Arizona tried adding equity into Marijuana Licensing. Dispensary chains still took over
Would-be partners have offered Abel Ochoa "crazy amounts of money" for the social equity marijuana license he and his cousin own.
"I had somebody offer me $17 million," he said, laughing. "If I would've just took the money, like yeah, that would've been nice. But what, what would've been the purpose behind it?"
He and his cousin, Diana Pineda, turned them all down. Ochoa instead borrowed a nominal amount of cash from his parents, who own a small restaurant. He and Pineda are now the only social equity license holders, out of 26, who both own and control their own dispensary.
The other 25 are controlled, and in many cases owned outright, by partners — mainly multistate cannabis companies.
Arizona voters created the social equity license program by approving the state's recreational marijuana law in 2020. It defined the program as aiming "to promote the ownership and operation of marijuana establishments and marijuana testing facilities by individuals from communities disproportionately impacted by the enforcement of previous marijuana laws."
Advocates of legal marijuana and social justice activists warned at the time the program only would add to the tally of dispensaries owned by wealthy corporations. And that's just what happened.
The social equity licenses come with more zoning headaches because they only allow for recreational sales. But they were still highly sought after as some of the last licenses available, since the state has a cap of one recreational or medical license per 10 pharmacies. Arizona has 169 issued licenses, with only a few still not in use.
Some hopeful social-equity applicants, often people of color, claim they were victims of predatory financial schemes. Rene Mendoza told The Arizona Republic how he and his partner lost his license after a dispute with their business partners and were hit with a $638,000 debt.
Aggrieved parties have sought help from the courts or the state Department of Health Services, which oversees marijuana regulation in Arizona. But the state agency, which set the rules for the program, only can play a limited role in how it works, DHS acting Director Jennifer Cunico said in a September 2023 letter.
The agency's authority "does not extend to resolving business disputes among or between licensees," she wrote in the letter to Tucson Democratic Rep. Alma Hernandez, who had inquired about problems with the program, "nor are we responsible for investigating fraudulent or exploitative business practices."
Program had been predicted to fail
Arizona is hardly alone in failing to create a successful social equity cannabis program.
“Of the 15 state social equity programs, not one has resulted in an equitable cannabis industry across all four pillars of equity (industry, justice, community, and access),” according to a 2022 report by the Minority Cannabis Business Association.
Reasons for the failures include lack of funding for startups, unwillingness to apply race-based criteria in programs and caps on the number of licenses, said the group, which was founded in 2015 to promote diversity in the industry.
Arizona’s social equity program was a way for the ballot measure’s authors to address the historic imbalance in marijuana arrests among racial minorities. Statistics, including those collected by the state health agency, show Black, Latino and Indigenous people in Arizona are arrested for marijuana-related offenses at a higher rate per capita than white people. Numerous media reports also have highlighted complaints that dispensary owners are disproportionately white men.
Members of the dispensary industry wrote Arizona’s law but left details of the social equity program to the state health agency. With suggestions from community members, the agency drew up rules that required license applicants or their family members to have an expungable marijuana offense in their past, have an income below 400% of the federal poverty line, live in an area disproportionately affected by marijuana enforcement, take a marijuana business training class and pay $4,000 to enter their application in a lottery.
A qualifying applicant had to own at least 51% in any group or corporation that applied, though the rules put no limit on selling a license once it was obtained.
Acre 41, a company consisting of women of color hoping to obtain a license, and the Greater Phoenix Urban League, a nonprofit that helps minority communities, sued the state over the rules. They alleged existing marijuana companies would buy out the token license holders without better safeguards.
Maricopa County Superior Court Judge Randall Warner dismissed the case in February 2022, declaring the DHS rules were “reasonably designed.” His ruling cleared the way for the April 8, 2022, DHS lottery for the licenses. More than 1,300 people entered, many backed by deep-pocketed patrons.
They “never had a chance,” said Celeste Rodriguez, one of the principals of Acre 41. Of the 26 people who won the license lottery, she said most sold their licenses or control of future business operations for much less than their value. At least four received as little as $35,000 for their licenses, she said.
Rodriguez is working with aggrieved current or former license holders, has reached out to lawmakers and plans to contact Gov. Katie Hobbs to try and fix the “nightmare” of a program. She’s hoping Hobbs can revoke some of the licenses and is lobbying for a new law that takes marijuana oversight away from the state health agency.
Rodriguez said Acre 41’s mission is now “to rectify the unjust that has taken place.” She encourages those who believe their license was taken in a “predatory agreement” to contact the state Attorney General’s Office and file a consumer fraud complaint.
For couple, license win started financial trouble
Mendoza, of Tucson, said he and his partner Anavel Vasquez both worked as wildland firefighters in her native Mexico for a time. But he said jumping into the cannabis business proved even riskier, at least for financial safety.
After an arbitrator's decision last year, they have lost the ability to use the social equity license Vasquez won to run a business and were ordered to pay attorneys' fees of $638,000, which they can't afford. The winner of the decision, Mike Halow of Story Cannabis, is also fighting Mendoza in court.
"We'll be over $1.5 million in debt if they win this one," Mendoza said.
He and Vasquez have average financial resources and met the criteria for the social equity program. Vasquez's son once was arrested for possession of a small amount of marijuana. Mendoza grew up in Arizona and has worked for three Arizona firefighting agencies, he said, including full time for the Rio Rico Fire District. They also run a CPR training company operating in both English and Spanish. Vasquez speaks limited English.
They responded to a flyer by Halow's company inviting them to own a marijuana business "at no cost" to them.
"'We’ll train you, we’ll teach you, we’ll provide all the funding,'" Mendoza said of the offer. "Once we got that license, it was different. They started threatening."
Only later did they find out a term sheet for a business contract was tucked into electronic documents that were part of the license application, which Mendoza said they signed without consulting a lawyer. Under the agreement they signed, they were members of a company called "Juicy Joint." To meet the criteria for the social equity license, Vasquez would retain 51% ownership of the license and company while Halow and his team, including two companies, Helping Hands LLC and Investing in the Future LLC, made up the other 49%.
Halow's associates met them in a hotel room, offering $35,000 cash in a duffel bag to give up their 51%, he said. Mendoza never met Halow in person. Their refusal kicked off a legal fight that, according to the term sheet they signed, had to be resolved out of court in arbitration.
The result was a July 2023 decision by arbitrator Shawn Aiken that went the wrong way for Vasquez and Mendoza.
His decision states Vasquez "recalls feeling threatened and intimidated" in one of two hotel meetings. "Whether justified or not," she refused to sign an operating agreement with Halow's team at that time, Aiken wrote. The decision said Vasquez then claimed Halow had felonies on his record and other issues that prohibited her from partnering with him. But Aiken found Halow's record didn't contain "excludable" felonies and rejected her other defenses.
He determined that Vasquez had "secretly," and wrongly, sold Juicy Joint's ownership of the license for $2.7 million to a company operated in part by Moe Asani of Tucson's Downtown Dispensary. Without the license, under state law, Juicy Joint couldn't operate a marijuana business.
"Under either partnership or fiduciary duty law, she breached her duties of care and loyalty to Juicy Joint," Aiken wrote in the decision.
Mendoza said he had received 30% gross of the $2.7 million as a "loan" in case a plan to start a dispensary with Asani takes root.
The arbitrator's decision reversed the deal with Asani, gave the license back to Juicy Joint and removed Vasquez from Juicy Joint. The company name is now tied to the new Story of Kingman dispensary.
Story Cannabis, which runs the dispensary, controls six of the 26 social equity licenses, more than any other company. Neither Halow nor Jason Vedadi, the CEO of Story Cannabis, returned calls from The Arizona Republic.
The company formed by Asani and Vasquez sued Halow, Juicy Joint and its other partners and the state health agency, which Vasquez and Mendoza blame for meddling in the case to the benefit of Halow. The case is set for oral arguments on Feb. 6 in Maricopa County Superior Court.
Mendoza said Halow is suing him separately for aiding Vasquez in trying to take away the license.
Vasquez still owns 51% of the license, and therefore 51% of the proceeds from any future sale of the license, he said. Mendoza believes Halow won't make it that easy for them.
"Mike doesn’t plan on giving us a penny," Mendoza said. "He wants to bury us and leave us in the street."
Companies came out on top
Steve White, the retired co-founder of Harvest cannabis stores, sunk $1.8 million into the marijuana legalization proposition’s campaign. He said he discussed the issue at length with the measure’s other authors but found “there was no model where social equity worked well.”
He acknowledged their plan included letting the DHS make the rules for the program, adding he had hoped the agency would give applicants more time to find sources of capital for their businesses.
The list of social equity license operators includes big names in the industry, such as Story Cannabis, Nirvana, JARS, Copperstate Farms/Sol Flower and Mint Dispensary, but not Harvest or Trulieve, which acquired Harvest in 2021.
“We chose not to put resources into that,” White said. As the largest contributor to the initiative, he said it would have been “really hard to explain” becoming a beneficiary of a social equity program.
He doesn’t blame the other companies for taking over the licenses, saying they just did what the rules allowed. As for the original license holders, “they did better than they could have done without the program,” he said, even if the main vision of the program “wasn’t achieved.”
Mint Dispensary owned several dispensaries in metro Phoenix before acquiring rights to four social equity licenses.
"My PR firm would probably not want me to tell you much," said Raul Molina, Mint's chief operating officer. "The system is not how it should have been."
For some original applicants, the program "didn't pan out as well for them as they could have because of who they dealt with," he said. "I've heard some horror stories."
Those who negotiated with Mint walked away "content," according to Molina. He can't say much about the deals because of nondisclosure agreements, but they involved "life-changing" amounts of money, he said.
In one case, a social equity license winner made a deal with Cookies, a multistate cannabis operator. The winner didn't have the resources to open a business himself, and he and Cookies ultimately sold the license to Mint for $7.5 million, Molina said.
Another case involved a license holder who formed a company called "Woodstock 1" and entered into a management agreement with Mint. For the next several years, Mint will "pay them a large amount."
"Whether we do well or not, they're making money," Molina said. "They are happy to still have the license."
Laura Avila, listed in state Corporation Commission records as one of the three principals of Woodstock 1, said she is happy with the Mint deal but declined to answer other questions.
El Mirage entrepreneurs eschew corporate help
Ochoa and Pineda’s El Mirage dispensary, Deeply Rooted Boutique Cannabis Company, is the outlier.
On a recent winter day, Ochoa sat in the cluttered back office of the tiny dispensary, talking about the company's next steps. At 30, he’s a former budtender and cannabis cultivator for local dispensaries who has used his connections to hire experienced employees, who he said were the lifeblood of the organization.
He said those experienced employees work hard, "so they deserve a lot of the recognition as well."
He has taken inspiration from his father, who told him to learn the business inside and out. Starting the dispensary from scratch has been so difficult, he said, that he "cried myself to sleep" some nights trying to figure things out.
He has entered into sales partnerships to sell numerous brands of marijuana flowers, concentrates, edibles and other products found in the corporate dispensaries. The company's goal is to focus on high-quality service and products. One crucial trick will be to keep their prices low enough to avoid being stomped by bigger retailers who can use economies of scale to offer better discounts.
Long term, Ochoa and his cousin plan to start their own cannabis brand and eventually get a cultivation facility up and running. His team had to move into their current location to meet DHS' October opening deadline, but it was always planned to be temporary. He and his staff are refurbishing a long-vacant auto shop across the street that will open soon as the permanent dispensary.
Adding to his long list of problems: The land surrounding the new location is eroding, which could lead to a potentially pricey fix. He sees the many challenges as just part of his "journey."
“I was able to prove a lot of people wrong based on just my work ethic and to never give up,” he said. “We created this as a team. We’re building something that you don't see a lot of.”
