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Updated Sunday, January 6, 2013 at 11:09 AM

Rocky Mountain high: Pot a $200M industry in Colorado

By Jonathan Martin
Seattle Times staff reporter

DENVER —

Inside the industrial-scale marijuana grow farms that dot Denver's low-rise warehouse districts, it is perpetual summer — 78 degrees, moderate humidity and fields of shoulder-high plants with fat, sticky buds swaying in the breeze.

These unmarked THC factories are easy to miss from the street, except for the casino-style security cameras perched on each corner. But inside the world's only fully regulated, for-profit marijuana market, there are few secrets.

Colorado has approved 739 of these indoor grow farms over the past two-plus years after vetting their owners' finances and requiring the buds be tracked on high-definition video and bar-coded every moment from seed to sale. Local building inspectors have signed off, and cops — city, state and federal — can drop in at any time.

This out-in-the-open marijuana is the best glimpse of the strange new reality coming soon to Washington state.

If Washington, as expected, follows Colorado's experiment, our state regulators will be investigating entrepreneurs' finances for links to organized crime and keeping steady watch over leakage to the black market — even as they allow warehouses of weed.

The challenges are immense. Washington's new marijuana law, approved by voters in November, creates a market for social use — vastly bigger than the medical-marijuana market regulated in Colorado. There is nothing like it anywhere.

In Colorado, regulators had to broker a shotgun marriage between law enforcement and marijuana dealers. Anxious state regulators wrote more rules than they could enforce. The state is now thinning its thick rule book, even as drug cops say Colorado-regulated marijuana has popped up across the Midwest.

Capitalism unleashed, medical marijuana suddenly became a $200 million industry, with retail prices — averaging about $7.50 a gram — among the cheapest in the country.

The federal government — despite its ban on marijuana — has largely been hands-off. Not a single big grow operation has been raided. It's not clear how the Justice Department will react to the massive, voter-approved expansion of social-use markets in Washington and Colorado.

Colorado Gov. John Hickenlooper, the grandson of a bootlegger, said regulations need to address teen use while acknowledging consumers' "huge appetite" for an increasingly potent drug.

"This is not your father's marijuana," he said.

'Twice as strict as alcohol'

Colorado's one-of-a-kind system arose through necessity.

In 2000, it joined Washington in allowing medical marijuana, but it wasn't until 2009 that Denver, like Seattle, began seeing wildcat marijuana dispensaries popping up across the city.

Then-state Sen. Chris Romer, son of a former governor, in 2010 pushed through medical-marijuana regulations envisioned to be "as strict, if not twice as strict, as alcohol."

Five-figure licensing and application fees — plus security and requirements that dispensaries grow most of their own product — added up to $500,000 or more. That was intentional, Romer said.

"If you raise the bar high enough, they won't risk their $500,000 or million-dollar investment to sell to youngsters," said Romer.

With a new law in place, a retired liquor regulator and one-time drug cop, Matt Cook, was brought in to broker a five-month negotiation that "had drug dealers on one side, law enforcement on the other, and my staff in the middle," he said.

Cook had one primary goal: no "diversion" of marijuana spilling from regulated grows onto street corners.

The result was a blizzard of rules: 24-7 video surveillance in grow farms and dispensaries accessible to enforcement officers via the Internet; bar codes on each plant; criminal background checks; and hard-copy manifests faxed to Cook's staff each time a pound of pot was moved.

"The process works," said Cook, who retired and is now a consultant to the medical-marijuana industry. "It sort of set the example for the rest of the nation. This commodity won't go away. And it can be regulated."

Washington lawmakers tried to replicate the system in 2011, but Gov. Chris Gregoire vetoed the bill, citing the remote risk that state employees could be charged with violating federal law.

Colorado skipped right over that.

Colorado's 2.9 percent state sales tax last year generated $5.3 million from medical-marijuana sales. Cities, which can impose huge licensing fees and extra sales taxes, have reaped far more. Dispensary owners say they pay federal income tax, often at high rates because their businesses do not qualify for many deductions.

With all the marijuana and money out in the open, theories abound about why federal authorities haven't intervened. Most cite Colorado's role as a swing state in presidential elections and the fact its own regulators — not federal drug cops — are called to handle problem dispensaries.

"All of the arguments used, to do a half-assed regulatory system, are based on the fear of the feds," said Romer. "I understand that. But the greater risk here is a use by younger users because (of) a lack of controls."

'That's a lot of marijuana'

Denver Relief's grow site, in a nondescript warehouse in northeast Denver, is a midsized operation by local standards, but would be the Taj Mahal by Seattle standards: 2,000 plants, 13,000 square feet, 62,000 watts of power and 2,000 gallons of filtered water a day. Build-out costs were $500,000, including the site's own transformer.

Up close, flowering marijuana plants look like Frankenflowers, genetically filtered into strains such as Romulan or Red Headed Stranger to produce plum-sized buds dangling from spindly stalks. The dispensary was one of the first amid the Colorado medical-marijuana land rush of 2010. More than 1,800 budding entrepreneurs, some pushing shopping carts full of documents, lined up at Cook's office, dreaming of getting a state license to grow or sell pot.

To get one, applicants had to waive their Fourth Amendment right to limitations on search and seizure: regardless of state law, the business is illegal under federal law. They also had to disclose years of bank statements.

"I think a lot of the info they required weeded out a lot of people who would have been bad for the industry," said Kayvan Khalatbari, co-owner of Denver Relief.

It is a tightly competitive market, with more than 520 dispensaries and 150 processors of cannabis-infused food statewide. The industry leases an estimated 1 million square feet in the Denver area, with some grow sites having as many as 10,000 plants.

Still, all this would be dwarfed by Washington's new marijuana market.

The state predicts 363,000 consumers will go through 187,000 pounds of dry marijuana a year in Washington. But that estimate may be way low — it fails to include production needs for marijuana-infused food and drinks; in Colorado, about half of the marijuana produced goes toward so-called "medibles."

By Khalatbari's calculations, Washington would need about 1,000 grow sites the size of Denver Relief. "Wow, that's a lot of marijuana," he said.

It is "naive" to think that any rules Washington may create will keep that much bud from leaking into the black market, said Colorado Attorney General John Suthers, a Republican ex-federal prosecutor.

He and other opponents say the Mile High State has become a bulk exporter: a recent report documented cases of state-regulated marijuana finding its way to 23 other states. Suthers' office is pressing a racketeering case against the owners of a local dispensary, The Silver Lizard, for selling hundreds of pounds as far away as Florida.

Recreational use will only make it worse, Suthers fears, and sends a "terrible" message to teenagers.

"We're in a cultural collapse, in my opinion. But I'm an old fogey," said Suthers. "The industry would call me a drug-war dinosaur."

Preparing for legal sales

In theory, Colorado's Medical Marijuana Enforcement Division was to have dozens of regulators so vigilant that every plant could be tracked, in person and on camera, from seed to sale.

But that ambition gave way to financial reality. The agency overspent, then had to cut staff; now there are 10 regulators for a $200 million industry. Shipping manifests, spit from a state fax machine, have gone unread, and more than 860 license applications still need to be vetted.

"Sometimes it feels like the division bit off more than it could chew, truly looking over the shoulder of the licensee at every step of the way," said Laura Harris, who took over the enforcement division a year ago.

Her agency is now simplifying rules with input from industry leaders such as Norton Arbelaez, an attorney who runs River Rock, one of the largest dispensaries in the state. He said his company pays $1 million in taxes, with top-end growers earning $100,000.

"The free market has done a good thing," said Arbelaez. "Isn't that better than operating in the shadows? ... Isn't it better for the city of Denver that revenue from medical marijuana funds the parks?"Colorado, like Washington, is just starting work on the social-use market. Both states plan to open retail stores in about a year.

Rick Garza, deputy director of the Washington State Liquor Control Board, said his agency first needs some basic numbers: How many customers will there be? Is it 363,000, as the state once estimated? Or will more people dabble, now that it's legal under state law? And how much will they consume? About a half-pound, on average, as the state predicted? Or double that, as Colorado's medical-marijuana patients do?

"Once you get a feel for what that market looks like, it drives everything else," said Garza.

Both states are plowing ahead, but also awaiting a response from the U.S. Justice Department to letters and personal appeals from Hickenlooper and Gregoire seeking clarity. In an interview with ABC in December, President Obama indicated the Justice Department would not arrest recreational users, but did not say how it would deal with large grow farms and heavily taxed sales.

Left alone, Washington's market is likely to be governed by a blend of Colorado's medical-marijuana rules and its own liquor regulations. "I suspect we'll use many of the requirements we do with liquor," said Garza.

Once the rules firm up, expect to see a new land rush from entrepreneurs like Tripp Keber, founder of Dixie Elixirs, a medibles manufacturer. Once a developer of luxury motor-home resorts, Keber decided to get into medical marijuana while at a card table in Las Vegas, and he keeps a pair of red dice in his pocket.

His 27,000-square-foot production space near the Denver airport has 35 employees, including a biochemist, a chef and a mechanical engineer. It churns out 70 different products, including 175 cases of his signature THC-infused sodas.

Preparing for legal recreational sales in Colorado and Washington, his company bought a $200,000 extraction machine to expedite a process now largely done by hand.

"If you don't believe that big alcohol, Big Tobacco, Big Pharma are watching this, you're crazy," said Keber.

"There is no medical-marijuana book for dummies. Given the chance to buy it, I would have, and saved thousands and thousands of dollars."

Jonathan Martin: 206-464-2605 or jmartin@seattletimes.com.

On Twitter @jmartin206.

Washington's marijuana law

Possession: Eliminates state criminal penalties for possession of 1 ounce of marijuana (or 1 pound in cannabis-infused food, or 72 ounces of cannabis-infused drink). Public consumption of marijuana, like alcohol, can mean a fine.

Retail stores: It will be illegal to sell marijuana for recreational use anywhere except state-licensed marijuana stores; those stores won't open until at least December 2013.

Grow operations: The Liquor Control Board is accepting public comments on plans for a marijuana-producer license. Marijuana sold at state-licensed stores must be grown in-state.

Medical marijuana: Not affected by the new law.

Source: Initiative 502


ALAN BERNER / THE SEATTLE TIMES
In a former bus barn near Denver, marijuana plants live their lives on camera, part of an intense seed-to-sale scrutiny that distinguishes Colorado's medical-marijuana industry. Washington is looking to Colorado as it considers rules for a new legal marijuana market.




ALAN BERNER / THE SEATTLE TIMES
The Pink House medical-marijuana dispensary in Denver has the look of an upscale boutique. Rachel Schaefer is putting out product before the shop opens for business. Lily Bella, her dog, accompanies Schaefer to work.




ALAN BERNER / THE SEATTLE TIMES
This plant was seeded without soil — in pulverized rock — to spur faster growth. Colorado's medical-marijuana industry is increasingly sophisticated at producing high-quality crops indoors.




ALAN BERNER / THE SEATTLE TIMES
At Dixie Elixers & Edibles in Denver, product specialist Chris Moder prepares THC-infused candies. About half of the marijuana produced in Colorado's medical-marijuana market goes toward so-called "medibles."




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