Study: NJ’s glacial pace on legal cannabis licenses may allow illicit sales to flourish

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A recently published industry report warns that New Jersey’s limited number of legal, licensed and regulated cannabis dispensaries may harm the state’s ability to curtail the illicit cannabis marketplace.

Of the 14 states across the U.S. with legalized adult-use markets, New Jersey – with a population of 9.2 million – had the fewest stores per capita, coming in at 0.3 dispensaries per 100,000 people, according to a study done in partnership between cannabis use and education website Leafly.com and research firm Whitney Economics.

Though the state launched recreational cannabis sales in April, illegal street sellers still command more than 80% of the market, researchers said. As of July 1, the 26 legal adult-use and medical cannabis stores licensed and operating in New Jersey captured less than 20% of legal sales, the report found.

By contrast, Montana and New Mexico, which also kicked off recreational sales this year, have significantly more stores, enabling them to command a greater share of the total demand.

According to the report, Montana had 39 stores per 100,000 people and captures 78% of sales, while New Mexico’s six stores per 100,000 residents handled 75% of total demand.

After examining a variety of sales, population and adult-use market data from states with legalized recreational cannabis retail markets, researchers found a strong correlation between legal cannabis stores per capita and legal market capture. According to the study, states with more legal, licensed and regulated stores had more success in putting illegal cannabis sellers out of business, while those with fewer dispensaries tended to have the most street dealers.

Shaya Brodchandel, president of the New Jersey Cannabis Trade Association, said, “The promise of legalizing cannabis was that it would allow those that for years operated in an illicit market system to become part of an exciting, growing and legal industry. State regulators prioritize those who wish to transition to the legal market and generate taxes for the state, while strictly enforcing and shutting down those who continue to operate illegally.”

Brodchandel, who is also the CEO of Harmony Dispensary added, “While I’d love to see things moving faster from a regulatory perspective, I also have to acknowledge it takes time to build a new marketplace the right way.”

Leading up to the start of New Jersey’s official launch of the recreational marketplace, 71% of municipalities opted out of permitting the sale, cultivation, manufacturing and distribution of cannabis. That has left adult consumers with few legal options and ultimately created “an economic protection zone for illegal street sellers to continue business,” the report said.

By banning cannabis businesses, local officials indirectly encourage adult consumers to purchase illegal products, put public health at risk by allowing circulation of untested products and sustain illegal sales to local teens, the report said. Doing so also inhibits local job creation and limits tax revenue opportunities, as well as continues a losing war on drugs.

Some officials believe those decisions to opt-out should be reconsidered. After seeing neighboring Rochelle Park collecting 2% in local tax revenue from every sale at the thriving Ascend dispensary, Paramus Mayor Richard LaBarbiera wondered why his borough isn’t doing the same.

The Democratic mayor has said he believes it is “a wasted fiscal opportunity for Paramus” and “reckless and inappropriate” for officials to decline “this type of windfall and not pass some of those gains on to taxpayers.”

But in August the borough council, which has a Republican majority, tabled a proposal by the mayor to amend Paramus’ existing medical cannabis ordinance to include recreational retail.

Location, location, locations

Meanwhile, other parts of New Jersey are struggling with how best to incorporate the new businesses within their communities.

Citing public concerns, the Hoboken City Council has taken steps to limit the number of recreational cannabis businesses allowed in the city, as well as where those establishments can set up shop. The changes enacted in April include a cap of six dispensaries citywide, no more than three per ward and no cannabis businesses within 600 feet of a school or early childhood learning center.

Besides high start-up costs and access to capital, location is one of the biggest challenge entrepreneurs face when it comes to establishing themselves in New Jersey’s emerging cannabis industry.

For Maxwell Thompson and Lauren Jordan Chang Thompson, finding a suitable place to open their proposed Blue Violets LLC dispensary wasn’t easy and took five months to find a property.

The married couple from Weehawken recently secured all the necessary local approvals from the City of Hoboken to open a microbusiness on Washington Street and is now pursuing a license from the New Jersey Cannabis Regulatory Commission.

“The biggest challenges were first finding the property, then moving through the local board approvals,” said Chang Thompson, who added that the process, thus far, has taken nearly 10 months.

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“As small business owners we’ve been trying to do as much as we can on our own so that we have as much of our savings as possible to invest into our store when we finally get our license from the state,” said Chang Thompson, a registered nurse. “It’s tough for us to pay rent on a space for that long without being able to open, but we did the math and felt if everything went just right, we could manage it for a bit. But there have been plenty of delays, so we’ve had to be very careful with our expenses for both the store and our personal lives. It’s all the same money for us, so we’ve had to put a lot of things off for now.”

“On top of that, we were bullied by a vocal anti-cannabis minority throughout most of the local approval process,” she said. “We weren’t really prepared for that, but we managed. It helped that the majority of people in our city were supportive.”

Maxwell Thompson believes there are a few ways to make the entire process smoother for applicants. “At the state level, more transparency from the CRC on exactly where applications are in the review process would help. In the submission portal today, an applicant’s status will simply say ‘Submitted’ and never change with an actual progress tracker. Knowing what documents are being reviewed and what remains would be helpful in better estimating timelines,” said Thompson, an attorney.

“At the local level, municipalities may need to do a better job of protecting their local industries as they are launching them. Rule changes, unclear instructions, and political pandering have all led to calamity in our situation, and we’ve heard it’s the same in many other towns as well,” he stated.

To date, the CRC has issued nearly 1,700 conditional cannabis licenses, including more than 900 to potential dispensaries. After receiving a conditional license, applicants have 120 days to find a location and get municipal approval before converting to a standard, annual license.

At its Oct. 27 meeting, the board signed off on 297 conditional licenses, as well as the first 18 annual adult-use cannabis business licenses – 10 of which were conversion applications to annual licenses and eight annual license applications.

CRC Chairwoman Dianna Houenou described the approvals as “a special milestone for the commission and for New Jersey’s new legalized industry” and part of their continued effort to set “good groundwork.”

During his monthly call-in show with WNYC on Oct. 31, Gov. Phil Murphy said he believes the administration and regulators are working hard on establishing the market but admitted it is taking “longer than any of us would like.”

“But they’re doing a really good job with things such as conditional licenses … to people [who] are overwhelmingly women, minorities and veteran owned,” the governor stated.

Murphy went on to say, “I don’t want an industry where it’s just the big guys. They can be part of it, for sure, but I want everybody, particularly the folks who are impacted so badly by the war on drugs.”

Currently, eight out-of-state entities own and operate all 20 dispensaries licensed to sell adult-use cannabis across New Jersey.

A key aspect of the state’s cannabis law is that at least 70% of tax revenue generated from recreational sales be invested into impact zones, which are communities with higher-than-average unemployment rates, crime indexes and cannabis arrests.

Following a recommendation from the CRC and approval by the Department of Treasury, some of those funds are being allocated to the New Jersey Business Action Center to set up a Cannabis Training Academy for those who are looking to break into the industry. The 10-week program, which is scheduled to roll out in the first half of 2023, will provide no-cost technical assistance, training and mentorship to applicants pursuing recreational cannabis licenses.

The proposed curriculum includes modules designed to help participants decide if a cannabis business is right for them and will include business plan development as well as a Legacy to Legal course.

Some program resources will be targeted to “Specially Designated Categories,” which include social equity businesses, diversely owned businesses, microbusinesses, and Impact Zone businesses, according to the NJBAC.