal market if you keep doing this. And then we’re going to shut you down.” And now we’ve started that in earnest.

I think, by the end of the year, we’ll have shut them down, quite frankly, as a sector. I think there’ll be some pop-ups coming in, some that will be litigating something or other. But I do think it’ll be that quick.

It coincides with the with the ramp-up of the legal stores, because what you really want to do is redirect folks from the illicit market to the legal market. So you just give them that option.

The more interesting question is the rate of transition from illicit to the legal market in general. And we’ve had tremendously good data from other states – Washington, Colorado, all well above 90% transition to the legal market. Canada in three years, Quebec, in 3-4 years, 75% of the market has transitioned. So I truly believe, and the data bears out, that when you offer consumers an accessible, relatively priced, comparable product, they will go to the legal market.

What we’ve been hearing is that the really well-established, really difficult to dislodge illicit market – all the messenger stuff, all the home delivery that’s been around for 100 years in New York City – is actually being driven out of the market because of the 2,000 pop-up dispensaries that are flooding the New York market. There’s so much weed in these stores that they’ve actually driven out of the market the delivery folks that we thought we were going to have a hard time getting dislodged.

If you believe that brick-and-mortars are a lot easier to shut down than an invisible delivery system, then you actually may want to actively allow pop-ups to come in, flood the market, disrupt the consumer patterns, and then shut them down more simply, because they’re like fish in a barrel, because they’ve got a brick-and-mortar store.

Thoughts on out-of-state brands entering New York via licensing deals, such as Theory Wellness? That seems to undercut some of the OCM’s priorities, such as bolstering small New York companies.

Actually, counterintuitively, I would say we are hugely amenable to, and encouraging, out-of-state brands to come participate in New York, because we are looking to have the most competitive market possible on the supply side.

It goes back to what I was giving you as the vision. We don’t want you to come in as an MSO and try to build a 250,000 square-foot-average weed grow facility. If that’s the (business model) you’re in, then New York is not where you want to be, because we’re not going to let you do it.

You’re going to go to dispensaries, you’re going to try to go around our two-tier (structure), you’re going to try to push your shitty weed because you have so much of it at shitty prices. So no, if you’re doing that, no. But if you think you have the best weed in the world, then you should come to New York. Because we’ve set up a system where you are more than welcome to compete.

In fact, you can come into New York, you can partner with a processor, and we will give you a processor license, without you having to actually set up processing facilities. It’s called the ‘processor in name only,’ which is just a license so that we know that you’re here as a brand. You can white label with any of our existing processors. You can buy biomass from an existing farmer, or try to apply for a grow license, or buy one.

We’re going to do (true party of interest) analysis, to make sure that you’re not also trying to own the retail sales and essentially game the system. But if you’re willing to compete on the merits, come on in.

We’re looking forward to the competition. We think it’s what’s best. Competition gets you the best product.

In part 2 of this interview, Bernabe delves deeper into the true party of interest rules.