New York Cannabis Market in Turmoil After Regulators Reverse Course on School Proximity Rules

State Memo Threatens 150+ Cannabis Licenses, Reigniting Zoning Chaos

New York’s $1.5 billion cannabis industry is once again in crisis after the Office of Cannabis Management (OCM) announced a dramatic reversal of its guidance on how far retail dispensaries must be from schools. On July 28, state regulators informed more than 150 operators and applicants that their dispensary locations are too close to educational institutions, despite earlier state-approved plans and costly buildouts.

This abrupt change contradicts a policy adjustment OCM made in late 2023 to ease location challenges, especially in densely packed urban areas like New York City. The fallout is already being described by stakeholders as a betrayal—one that threatens livelihoods, undermines state trust, and exposes the still-fragile legal market to even more instability.

New York’s School Distance Rule: A Legal Contradiction Unfolds

State law prohibits cannabis dispensaries from opening within 500 feet of a school’s property line or on the same road as a school. That distance was originally measured from the closest property lines—often fences or boundaries rather than entrances.

However, in late 2023, regulators introduced a more pragmatic measurement method: a straight line from the entrance of the dispensary to the entrance of the nearest school building. This method was widely praised as a common-sense compromise and reflected in approved location decisions for several licensees.

But in the July 28 memo, OCM Director Felicia Reid announced that this change was illegal.

A Sudden Shift That Puts Dozens of Businesses in Jeopardy

OCM’s reversal affects 108 current license holders—38 of which are in New York City—and 44 pending applicants. Of the affected applicants, many had already invested significant time and money into site selection, leasing, and property development based on OCM’s earlier guidance.

Those awaiting licenses must now find and apply for new locations, though the state is offering up to $250,000 in assistance for relocation or buildout.

But for current operators, the stakes are even higher. The state has stated that it cannot legally renew licenses for dispensaries that are not compliant with the original proximity law. As a result, dozens of dispensaries could be forced to close unless lawmakers step in to pass emergency legislation to legitimize their locations.

However, that legislative outcome is not guaranteed.

Advocates Say the Decision Punishes the Very People the State Pledged to Help

Former OCM official and Bronx Cannabis Hub Director Damian Fagon criticized the sudden policy reversal as “a stunning betrayal of public trust.”

“It effectively punishes licensees who followed the state’s own guidance,” he said in a statement. “This will break us. We cannot afford to move to another location.”

Indeed, for many social equity applicants—who were already navigating narrow margins and tight capital—the order to relocate could mean financial ruin. These operators followed OCM’s published guidelines, only to be told months later that those same guidelines were invalid.

Lawsuit Architect Claims He Warned Regulators Months Ago

Jeffrey Jensen, a Los Angeles-based attorney who successfully challenged New York’s residency requirements in court, says he flagged the proximity issue with OCM as early as March 2024. He noted that at least one licensed location—a Sunnyside dispensary temporarily closed—was within 500 feet of a school’s property line, despite being permitted under the updated entrance-to-entrance rule.

Jensen says he received no response from the state. At the time, he was searching for a location for a client awarded a license as part of a settlement with the state. That client, Variscite One, ultimately exited the market after failing to secure a suitable site.

Zoning Crisis Amplifies Broader Market Struggles

The proximity issue compounds an already staggering list of obstacles facing New York’s marijuana market. As of July 2025, there are 436 licensed stores operating statewide. But regulators received more than 4,500 retail and microbusiness applications during the most recent licensing window that closed in December 2023.

At a Cannabis Control Board meeting held last week, officials acknowledged that more than 3,000 of those applications have yet to be reviewed—and that it may take up to eight years, until 2033, to clear the backlog.

Market saturation is also a growing concern. OCM analysts say New York can sustainably support only about 1,700 cannabis stores. With over 4,000 applications in the pipeline, a significant number of future licensees may never find viable real estate or achieve profitability.

Will Lawmakers Act in Time to Save Existing Retailers?

Both Governor Kathy Hochul and the OCM have pledged to “aggressively pursue” legislation to retroactively legalize affected locations. But the clock is ticking.

Until a bill is passed, dispensaries operating in violation of the school distance rule remain in legal limbo. Their licenses are at risk, and their investors and staff are left in the dark about their future.

“This is the point where we could start seeing closures, price collapse, and equity failure,” said Kevin Brennan, OCM’s market analyst. He warned that only 76.3% of approved licensees actually open for business—and that number could drop further as viable properties become increasingly scarce.

An Already Delayed Market Now Faces a New Obstacle

New York’s recreational cannabis program has faced numerous setbacks since its inception. Legal challenges, regulatory delays, real estate confusion, and enforcement issues have slowed rollouts and limited product availability. Now, with regulators backtracking on zoning interpretations, operators are once again caught in the crosshairs of conflicting state policies.

Where Does the Industry Go From Here?

Operators and advocates are calling for immediate legislative relief and a more consistent regulatory framework. Many are urging lawmakers to revisit and update the state’s cannabis laws to reflect the realities of urban zoning challenges, especially in a city like New York where every square foot is contested.

The broader cannabis industry is also watching closely. If New York—the nation’s second-largest potential marijuana market—can’t stabilize its rollout, other states may hesitate to follow its regulatory model.

For now, operators wait. Some cling to hope for emergency legislation, others consider legal action or relocation. But all agree: this is a make-or-break moment for New York’s legal cannabis market.