The Arizona Department of Health Services (ADHS) awarded the state’s 26 highly sought-after social equity cannabis licenses April 8 marking the beginning of each licensee’s journey to opening an adult-use dispensary, and, if they so choose cultivation and processing operations.
It’s been a long road for these social equity licensees, but perhaps an even longer road lies ahead as they work to launch their businesses.
Arizona voters approved adult-use cannabis legalization in the November 2020 election, and that measure, Proposition 207, allowed the state’s existing medical cannabis operators to seek licenses in the adult-use market starting in January 2021.
Prop. 207 also created 12 new adult-use dispensary licenses in rural counties that have one or no medical cannabis retailers, as well as the 26 social equity licenses reserved for applicants impacted by the war on drugs.
ADHS then created the requirements for the social equity licenses, declaring that they would be awarded to applicants who met three of four qualifying criteria, which focused on household income, adverse impacts from prohibition and residency requirements.
Last fall, ADHS announced that applicants who have recently lived in one of 87 qualifying ZIP codes would meet the residency criteria for the licenses.
A lawsuit, filed in part by the Greater Phoenix Urban League, sought to challenge the licensing requirements, alleging that the state’s rules governing the social equity licenses were deficient, lacking provisions such as a prohibition against license transfers and a requirement that licensees’ expenditures and profits remain in their communities.
Maricopa County Superior Court Judge Randall Warner ultimately dismissed the lawsuit in February, paving the way for ADHS to award the licenses.
Meanwhile, more than 1,500 applications poured in for the 26 licenses, which were awarded April 8 in a randomized lottery drawing.
So, what comes next for these freshly licensed businesses, which now have 18 months to open their adult-use dispensaries?
Sara Gullickson, founder and CEO of consulting firm The Cannabis Business Advisors, says licensees should first figure out where they will secure the capital to launch their business, as well as who they can recruit for their team to provide operational expertise.
“You have to fine-tune your business plan and your marketing plan and understand what your approach for the market is in the sense of how you’re planning on dispensing and what’s going to make you different, as well as cultivation and manufacturing,” she says. “I think that’s the first thing people are going to need to do if they haven’t already established the capital that they’re going to need to raise and obviously spend on the actual operations, and then the team surrounding you to do so.”
Licensees must also secure real estate for their operations, which largely depends on local ordinances that are still being drafted in many of Arizona’s municipalities.
“Real estate is one of the more critical issues,” says Berekk Blackwell, COO of Scottsdale-based Zoned Properties, which provides commercial real estate services to the cannabis industry.
All of the municipalities that opted into Arizona’s medical cannabis program crafted zoning ordinances to govern the medical cannabis businesses within their jurisdictions, Blackwell says, and many of these municipalities have redrafted or updated their ordinances to address the adult-use market.
Many municipalities that allowed medical cannabis businesses updated their ordinances to also allow “dual licensees”—medical cannabis businesses that ultimately became licensed to also serve the adult-use market.
The 26 new social equity cannabis licensees, however, are strictly adult-use businesses, so many municipalities must now draft new ordinances to govern where and how they want these operations to set up shop.
“There could potentially be a lot of delays with municipalities drafting these updated ordinances to tell social equity license winners where they’re allowed to operate their businesses,” Blackwell says. “It’s important because they have 18 months [to open their dispensaries]. Tucson last week came out and said they’re going to take a deep breath and really take a close look at how they want to do this. They estimate that it’s probably going to take them the next six months. So, if you wait six months, now you’re down to 12 months to get your license open [with] the consequence being that you might lose your license if you don’t get open in 18 months.”
One of the larger municipalities in the state, Tucson’s announcement could sway others to take the same approach, Blackwell says.
“Tucson’s an interesting case, just given that it’s such a big municipality and some of the rhetoric that was used in their statement last week to city council members was very much in the tune that they are interested in seeing … what the results are—basically, who ends up winning these licenses?” he says. “I think at the end of the day, their intent is to try to enforce more of a social equity component in terms of zoning, so trying to put these businesses in areas that might have been negatively affected by the war on drugs and things like that.”
The social equity cannabis licensees should focus on securing real estate in municipalities that have finalized their adult-use cannabis ordinances, Blackwell says, but should also think about where, geographically, they would prefer to operate.
“Then, from there, it’s the typical cannabis real estate stuff—looking for parcels [and] available properties, trying to negotiate a deal with a property owner, and starting that special use permit process with the city, which all … can take time,” he says. “My piece of advice would be to definitely start early and get prepared on that front.”
Once licensees have locked in real estate, the focus should turn to other aspects of the business.
“On the dispensary side of it, once you establish your real estate, your tenant improvements and your interior design, then obviously you have to expand your team, think about hiring, think about standard operating procedures, and think about branding and marketing and all the things that go into opening up a business,” Gullickson says.
While licensees must open their dispensaries first, they can also choose to be vertically integrated with cultivation and processing operations. Or, Gullickson says, licensees can lease these additional licenses to other groups.
As the social equity conversation continues in Arizona—and in other state-legal markets across the country—Gullickson says more is needed to ensure that social equity applicants have the tools they need to ultimately be successful in the cannabis industry.
“Social equity is such an interesting conversation because on one side of it, it’s this feel-good thing that the different government agencies want to be a part of, and then on the other side of it, this industry is very, very, very capital intensive,” she says. “We talk to so many social equity candidates that don’t even have the money to apply.”
In the future, Gullickson says that social equity programs should have funds backing them to provide entrepreneurs with the necessary capital to launch their businesses, especially since the industry is excluded from federal funding and small business loans.
“Go into it in a cautious way and go into it with your eyes wide open,” she says. “I think everybody’s misconception about the industry is that everybody is printing money, and everybody is making millions, and that’s just not the case anymore. You have to have a solid business plan, solid operators and a solid entrance into the market in order to be successful. So, surround yourself with the right people. Surround yourself with people who have ethics and morals and who have like-minded goals. At the end of the day, just like every other business, this business takes a lot of hard work and dedication, and it’s not something where you’re just going to become a millionaire overnight.”
Despite the challenges ahead, Gullickson says opportunities abound for these 26 social equity licensees.
“Obviously, it’s a huge opportunity for people that have potentially been wronged by cannabis criminalization,” she says. “They now can get into the legal industry. … The people who get these have the opportunity of a lifetime, really.”