High Hopes: Will Prop 207’s Aspirations of Empowering Minority Communities Go Up in Smoke?

Chris MalloyJanuary 14, 2021
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Grow room at Mohave Cannabis Co.; Photo by Christopher Mortenson
Grow room at Mohave Cannabis Co.; Photo by Christopher Mortenson

Proposition 207 will legalize marijuana in Arizona, but without sound policy, its aspirations of empowering minority communities will go up in smoke.

For months, Susana Holguin Espinoza has been shopping for leases for her dream business – a cannabis dispensary. When she’s not cooking, cleaning, driving and otherwise managing her household of nine children, the divorced 47-year-old Glendale resident works the phone with wholesale growers and potential investors, determined to claim one of the roughly three dozen new dispensary licenses the State of Arizona will grant applicants in the wake of Proposition 207, which legalizes 21-and-over “adult use” marijuana in Arizona.

The law, which passed by 20 voter percentage points in November, will do more than put THC-laced gummy bears in the hands of consenting adults, however. Propelled by funding from existing medical dispensaries and industry supporters – including a $1.425 million donation from Harvest Enterprises, which owns 15 dispensaries in the state – Prop. 207 also frames itself as a vehicle of social and criminal justice reform, one that would statistically benefit racial minorities by expunging certain past offenses and de-incarcerating low-level offenders, and feed a community reinvestment fund with a 16 percent excise tax on recreational pot.

Moreover, Prop. 207 promises to share the riches of recreational pot by opening up the rapidly consolidating industry to new, independent owners, primarily by awarding social-equity licenses to “communities disproportionally impacted” by Draconian pot laws – presumably, lower-income people and minorities.

The social-equity provision is where Espinoza – a proud Donald Trump supporter who once co-owned her ex-husband’s busy dental practice – hangs her hopes for a dispensary. But is she the model candidate? Is she at the right income level? Does she live in the right neighborhood? Will her previous work experience in the dispensary industry factor?

All are unknowns – at least until the Arizona Department of Health Services narrows and calcifies Prop. 207 in an ongoing rulemaking process set for April 2020 completion. It will be a critical four months for Arizona’s nascent recreational pot industry, because Arizona is not the first state to mix in a spoonful of social-justice sugar to make the marijuana medicine go down – and the results have not always been effective, or ethical.

Either way, Espinoza is keeping her eye on the ball. “Right now, it’s happening and it’s really exciting,” she says. “However, at the same time we’re waiting for people to come up with the rules.”

Following the passage of medical marijuana in 2010, Arizona started to construct a cannabis industry based on a small, limited number of licenses to grow and distribute – a regulated medical market, not a consumer market. Arizona issued dispensary licenses in two rounds, in 2012 and 2016. These two distributions brought the total number of licenses to approximately 130. Almost all of them were doing business as operating dispensaries by 2020, with seven left idle by the holders.

In the early days, the industry was dominated by single-license owner-operators who – along with hundreds of their fellow aspiring pot moguls during the initial phase – paid a $5,000 fee simply to file an application. But the industry has gradually shifted toward consolidation. According to Ryan Hermansky, a Flagstaff-based dispensary owner who was elected president of the Arizona Dispensaries Association (ADA) in November, the division between independent dispensaries and conglomerates – between mom-and-pops and the larger corporations, some of the latter trading on the Canadian Securities Exchange – is roughly even as the Arizona industry enters its second decade.

“We’ve seen that for seven years now,” he says. “No question consolidation has happened. That’s what’s created dispensaries that have two, three, 15 locations.”

Of course, corporate encroachment makes perfect sense, when one factors in the spectacular revenue generated by legal pot in Arizona. In 2013, medical pot sales totaled $40 million. That number grew tenfold to $400 million by 2018, and mushroomed another 25 percent the following year, to a cool half-billion dollars in annual revenue. By November 2020, there were 301,000 medical cannabis cardholders, a customer base set to multiply with the coming of adult use, given the growth rate and population
of Arizona.

Prop. 207 paves the way for north of 150 adult-use licenses. The approximately 130 present owners of medical licenses have a fast track to obtaining adult-use licenses, according to those familiar with the law, and should have them early in 2021. In addition, some 10 new licenses will be awarded in parts of the state lacking current dispensary access. Finally, 26 “social
equity” licenses will be assigned, these falling under Prop. 207’s Social Equity Ownership Program.

Glendale resident Susana Holguin Espinoza hopes to procure a dispensary license.; Photo by Carrie Evans
Glendale resident Susana Holguin Espinoza hopes to procure a dispensary license.; Photo by Carrie Evans

The competition for new licenses will be fierce, with hundreds if not thousands of applicants. Each license will be the equivalent of a small lottery win, based on the rising transferable value of the original licenses that were issued in 2012 and 2016.

“If you brought me a suitcase of cash today with $15 million in it, I would have trouble shaking a [pre-Prop. 207] license from a tree,” said Demitri Downing, a cannabis lobbyist and the founder of the Arizona Marijuana Industry Trade Association. Downing says a well-run dispensary – like those of Harvest House of Cannabis, part of the same Canadian corporation that helped bankroll the pro-207 campaign – can produce $1 million in sales per month on medical cannabis alone. This is a big part of why Espinoza and others are so eager to apply.

In distributing the 26 social equity licenses, the state will favor applicants “from communities disproportionately impacted by the enforcement of previous marijuana laws.”

Historically, black people are three times likelier than white people to be arrested for marijuana possession in Arizona, while Hispanic offenders prosecuted in Maricopa County received “significantly longer” prison terms than whites for simple marijuana possession, according to ACLU Arizona.

Uneven pot justice, preferential status for pot licenses. Some pundits have likened it to reparations.

Still, the journey won’t be cheap for the fortunate 26 who do procure a license. Applicants who believe they meet the criteria will pay a process fee of $25,000, according to draft rules released on December 10. The same rules also require that applicants demonstrate $500,000 of funding. Potentially, there will also be legal or consulting expenses. “To get professional help will cost between $10,000 and $30,000,” Downing estimates.”

Ryan Hermansky, co-owner of Flagstaff dispensary Greenhouse, was elected pesident of the Arizona Dispensaries Association in November.; Photo by Chris Mortenson
Ryan Hermansky, co-owner of Flagstaff dispensary Greenhouse, was elected pesident of the Arizona Dispensaries Association in November.; Photo by Chris Mortenson

And then there’s the cost of building and stocking the dispensary itself. Downing estimates startup costs somewhere between the high six figures and low seven figures, depending on the nature of the dispensary and factors like real estate.

One social equity license hopeful interviewed by PHOENIX expects a dispensary to cost $3 million.

Though hard demographic data isn’t available, insiders say the current population of dispensary owners is not particularly diverse.

“No one has ever done an official demographic survey of who owns what,” Downing says, adding: “I have interacted with almost every single license holder since 2012, and I can tell you that there are very few individuals who came from the backgrounds that the social equity intends to help.”

He says he has encountered, among disclosed partners owning licenses, “two or three African Americans, two or three Hispanics, and then a couple of Asians.”

Prop. 207 looks to set the table with more seats. But who exactly comes from a “disproportionately impacted” community, as the measure requires? Potentially millions.

Pot activist Demitri Downing with staff.; Photo by Chris Mortenson
Pot activist Demitri Downing with staff.; Photo by Chris Mortenson

Adam Trenk, director of hemp, equine and cannabis law at Rose Law Group in Phoenix, says we won’t know exactly who will qualify until the rule is finalized in early 2021. Still, he believes DHS is likely to consider
three factors.

The first is the applicant’s demography: race, ethnicity, religion, age and gender. The second is socioeconomic status; lower-income applicants might qualify, even if they aren’t from an impacted demographic group. The third factor is geography – whether an applicant lives in an area with a higher rate of marijuana arrests.

“It will likely be one of the three and probably a combination of the three factors,”
Trenk says.

In essence, we have little specific idea of DHS’s ideal applicant. The first draft of rules, released December 10, did not address social equity.

Espinoza thinks she qualifies because of demographics, as a woman and Latina. She and others believe that further factors will winnow down the applicant pool, like preparedness and industry experience. Managing her ex-husband’s dental practice might push her out of the DHS’s ideal socioeconomic bucket, but it gives Espinoza a grounding in business.

She also has cannabis-specific business chops. In the first days of medical cannabis in Arizona, Espinoza, who has an academic background in psychology, helped run Arizona Organix, an early dispensary in Glendale. She says she was a “mama bear,” doing some of everything, including developing and implementing systems for the shop, which was then wading into a novel, highly regulated industry.

“I got to see the trenches of it all, the people who were so sick and on chemo,” she says. “And then I became a believer.”

cannabis attorney Sara Presler at Mohave Cannabis Co..; Photo by Chris Mortenson
cannabis attorney Sara Presler at Mohave Cannabis Co..; Photo by Chris Mortenson

Though her license is still a dream, Espinoza knows what she would call her shop: De Colores, Spanish for “Of Color,” reflecting the potential shop’s origins and character – different from the dispensaries run by conglomerates.

“We’re going to make it interesting for people of color, to be proud of a place they can say that this is something that my people created.”

Many states that “legalized it”

prior to Arizona similarly implemented social equity programs, and such programs have frequently veered in dark directions.

Sara Presler – a Mesa cannabis consultant, the former mayor of Flagstaff and the owner of a small dispensary in Ohio – notes that “different states have handled social equity differently.” Many times, during the application phase, applicants meet important thresholds, she says. Then they get a license and things change due to lack of back-end enforcement. “Once licensing has concluded,” she adds, “these thresholds kind
of disappear.”

The result? Without support, social equity license holders may lack the capital or business acumen to run a successful dispensary. Worse, in many cases predatory investors gain control of licenses through deception and creative contracting, prying decision-making power from the license holder. In still other cases, a social equity owner may be paid to remain passive, a “straw man,” while behind-the-scenes forces control the dispensary in reality.

Dispensaries ranked by shops owned

1
Harvest HOC
: 15
Trades on Canadian Securities Exchange, has dispensaries in 9 states

2
Curaleaf
: 8
Trades on CES, has dispensaries in 23 states

3
Health for Life
: 8
Has dispensaries in Arizona and Maryland

4
Nirvana Center
: 5
Founded in Arizona, has dispensaries in 4 states

5 (tie)
Bloom
: 4
All in Arizona 

Sol Flower: 4
Based in Tempe

These problems have beleaguered California’s social equity programs, which are different from town to town. Bonita “Bo” Money, the director of the National Diversity & Inclusion Cannabis Alliance, has been involved with cannabis social equity for five years and is working with Los Angeles to address some of its imbalances. She believes that “having a good plan and a good program actually executed are two different things.”

Many hopeful applicants in Phoenix are hip to this reality. Some have even studied how social equity programs have fared in other states. “That’s really what happens,” says Jarrett Maupin, a reverend, civil rights activist, former congressional candidate and figure of some local controversy who has entered the cannabis arena. “In some of those places [like California], they have window dressing for colored folks that are just there – they just rented them.” By this, he means minorities have been used as powerless frontmen, a tactic deployed in California and other states.

One Arizona dispensary owner who asked to remain anonymous recalls talking to an investor in Oklahoma, where pot was legalized in 2018. The investor, who is white, recruited a black person to front the project. “Then, after it was granted, the [investor] paid the straw man to walk away. $50,000, see you later. I guess it sort of worked out for everybody.”

Some insiders remain skeptical, especially following the omission of social equity in the December phase of the draft rules, and recent regulations limiting adult-use marijuana in many cities. Late in the fall, Chandler, Mesa and Gilbert limited adult-use dispensaries to those with dual licenses, meaning licenses for both medical and adult-use sales. These changes, one insider notes, might serve to bar social equity owners, who will probably only be licensed for adult use.

Many social equity applicants, however, are keeping their focus on the dream.

“[Medical use] licenses were not designed for people with normal incomes,” Espinoza says, perhaps forgetting the seven-figure bill awaiting her if she does receive a license. “This was designed for rich, rich, rich people. And all we could be was workers. And now, with social equity, we can own.”

Breathe Deep: AZ Pot By the Numbers

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Even earnest efforts can flounder. “We’re dealing with a lot of license holders who are now in dispute with predatory investors,” Money says of the pot industry in Los Angeles. “They’re trying to get out of the contract.” A good social equity program needs proper guardrails, she says – like mandating that a social equity owner occupy their dispensary’s highest position and hold certain corporate voting rights, and that the city or state vet owner-investor contracts.

Moreover, the application fee, dispensary costs, and other financial barriers to entry are high to the point that they will exclude applicants. Not everybody has $25,000 lying around for an application, not to mention investors at the ready. “It’s really expensive to start up and operate a cannabis business,” Presler says. “There’s this seesaw between the idea of making something fair and just, but I also think you need to be able to have the resources to operate that business.”

Balancing equitable entry with the need for experienced operators in an expensive industry with tight regulations, not to mention the legal and tax gymnastics given the federal illegality, presents a conundrum. “This is exactly why social equity programs have struggled,” Presler says.

Perhaps inevitably, many of the social equity licenses distributed in 2021 will end up in the hands of Big Pot, i.e. multistate corporations.

For his part, ADA president and Flagstaff single shop owner Hermansky has no desire to sell out – or to  “scale up” and join the ranks of Big Pot, for that matter. “As you scale up and have multiple locations, it’s just physically impossible to spend time at all your locations and truly know what’s going on,” the co-owner of Greenhouse of Flagstaff says. “We’re able to listen to patients directly and help them get their needs met.”

In the wake of Prop. 207, Hermansky expects consolidation to continue. However, even as the owner of a mom-and-pop dispensary, he welcomes consolidation, which he says only further sets his shop apart. “I don’t see a downside to it,” he says. “It allows for a competitive marketplace… Ultimately, there’s a lot of different options out there, so patients are able to choose which type of experience they want.”

Over time, licenses have been sold into the hands of fewer and fewer owners. Some groups now possess many. Some larger entities, like Harvest House of Cannabis, also operate in states as far as Pennsylvania. At the opposite end, some local cannabis shops, like Giving Tree Dispensary in North Phoenix, are small and independent, retaining the quirks and style of owners.

Besides redressing past criminal justice ills, social equity has the potential to enrich the owner-operated, independent character of the market.

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