LEGAL ISSUES

Legal Marijuana Industry Is Slow to Catch Fire

Recreational marijuana is now legal in Colorado and Washington. But while pot proponents celebrated the victories, entrepreneurs say the so-called Green Rush to join a $1.7 billion industry is still a long way off. Here's why.
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Colorado Governor John Hickenlooper may have said it best when he warned his constituents recently not to, "break out the Cheetos and Goldfish too quickly."

He was referring to the passage of Amendment 64, which made a change to the state's constitution in order to legalize recreational use of marijuana. The vote coincided with the passage Initiative 502, which does the same for Washington State.

Both were big wins for legalization proponents, but now that the Election Day high has mellowed, it seems the so-called Green Rush to the marijuana industry is still a long way off. Despite their support for ending what many refer to as prohibition, and the fact that the medical marijuana industry is already worth $1.7 billion, it seems most marijuana industry insiders are reluctant to be the guinea pigs in a market that's not only new to consumers, but still very much illegal on a federal level.

"There's always plenty of risk to opening any kind of retail store, even a cafe, but one of those risks is usually not that the federal government will come raid you and shut you down," says Aaron Varney, co-founder of a Seattle-based medical-marijuana dispensary called Dockside Cooperative. "Until the federal contradiction is more clear, it's going to be really tough for people to rationalize investing time, energy, and money into a business that could be shut down by the feds whenever they want."

After President Barack Obama took office in 2008, the Justice Department announced that it would cut back on Bush-era raids of medical marijuana dispensaries. This gave their owners some comfort--however slight--that as long as they obeyed state laws, their businesses would be safe. But since I-502 and A64 passed, the federal government has made no such guarantees.

At the same time, most of the rules regarding how A64 and I-502 will be implemented have yet to be written.

In Washington, the state liquor control board has until December, 2013 to draft its framework, and in Colorado, the Department of Revenue has until next July. The only pieces of legislation that will go into effect almost immediately concern individuals' rights. Both laws dictate that adults older than 21 may have an ounce of marijuana in their possession at any time. In Colorado, A64 also states that adults may grow six plants in their own homes, with just three flowering at a time.

The individual rules will go into effect before the end of the year. Meanwhile, even eager entrepreneurs continue to wait until they know more.

"You never want to be the first people to try anything in this industry," says Kayvan Khalatbari, co-founder of Denver Relief, a medical-marijuana dispensary based in Denver. "You're just begging for federal intervention."

That being said, Khalatbari, Varney, and their cohorts in the medical marijuana industry do have some guesses as to how this will all play out. For starters, Denver or Seattle will not be the "new Amsterdam" some opponents feared. In both Washington state and Colorado, marijuana use will only be legal within a private residence, meaning the coffeeshop culture Europe's most pot-friendly city is known for won't be an issue. Instead, marijuana will be treated more like alcohol, with state-licensed shops selling the goods.

Another assumption is that the recreational industry will have to comply by the same zoning laws that medical dispensaries follow. Those zones are typically determined by local communities, and most often, they refer to the dispensary's proximity to a school, hospital, or public park. Failure to abide by those rules is one mistake that entrepreneurs should watch out for, because it definitely attracts federal attention. In August, the Drug Enforcement Administration shut down 23 dispensaries in Washington for operating within 1,000 feet of a school.

Both states are also imposing hefty taxes on the recreational industry, in addition to the state, local, and sales tax medical dispensaries already pay. In Colorado, marijuana will be taxed at 15% for the first five years, with the possibility of an increase after that. In Washington, it will be taxed at 25% at three stages of the lifecycle: sale, production, and processing.

According to Varney, "People will have to do an in-depth financial analysis to make sure it's worth their while to even do it with all the taxes and fees imposed."

There are other headaches the medical marijuana industry endures that won't likely go away as the new industry emerges, including the inability to secure a loan and open a corporate bank account.

"Banks don't want to touch this industry," Khalatbari says. And as might be expected from an industry whose very legality is a contradiction, entrepreneurs looking at this space should expect a lot of "gray areas" to pop up, like the fact that selling marijuana is legal, but buying seeds is not.

"It's sort of a don't-ask-don't-tell policy," says Khalatbari. "There are a lot of avenues to buy seeds, but none of them are entirely legal."

As for how the government will track what is being sold (and to whom) in the recreational space, each state can expect something different. In Colorado, there are already air-tight rules around tracking a plant from seed to sale and linking that plant to its corresponding patient. As recreational dispensaries open, Khalatbari says some of those requirements will likely be lifted. "I could see them still tracking the plants from a numbers standpoint, but you're not going to have to track your patients," he says. Instead, customers will only need to show a state-issued ID to prove they're 21.

In Washington, where laws regarding medical marijuana dispensaries are fuzzy, the rise of a recreational market is expected to bring more regulation.

"There's no state law in Washington that says you have to track your patients, but I could see them now saying you have to track inventory, where it goes, and where it comes from," says Hilary Bricken, an attorney specializing in marijuana law with Canna Law Group, "They're already doing that in Colorado, and I'd anticipate it would play a part in recreational use here to make sure people aren't straight-up drug dealing."

The types of entrepreneurs who will be joining this space seem to vary state to state, as well. According to Brian Vicente, an attorney with the medical marijuana law firm Vicente Consulting and one of the drafters of A64 in Colorado, the medical marijuana industry was influential in developing the amendment there.

"We had their interests in mind when we were drafting this, so there is some preferential treatment given to them," he says. That means people who already have a license to sell medical marijuana will be the first to receive recreational licenses if they so choose. They will also have lower application fees and the advantage of having already worked with the Department of Revenue.

In Washington, on the other hand, the two arms of the industry have already butted heads, with medical dispensary owners leading the fight against I-502 prior to the election. Bricken says we can expect to see much more of this in the future, especially if the liquor control board makes marijuana entrepreneurs choose one type of facility or the other. "I do think it'll create turrf warfare. You're going to see insane competition," she says. "I think that'll scare the crap out of the medical business, because they're going to want to do both if they can."

Of course, this industry will be made up of more than just dispensaries. Growing and processing operations will also arise, although most people in the industry believe starting that type of business will require some deep pockets. According to Varney, the tax structure on growers in Washington will make it so they need to rely on economies of scale. There's also substantial risk involved. "You're talking about a really really big grow operation, and to me, that just has a huge bullseye over it," he says. "They're going to license the biggest grows in the state."

Meanwhile, Khalatbari, who also owns two pizza restaurants called Sexy Pizza in Denver, is eyeing a another industry that would allow him to dip a toe in the recreational market: marijuana friendly hotels.

"It gets us in, without taking on the liability," he says. "If you have a hotel that's honest and open about the fact that people over 21 can use marijuana safely and legally in a private room, that can have a huge impact."

But until more legislation is passed, no one is making any sudden moves, and, according to Bricken, that's wise.

"My recommendation is to tread carefully. Cannabis is still a federal crime, and people need to embrace that risk," she says. "People should expect to run a tight shop, grow, or processing facility or face the consequences."  

IMAGE: Getty
Last updated: Nov 19, 2012




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