“It is vital that policies aim to promote a fairer market and reduce the risk of the cannabis industry becoming an oligopoly.”
By Ari Hoffnung, Bridge West Consulting
Merger and acquisition (M&A) activity in the New York City cannabis market is at an all-time high. Four of the ten vertically integrated medical cannabis companies in New York are actively seeking regulatory approval to sell their New York license. While the terms of each acquisition vary, analysts have estimated that the value of a New York cannabis license could be worth as much as $300 million.
There are many variables driving these blockbuster numbers — including the value of the company’s real estate assets and intellectual property — but the most valuable aspect of these vertically integrated licenses is their scarcity. Simply put, the fact that New York, a state of 20 million people, only issued ten vertically integrated licenses and chose to ban vertical integration for all new licensees for adult use makes those ten licenses extraordinary valuable.
At the same time that medical companies are benefiting from their licenses, New York’s cannabis regulators, who intend to give 50 percent of adult use licenses to social participation companies, are looking for new solutions to give those companies the estimated #1 To provide $1 billion to startups with the capital needed to successfully launch those businesses.
At first glance, M&A activity is unlikely to be viewed positively by social equity entrepreneurs and other stakeholders. Nine-figure transactions raise serious concerns about the ability of smaller players to compete effectively against much larger and well-capitalized operators. That’s why it’s important to find a way to ensure these mega transactions are used to help smaller operators thrive.
To that end, I propose that New York introduce the nation’s first cannabis license transfer fee (“CLT”) on license sales of $10 million or more. The CLT fee would be a percentage fee charged on the transaction amount. This fee would help recapture some of the value the state government created by issuing a limited number of licenses rather than the operators themselves.
Here’s an example of how the CLT fee would work: If a company with a New York cannabis license sells for $300 million and New York adopts a 10 percent CLT tax rate, the state would impose a $30 million transaction fee -Collect dollars from buyer. These funds would then be used to fund social justice businesses through government loans and incubator programs.
To be fair, the CLT fee might allow for certain deductions. For example, if the $300 million sale included $50 million in real estate assets, equipment, and inventory, that amount could be deducted from the purchase price. Only the $250 million “net license value” would be subject to the CLT levy, which would generate $25 million in government revenue.
While there does not currently appear to be a similar license transfer fee in the cannabis industry, there is precedent for taxing assets at the time of transfer in order to generate revenue for the state. For example, New York City levies a 0.5 percent Taxicab License Transfer Tax on locket sales, and New York State levies a “mansion tax” at rates ranging from 1 to 3.9 percent on real estate transactions.
State policymakers would need to determine the appropriate CLT fee rate. This would require a careful balancing act. On the one hand, if the tax rate is set too low — say 1 percent — the fee might not generate significant revenue for the state. On the other hand, if the fee is set too high — say, 20 percent — the fee could discourage the transfer of cannabis licenses.
I estimate that if New York levied a CLT fee at a rate of 10 percent, the state could generate between $50 million and $100 million in new revenue over the next 12 months. In other words, the CLT fee is a mechanism by which M&A activity could be leveraged to help social justice entrepreneurs thrive.
To be clear, I believe the CLT fee should be levied not only on sales involving the ten vertically integrated licenses, but also on sales of all future cannabis licenses issued by New York. This will help create an ongoing revenue stream for social equity businesses and ensure that entrepreneurs who have benefited from a state license will help pass it on to those following in their footsteps.
Every M&A headline should serve as a reminder that we need to adopt policies like a CLT fee. It is vital that policies aim to promote a fairer market and reduce the risk of the cannabis industry becoming an oligopoly. Otherwise, Main Street’s David’s Craft Cannabis won’t stand a chance against Wall Street’s Goliath Cannabis Company.
Ari Hoffnung is the Founder of the Opportunity Grows Cannabis Accelerator, created in partnership with SUNY Binghamton’s Koffman Incubator to help entrepreneurs thrive with social justice. He is CEO of Bridge West Consulting and was formerly CEO of Vireo Health of New York and Associate Comptroller of New York City.
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