Where are All the Marijuana Millionaires?

March 29, 2011 – FORT COLLINS, Colo. — When Drew Brown first opened Abundant Healing, a medical marijuana dispensary that serves nearly 300 patients, he dreamed of early retirement to Costa Rica, where he would spend his days as a beach bum renting surfboards to tourists.

Then came a regulatory crackdown. Fifteen months later, Brown’s business — mired in red tape and compliance costs — isn’t the moneyspinner he imagined it would be.

“I made more money doing concrete,” says Brown. A former construction worker and oil rig roughneck, he and his business partner Dave Schwaab are among the thousands of Coloradans who jumped into the legal pot business in late 2009.

That’s when the U.S. Department of Justice ordered federal prosecutors to lay off busting such businesses where they’re legal under state laws — sparking a Renaissance/gold rush.

Marijuana’s use by qualifying patients had been quasi-legal in Colorado for almost a decade, since voters amended the state constitution in 2000 to allow it. But there were no statewide regulations governing its sale and distribution. The federal ban still trumps Colorado’s state law, but enforcement was light. The rapidly expanding market seemed to promise piles of easy money.

Then in 2010 Colorado tightened the screws. New laws imposed tough and often expensive standards on how business could run. Suddenly owning a pot dispensary — officially called a Medical Marijuana Center, or MMC — became no more profitable than owning a liquor store.

The new rules include minimum distance requirements between MMCs and sensitive community areas like schools and churches; a minimum two-year residency requirement for MMC owners; restrictions on felons working at or owning MMCs; and detailed control measures for every seed grown and every ounce of bud sold throughout the state.

Regulations adopted just this month include detailed surveillance requirements at dispensaries and meticulous inventory tracking. A bill introduced in the state legislature threatened to ban the sale of edible marijuana products like pot brownies — bestsellers that shop owners rely on — before patient outcry convinced the sponsor to drop the measure.

Perhaps worst of all for business owners is a provision that allows local communities to adopt even stricter standards than the state, including outright bans. With each new election, dispensary owners must worry about whether they will be voted out of business.

March 1, for example, was the deadline for pot shops in the city of Loveland to close down, following November’s vote to ban them from within city limits. A handful of MMCs sued the city, setting up the possibility of a trial to determine if such measures are compatible with the state constitution.

Such an unpredictable business environment makes it tricky to plan for the future. Minting millions is no longer many pot-shop owners’ immediate goal. They’re simply struggling to survive.

“The uncertainty is killing us,” Schwaab says.

Abundant Healing is one of 23 MMCs in Fort Collins, a college town of 145,000. Brown and Schwaab have yet to earn back their $150,000 investment in the business. Depending on how sales go, they each take home between $2,000 and $4,000 per month.

Their situation isn’t unique. Dispensary owners in Denver, which has the highest concentration of marijuana operations, laugh at the perception that they’re raking in dough. Erik Santus, who owns two Lotus Medical locations in Denver and Boulder, said that when he opened the doors in October 2009, his businesses experienced 50% to 100% revenue growth month-over-month for the first several months of operation. Now, he says, 6% to 8% growth is considered healthy, with many shops “just making enough to survive.”

It’s a transition not every operator was prepared for.

“A year and a half ago, you just had to have a door and be open for business in order to have a business,” says Elizabeth Robinson, the CEO of a medical marijuana-focused public relations company, Grow Room Communications. “But any time something goes from being a movement to being an industry, there are growing pains. All these regulations are par for the course, for any business.”
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Many medical marijuana advocates applaud Colorado for seeking to manage an industry that other states have tried to quash. Of the 15 states that allow the medical use of marijuana, Colorado is the only one with a government-sanctioned, for-profit distribution model up and running.

But some of the field’s entrepreneurs complain that the state has over-reached.

Regulators have an eye on every step of the growing, manufacturing and sales process, and the state has imposed a rigorous and expensive licensure system. Depending on the number of patients MMCs serve, initial licensing fees run from $7,500 to $18,000. New rules call for centers to grow at least 70% of the pot they sell. That requires an additional one-time $1,250 cultivation license — plus a capital investment for warehouse rental, growing equipment and security expenses.

The requirement was adopted so that regulators can account for the pot being sold and ensure it’s not being diverted to the black market. But for dispensary owners, the so-called 70% rule carries the risk of a catastrophic crop failure wiping out a shop’s supply, which would doom many businesses.

Background checks are another bottleneck. The state is currently conducting more than 4,000 investigations on 2,376 business applications, according to Julie Postlethwait, spokeswoman for the Medical Marijuana Enforcement Division of the state Department of Revenue. Applicants must be vetted through some 20 databases to check everything from their criminal records to whether they’re current on their taxes and child support payments. Each must be individually interviewed. The department has until July 1 to work through its backlog — and until then, no more applications are being accepted. The moratorium on new businesses may also be extended.

“Our industry is regulated more than any other industry in Colorado, by far,” says Rob Corry Jr., a lawyer specializing in medical marijuana who is representing the MMCs suing Loveland. “It’s much easier to become a lawyer than a dispensary owner, in terms of barriers to entry. We’ve got these tight, tight regulations and it threatens to crush us, at least on the legitimate side.”

Still, Brown and Schwaab see the contraction as a natural shaking-out period for a nascent industry — one unique in U.S. history, since its primary commodity remains illegal under federal law.

They just hope they can survive it.

“We’re in this for the long haul,” Schwaab said. “I think a lot of people who got into the business calculated the pounds of marijuana they could grow and didn’t anticipate normal business costs. Our margins are no different than any other retail business.

“If we’re able to continue as we have been, we’ll make a reasonable living,” he added. “We won’t be making the huge dollars that everyone thinks we’re making.” By Greg Campbell Source.

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