Pubdate: Sun, 26 May 2013
Source: Chicago Tribune (IL)
Copyright: 2013 Chicago Tribune Company
Author: Peter Frost


Colorado Sees Opportunities, Consequences; in Illinois, Quinn 
Considers a More Restrictive Law

DENVER - At Leela European Cafe, a quirky, 24-hour coffee shop and 
bar in the heart of downtown, a bartender was quick with her thoughts 
on Colorado's experience with the legal sale of medical marijuana.

"It's really easy to get," said Cara Wanek, 25, who says she uses it 
to calm her anxiety, boost her appetite and help her to sleep. "And 
it's delicious." That's exactly what Illinois is trying to avoid. 
While Colorado is not quite the Wild West of medical marijuana, it 
offers a window into the opportunities and consequences that arise 
when a state allows the legal sale of a long-banned drug.

The state's therapeutic cannabis industry launched in earnest in late 
2009, triggering a "green rush" that boosted the state's economy. Big 
Marijuana added thousands of new jobs, revitalized aging industrial 
warehouses and shuttered storefronts, and generated millions of tax 
dollars for the federal, state and local governments.

At the same time, state officials acknowledge they were unprepared to 
license, inspect and regulate medical marijuana businesses, leaving 
millions of fees and taxes uncollected and a significant swath of the 
industry unchecked. And recently released police data show a modest 
uptick in certain crimes near marijuana businesses in Denver.

But as the nation's first highly regulated, for-profit market, 
Colorado has served as a model for other states seeking to get in on 
the action.

In crafting legislation that would allow for the legal sale of the 
drug to certain patients beginning in 2014, Illinois lawmakers looked 
to build upon the experience in Colorado, where pretty much anyone 
with a long-ago injury can get a doctor's approval to purchase up to 
2 ounces of pot at a time - enough to stuff two small sandwich bags.

Illinois' proposed statute is far more restrictive, placing tighter 
limits on who can legally purchase the drug and where it can be grown and sold.

The bill, which would allow people with 42 defined conditions to 
purchase the drug legally over a four-year trial period, was approved 
by the Senate on May 17. It awaits the signature of Gov. Pat Quinn, 
who has said he is "openminded" about the prospect.

As the governor contemplates a decision, experienced pot 
entrepreneurs in and around Denver are watching closely with the hope 
that the time and money they've spent shaping and supporting the 
Illinois bill will pay off.

"Everyone is looking at Illinois and New York because that's where 
the population is," said Kayvan Khalatbari, a 29-year-old Nebraska 
native who was one of the pioneers in the Denver marijuana scene. 
"The ball is rolling, and with more and more states coming on all the 
time, we see opportunities everywhere."

If Quinn signs the bill, Illinois would become the 20th state, plus 
the District of Columbia, to allow the sale of medical marijuana. 
Dispensaries could open as soon as next year.

In Colorado, legalization of the drug for medicinal purposes was 
approved by voters in 2000. But because the drug remained illegal at 
the federal level, most users remained underground, growing as many 
as six plants each for their own medical needs.

The industry didn't emerge until 2009, after an Obama administration 
memo suggested that federal authorities would not aggressively 
challenge state laws.

Almost overnight, Colorado was swamped with retail dispensaries and 
large-scale operations to grow the plants. The state, which didn't 
have an adequate regulatory or tax structure in place, soon had more 
weed shops than Starbucks.

By the next spring, when lawmakers scrambled to pass regulations, 
more than 2,000 companies had filed with the state to sell medical marijuana.

"We didn't get off to a great start because we didn't have the time 
or the staff to tool up," said Ron Kammerzell, the Colorado 
Department of Revenue's enforcement director. "We're still, in a way, 
playing catch-up."

At the end of 2010, the first year of regulated medical marijuana in 
Colorado, the state's industry had more than 1,100 businesses, 
including dispensaries and manufacturers of marijuana-infused 
products, according to state statistics. Today, there are 675. "A 
majority of the people who came in in 2009 to make a quick buck are 
either broke or in jail," said Norton Arbelaez, a tall, loquacious 
Oklahoma native who practiced medical malpractice law in Louisiana 
before he and a friend founded River Rock Wellness, a two-store 
medical marijuana operation in Denver.

"There were a lot of bozos in this business in the beginning," 
Arbelaez said. "For the most part, those of us still around are the 
ones who are doing it right."

In the roughly three years since the regulations took effect, sales 
have ballooned to nearly $200 million, generating $5.4 million in 
state sales tax in 2012.

In addition, operators have paid the state more than $10 million in 
application and licensing fees.

The most successful of Colorado's 479 registered retail dispensaries 
log annual sales greater than $3 million.

Kayvan Khalatbari's venture, Denver Relief, started with $4,000 and a 
halfpound of marijuana.

Wedged between a salon and an urgent care center on Denver's near 
south side, the 25-employee operation expects sales of $1 million to 
$2 million this year. It has made money from day one, Khalatbari said.

But even as the legal sale of the drug emerged from rogue growers' 
basements, retail owners and growers said they still operate in an 
environment of fear.

Because state laws run counter to a 43-year-old federal law that 
classifies cannabis as a Schedule 1 controlled substance, companies 
say they face hurdles that other businesses typically don't encounter.

Banking is difficult, insurance is hard to come by, and operators 
fret that their nascent enterprises could be shut down at any time by 
federal regulators.

Operators say most banks won't lend to enterprises that handle a 
product that is illegal under federal law. As a result, the vast 
majority of Colorado's marijuana enterprises are financed solely with 
their own and private investors' money.

Many lack business bank accounts and pay all of their bills - 
workers' paychecks, utilities, contractor fees and mortgages - with 
cash or money orders.

Another issue is taxes. On average, small businesses pay an effective 
tax rate of about 20 percent on net income, according to the Small 
Business Administration. Marijuana purveyors, by contrast, say they 
pay an effective tax rate of 60 to 70 percent.

That's because the federal tax code prohibits the deduction of 
standard business expenses for those who deal in controlled 
substances - marijuana included - even in states where it is legal.

"It's a very heavy-overhead business that requires a lot of capital," 
said Rhett Jordan, co-owner of Native Roots Apothecary, an upscale 
medical marijuana shop on the 16th Street Mall, Denver's answer to 
Michigan Avenue.

Inside the spa-like shop, 30 airtight glass jars filled with buds sit 
behind a counter. A "bud-tender" helps patients choose the product 
best suited for their ailment. Chocolates, candies, tinctures and 
tiny jars filled with concentrated cannabis, called hashish, are 
arranged much like jewelry inside a glass case. Cameras are everywhere.

Customers range from local business magnates to musicians and 
construction workers.

Jordan, who said he has relatives in Illinois, has a keen interest in 
opening a dispensary in Chicago.

If and when Illinois opens the door to medical marijuana, weed 
retailers like Native Roots will face a much different regulatory 
environment. The number of dispensaries will be limited to 60 
statewide and the number of growers to 22, one for each state police district.

Illinois also will be more restrictive on what diseases can be 
treated with medical marijuana. Of the roughly 108,000 Coloradans who 
hold state-issued medical marijuana cards, more than 101,000 reported 
using cannabis in part to treat "chronic pain," a catchall category 
that will not be recognized in Illinois.

While the tighter restrictions in Illinois likely mean a smaller pool 
of potential customers, industry veterans in Colorado are confident 
the law eventually will loosen.

Colorado law, just like the one proposed in Illinois, requires 
growers to raise their plants indoors, under tight security. 
Installing robust security systems, which include high-definition 
cameras, automatically locking doors and shock sensors, can cost more 
than $100,000.

The state's marijuana cultivation centers range in sophistication, 
security, employment and quality of product. Some have a thousand 
plants; some have more than 30,000. Most are grown indoors in 
modified warehouses; some use greenhouses surrounded by 10- foot-high 
electrified fences.

To prevent theft and diversion of the product to the black market, 
operators are required to invest in sophisticated software that 
tracks the plant from "seed to sale," a Colorado mandate that 
Illinois' legislation adopted.

Each crop, on average, takes about four months to grow. Monthly 
electric bills range from $3,500 to more than $15,000. The retail 
value of the inventory inside can easily stretch to several million dollars.

The plants are finicky and prone to mold and mildew, so temperature, 
humidity levels and air circulation are closely regulated.

Some operators grow their plants hydroponically, some prefer dirt, 
and others such as Gaia Plant-Based Medicine use a dirtlike product 
made of crumbled coconut husks.

The company's indoor cultivation center, a single-story brick 
building with barred windows, sits across the street from a Denver 
Police Department outpost in an industrial area on the northeast side 
of town between the airport and downtown.

A few years ago, many of the aging buildings here were empty. Today, 
they're the headquarters for metropolitan Denver's marijuana growers. 
The fragrant, unmistakable aroma of pot plants wafts down the street.

"If you look all around Denver, we came in and rented undesirable 
spaces," said Meg Sanders, Gaia's co-owner and chief executive. After 
Gaia opened a retail dispensary in east Denver, a Starbucks and a 
grocer moved in, Sanders said. "It becomes a hub."

Anecdotes like this abound in Denver, running contrary to what many 
feared would happen to their neighborhoods once the marijuana 
industry moved in. Visions of drug-addled stoners and nefarious 
pushers flooding the city's streets never materialized.

Two Denver City Council members and the head of the Denver Metro 
Chamber of Commerce said complaints to their offices about marijuana 
dispensaries and growing operations are rare.

Colorado's medical marijuana experiment has gone well enough, in 
fact, that voters in November were emboldened to push forward another 
constitutional amendment that will allow anyone 21 or older to buy 
the drug for recreational or "adult use" purposes as early as 2014.

It represents a major opportunity for Sanders, 47, who left the 
financial world in late 2010 to ride the marijuana wave.

Inside her discreet cultivation center, a Zen-style front waiting 
room makes way to an open warehouse, where tattooed workers trim 
marijuana plants, separate leaves from flowers and weigh product.

One-thousand-watt sodium lights cast a bright glow through ajar doors 
that lead to separate grow rooms.

Sanders had just returned from Illinois, where she spent time in 
Chicago meeting with potential growers and retailers and a day in 
Springfield to "help with the legislative process."

She wants to ensure Illinois doesn't make the same mistakes as 
Colorado, and that those who participate in the industry can learn 
from her company's initial struggles. When she and other investors 
took over Gaia two years ago, it was hemorrhaging money.

The company finally turned the corner and became profitable this 
quarter, she said. For the full year, the three-store company 
projects revenue of $5 million to $7 million.

"It's been far more challenging than anyone thought because the rules 
kept changing," Sanders said. But with more than $3.5 million of 
their own money financing the venture, she and her investors remain bullish.

"There are few other industries that have insatiable demand," she 
said. "Every single product we put on the shelves is sold each month. 
It pays for itself very quickly, and that's what makes it so appealing."
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MAP posted-by: Jay Bergstrom