San Francisco cannabis market expands slowly but surely via social equity program

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San Francisco is the birthplace of the modern medical marijuana industry.

But the city’s cannabis industry has been fairly stagnant the past two decades, with regulators approving only a few dozen storefront dispensaries to sell MMJ.

Over the past few years, however, there’s been a slow but steady march to significantly expand the industry, potentially by scores – or even hundreds – of new licensed businesses.

That’s because, after California legalized adult-use marijuana in 2016, San Francisco leaders revamped the rules governing the city’s industry and adopted a new system that will issue business licenses both for so-called “legacy” retailers that have been operational for years as well as social equity applicants and incubators.

That eventually led to the opening on Oct. 9 of the newly remodeled Stiizy Union Square shop, which is owned and run by Cindy de la Vega, a Latina and qualified social equity applicant who partnered with the Shryne Group.

De la Vega’s is one of 11 new social equity permits that have been issued to date by the San Francisco Office of Cannabis. And the agency has a long way to go in processing applications.

The office, which has received 380 cannabis business applications as of October, will be issuing permits on a rolling basis for eight different license types:

Cultivation.
Delivery retail.
Distribution.
Microbusiness.
Manufacturing.
Retail storefront.
Retail with consumption lounge.
Testing lab.

As of October, an agency spokesman said, 139 applications had been processed, and 24 were in the final phase.

One company, FGW Haight, is so close to the finish line that the company announced it had already been purchased – by Oakland-based Harborside for $2.1 million – before it even received its city or state permits. That shop is slated to open sometime in the first half of 2021.

That deal suggests there’s considerable interest in the San Francisco cannabis market from major companies, particularly because there’s room for the industry to grow.

It also means the current 79 legal retailers in the city – 39 stores and 40 delivery companies – will face new competition.

The main question is: How many companies will eventually open and when, since it takes most new applicants years to become licensed?

“The industry is transforming, but it’s transforming at a snail’s pace,” said California consultant Menaka Mahajan, who has advised several marijuana applicants in San Francisco.

“The people I tend to talk to … are in it to win it. They’re hanging on, and they’re very determined to make it through this process.”

Hurdle after hurdle

According to a step-by-step guide from the San Francisco Office of Cannabis, companies must complete at least eight procedures before they can obtain a city permit. Each step can take weeks to months.

Among the more expensive requirements – particularly for those hoping to win a retail license – is having a location ready to go and holding on to that location during the entire permitting process.

That alone can become a disqualifying hurdle, because many social equity applicants can’t afford hundreds of thousands of dollars – or even millions – to rent a commercial space for that long, let alone pay for required build-outs.

“If you’re completely dialed, and you know exactly what you’re doing and you’ve got a friend in every (city) department, two years is your minimum timeline. That’s your best-case scenario,” said Johnny Delaplane, the president of the San Francisco Cannabis Retailers Alliance.

“I think for most people it’s going to be three to four years just to get from applying to opening their doors for business.”

Delaplane, who also is a partner in FGW Haight, said that shop has taken about 2½ years to get where it’s at today – and that shop is still months from opening.

Audie Vergara, head of corporate communications for the Shryne Group, said it took his company roughly 3½ years to get the new Union Square shop open.

That included several months of construction delays because of the coronavirus.

But the morning the doors opened, Vergara said, “we had a line around the corner, which really surprised us,” because the business didn’t expect as much of a crowd amid ongoing coronavirus concerns.

Moreover, the Shryne Group has plans for two more social equity-licensed shops in San Francisco, including another that’s slated to open before Christmas.

The social equity partner is professional boxer Karim Mayfield, a San Francisco native.

Vergara said he’s not sure how many other companies have similar plans, but he reckons it’s a decent number.

“I don’t think San Francisco is over yet, in terms of action and activity,” Vergara said. “If we haven’t stopped our activities, we can’t be the only ones.”

Uncertain changes

It’s unclear how many of the 380 applications will make it to the finish line, particularly among retailers.

The San Francisco Board of Supervisors is weighing a proposal – introduced in February – to cease accepting new retail marijuana license applications.

The city also already limits corporate interests in retail operations to a maximum of four, meaning operators such as Harborside and the Shryne Group wouldn’t be able to buy up all of the shops, even if they wanted to.

It’s also still unclear how many of the 380 remain viable.

Many likely already dropped their plans or have been unable to afford to wait for the city to process their paperwork, Delaplane said.

“I’m sure (the cost of waiting has) narrowed the pool. I don’t know how much,” he said.

“But there are certainly projects you hear about being abandoned because people can’t afford to pay the rent anymore, or their initial financing partner dropped out.

“So that’s going to have an impact on how many dispensaries there’s going to be in San Francisco, ultimately, is who has the staying power.”

Social equity applicant Alexis Bronson is an example.

He filed six business license applications and tried lining up financing with multiple big-name companies – including multistate operators MedMen Enterprises and Harvest Health & Recreation, and even marijuana publisher High Times – before they all pulled out and forced him to find another investor.

Bronson, who’s been trying to get a license for about 2½ years, estimated he’s roughly $250,000 shy of the capital he needs to open his shop.

Even if he were to land an investor tomorrow, he said, it would still take him months to get his store open.

But he’s not giving up.

“As long as the application is on file, I may come out of this,” Bronson said. “You just have to keep fighting somehow.”

John Schroyer can be reached at johns@mjbizdaily.com