Colorado’s Medical Pot Business Is For-Profit, Regulated – and Thriving

Denver – After 15 years as a white-collar “corporate nomad,” Dan Rogers found his new career in the thriving green-collar industry of Colorado, the only state in America with a for-profit medical marijuana market.

The equities trader and former investment banker now produces pot breeds “Reclining Buddha” and “Heartland Cream” in a converted printing press warehouse near downtown Denver.

In the nation's most heavily regulated medical cannabis industry, he also works under constant video surveillance.

Electronic eyes, required by Colorado's year-old Medical Marijuana Enforcement Division, track packaging of each shipment from Rogers' warehouse to his four marijuana stores, called Greenwerkz.

He submits product manifests and delivery routes for state approval. Still more cameras are recording as marijuana is unpacked and his state- licensed employees sell to state-registered patients.

“Everything from seed to sales is on video,” Rogers said. “You need to know where every gram goes, where every plant is.”

In Colorado, America's second-largest medical marijuana market behind California, marijuana capitalism flourishes under strict regulations approved by the state Legislature starting last year.

In California, dispensaries handling millions of dollars in transactions are supposed to operate as nonprofits – with medical marijuana users giving “donations” to “reimburse” operators and growers for costs.

Colorado stores simply pocket cash as profit. And, under new mandates that stores grow at least 70 percent of the marijuana they sell, weed industrialization is flourishing. It is happening despite U.S. Justice Department warnings over attempted large-scale cultivation in California or suspected medical pot profiteering in other states.

In Denver, the marijuana boom grows in old brick buildings and shuttered factories that only five years ago were being converted into artist lofts and live-work spaces for urban professionals.

A former truck and tractor parts factory now houses indoor farms for eight marijuana stores. Elsewhere, real estate broker John Wickens has leased a half-million square feet of space to medical pot entrepreneurs – including a 76,000-square-foot cultivation room for one store.

“This has helped the city tremendously,” he said. “It steadied commercial real estate. There are buildings with 40,000 square feet sitting empty. Who else is going to take it?”

Denver interim city attorney David Broadwell said the city took in $3.5 million in marijuana sales taxes last year and hundreds of thousands in local licensing fees from 300 marijuana stores and other cannabis businesses. Colorado's medical pot market may be one-sixth of California's, yet Broadwell said Colorado's cannabis capitalism took the Golden State model “and put it on steroids.”

The industry worries Tom Raynes, a former deputy state attorney general and local prosecutor who heads the Colorado District Attorneys' Council. He says Colorado pot businesses operate as an “assumption-of-risk industry” – doomed to collapse if the U.S. Justice Department, which considers all marijuana illegal, decides to intervene.

“I think they're inviting the federal battle,” he said. “They're poking the tiger.”

But Tom Massey, a Republican state representative from central Colorado who co-sponsored legislation regulating the industry, holds Colorado up as a national model, one that eased federal concerns by providing meticulous oversight to prevent diversion of medical marijuana to the illegal market.

“I think the feds are thinking that as long as we keep it for its intended use, they're going to turn a blind eye,” he said.

Fees fund enforcement

In Colorado, where voters legalized medical marijuana use in 2000, fees on 730 retail stores and more than 1,000 cultivation centers and other cannabis businesses now fund the $10 million budget of the Medical Marijuana Enforcement Division. It is part of the Department of Revenue, which oversees the liquor and gambling industries.

Paul Schmidt is one of the division's medical marijuana G-men. An enforcement director in a black pinstriped suit, he drops in on marijuana stores and grow rooms, reviewing the security and integrity of sales transactions and cataloging plants marked for state counting with bar codes or special radio chips.

“It was really strange for me initially, because I used to call these people defendants,” said Schmidt, a retired Drug Enforcement Administration agent who once directed federal raids on pot fields in Oregon. “Now I call them an industry.”

With 55 employees and more than 30 compliance officers, the medical marijuana division licenses thousands of pot employees. Background checks ban anyone with a felony drug conviction from owning, investing or working in the marijuana businesses.

The state also registers all medical marijuana patients. Their numbers nearly doubled in a year to 130,000, with 20,000 more under review or rejected for improper paperwork. Last year, Colorado used $9 million in $90-per-patient medical marijuana program fees to help close a state budget gap.

Norton Arbelaez, a 31-year-old Tulane University law school graduate, is one of the emerging faces of Colorado's medical marijuana industry. He exuded professionalism as he led a tour of his River Rock store and cultivation center in a former Denver bus terminal building.

Before Arbelaez showed off his “Jack Frost Sativa” with its “very piney, very lush smell” or his “Bubba Kush” used by a favorite patient for her cancer symptoms, he pointed out his 32 video cameras.

Arbelaez and his partners invested $45,000 in surveillance, meeting state mandates that, by January 2012, will require all marijuana businesses to maintain 20 hours of video feeds that Colorado regulators can access online.

“We've waived our Fourth Amendment protections. We've given every piece of personal information to the state,” he said. “It's Big Brother. Let's not kid ourselves.”

Oversight costs are high

For Arbelaez and many others, it is also big business. He and partners invested close to $1 million in their retail and growing operation. They are only now close to turning a profit – but the future of his marijuana business looks prosperously green.

More than two dozen local Colorado jurisdictions have banned marijuana businesses. But in places such as Denver, Boulder and even conservative Colorado Springs, a medicinal Green Rush took off in 2009, before state regulation.

Denver's South Broadway Street was dubbed “Broadsterdam” or “the Green Mile” as pot shops opened in a frenzy. Dozens remain – mom and pop stores such as the Little Green Pharmacy with its shimmering neon marijuana leaf or the Little Brown House with its sign for “the house of the $5 joints.”

“The model before (regulation) was embarrassing, uncomfortable, unwelcoming,” said Alex Arguello, 25, who with two friends and his father later opened Colorado Wellness Inc., a dispensary and climate-controlled cultivation center. “I went into one business and there was a guy behind a black trash bag. He pulled it back and said, 'What do you need?' “

Arguello and partner Edward “Chuck” McLamb, who both came out of the jewelry and pawn shop business, are now comfortably operating in a state-licensed marijuana store. But many stores went under, unable to afford – or deal with – the demands and costs of new government oversight.

In Boulder, which took in $1 million in taxes and local fees on marijuana businesses in 2010, the college town that once teamed with more than 100 stores and grow rooms saw its industry shrink to an estimated 45 retail centers.

“There were a lot of people who got into this thinking this was going to be a real cash cow,” said Michael Bellingham, 38, co-owner of the Boulder MM Dispensary, one of the city's original pot stores. “But a lot of them realized they were in over their heads.”

Bellingham cashed out his 401(k) and borrowed from family members so he and his partner could outfit a warehouse to meet the state's marijuana store cultivation mandates. He said many stores merged with pot growers in shotgun marriages that were destined to fail.

Pair sells cannabis foods

State regulation offered the lure of legitimacy for Scott Durrah, an award-winning restaurateur known for his Caribbean-cuisine 8 Rivers eatery in Denver. With wife Wanda James, a marketing executive and leading Colorado fundraiser for Barack Obama's presidential campaign, they secured state medical marijuana licenses as “infused products” manufacturers.

Today, their Simply Pure kitchen makes cannabis foods – from marinara sauce and mango salsa to granola bars and gluten-free jam – for 285 Colorado marijuana stores.

“We grow all our own cannabis. We don't buy anything from anyone,” James said. “We cook with 100 percent bud.”

She said their regulated, professionally run kitchen and their personal standing in the community brought “a face to cannabis that people couldn't demonize.”

But Rogers, operator of the Greenwerkz stores and two cultivation warehouses, decided he didn't want to stand out too much after Deputy U.S. Attorney General James Cole issued a memo June 29.

It said “large-scale, privately-operated marijuana cultivation centers” – even if legal under state laws – aren't immune from federal prosecution.

Rogers and his partners were considering buying two other medical marijuana retail chains – a deal that would have made them the largest pot provider in Colorado. They abruptly backed out.

“We decided there was no need to be the biggest,” Rogers said. “We don't need to be the target. You don't want to poke the dog. We just walked away.”

© 2011 McClatchy-Tribune Information Services

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