The pot industry in Colorado is undergoing a massive makeover as it prepares to begin selling marijuana for recreational use legally under state law. Businesses are ramping up production, and trade associations are cleaning up their image, anticipating what could be a billion-dollar industry.
But the entrepreneurs who are hoping to cash in on the “green rush” starting next year are struggling with the unique challenges of conducting a business that the federal government considers a crime.
The state’s pot producers and retailers are having trouble securing business financing because banks won’t give them loans — and most of the time, not even an account.
State lawmakers are about to shake up the marketplace in unpredictable ways with regulations covering everything from the shape of containers to the labeling required for pot-laced brownies and other “infused products.”
And business owners say they’re anxious about the intentions of the federal government, which could seize millions of dollars they have invested or even send them to prison.
At a hearing in the Senate Judiciary Committee earlier this month, Attorney General Eric H. Holder Jr. said that he would soon announce a response to the initiatives in Colorado and Washington last year legalizing pot for recreational use. The federal government, which deems marijuana a controlled substance, could upend the plans of Colorado entrepreneurs at any moment.
Last year, the state’s voters approved a constitutional amendment to “regulate marijuana like alcohol” for adults to buy in small amounts, building on the state’s 13-year-old law allowing the sale of marijuana to medical patients. Under the new measure, marijuana stores, or dispensaries, must register with the state, but many of the other regulations governing pot sales are still being finalized.
Kristi Kelly, 35, began selling medical marijuana three years ago and plans to grow the business when recreational sales become legal in 2014. Her Good Meds company includes three stores and two industrial indoor gardens.
Wearing a blue blazer and knee-high leather boots on a recent tour of her operation, Kelly was more dressed up than most of her customers and employees. Some sat on couches in hooded sweatshirts and dreadlocks trimming dried marijuana plants. Jimi Hendrix played in the background.
She led the way through one of her “grow facilities,” a 65,000-square-foot garden where plants at different stages were segregated into different rooms by maturity.
“We have about 10 rooms that look exactly like this,” Kelly said over the hum of a humidifier. A chain of 1,000-watt fixtures showered bright light on dozens of plants so heavily laden with large flowers that they were supported by a net. A valve on the wall periodically spurted carbon dioxide.
A Washington, D.C. native, Kelly has a high-energy demeanor that seems more at home on the East Coast than in laid-back Denver. A former ad agency executive who once managed accounts for government agencies such as the U.S. Mint, she said she deals with the uncertainty of operating in a legal gray area by keeping a close watch on risks she can control, such as security and compliance with state rules.
“I tend to stay as conservative as possible on as much as possible,” Kelly said.
More than 500 businesses are already selling medical marijuana, and many are now preparing to burst into the new marketplace for recreational pot. These dispensaries sold $186 million worth of cannabis for medical purposes in the last fiscal year, according to tax receipts. The Colorado Legislative Council predicts that figure could rise to $920 million next year once the new constitutional amendment legalizing recreational sales takes effect. This estimate does not account for the anticipated influx of pot tourists who are expected to arrive in search of a Rocky Mountain high. With steep excise and sales taxes proposed, the industry could be a big revenue booster for the state.
Many of the entrepreneurs, like Kelly, have had little previous experience with marijuana. “We’re not those Woodstock hippies who have had secret grows in the mountains for decades,” Kelly said. “We’re business people.”
This isn’t business as usual, however. The federal government has cautioned many banks against handling marijuana finances. Many smaller pot businesses have been unable to find a bank to take their money and must operate on a cash-only basis, creating vexing problems with security and accounting. Kelly said she lost four bank accounts last year as one institution after another said they could not risk doing business with her company.
“The people who are lucky enough to have bank accounts guard them with their lives,” she said.
In her Lakewood, Colo., store, a two-ton safe bolted to the floor behind the counter holds a dozen gallon jars full of cannabis. With a doctor’s prescription, you can buy marijuana in just about any form in this store: rolled into joints, filling an e-cigarette cartridge, baked into chocolates and cheesecake cupcakes, or concentrated in Cannacap pills, lemon drops, Cheeba Chews, hard candies and liquid tinctures with flavors such as orange and agave.
Kelly says she has to pay premium rent for her storefront because landlords are wary of marijuana businesses, considering them risky ventures that can attract an undesirable clientele. She has also spent thousands of dollars upgrading her operation’s security to guard against thieves who could be attracted to the copious amounts of cannabis and cash.
Making her financial situation even worse, distributing marijuana isn’t a legitimate business expense under the tax code, so her company can’t deduct most of its expenses. Kelly’s business lost money last year, she said, after paying income tax.
Nor can these retailers use many of the traditional means for promoting consumer goods, such as advertising. Denver bans outdoor ads for marijuana, and most mainstream media outlets won’t run them. Kelly recently tried to sponsor a radio public service announcement about safe driving, but had her money returned by the station management.
Complying with a thick and evolving book of state regulations is another challenge. The rules, for instance, require each marijuana plant to be placed under video surveillance and tracked from seed to sale, at times by carrying a bar code.
Many more regulations are coming. Under Amendment 64, the legislature must tax and oversee cannabis stores for the general public as well. A task force appointed by the governor this month issued recommendations for those laws, which must be finalized before the legislative session ends this spring.
Many medical marijuana business owners, including Kelly, opposed Amendment 64 over concern that it would upturn their growing businesses or prompt action from the federal government. But now she and many other owners see the legalization of pot as a great business opportunity.
And medical marijuana businesses are seeking to have the tight regulations they follow expanded to recreational use, deploying a bevy of lobbyists to work the task force and the legislature. That has led advocates for liberalization to complain that the industry is trying to limit competition. For the first year, only retailers that sell medical marijuana will be allowed to sell pot for recreational purposes.
Business owners counter that by tightly regulating their industry, Colorado has avoided the kind of federal scrutiny given to other states, such as California, which largely leave regulation of medical marijuana to local jurisdictions.
The U.S. Drug Enforcement Agency is watching Colorado, but has yet to intervene in a dramatic way. The agency sent letters to some Colorado dispensaries within 1,000 feet of schools, warning them to shut their doors. Some business owners took that as a tacit endorsement of the state’s approach.
Federal policy on marijuana businesses will likely be fluid for some time, and disruptions in the marketplace may yet come. For Kelly, it won’t be the first time.
“We’ve changed our business plan like five times,” she said.
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