Colorado sets the bar for legalized pot industry

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, its 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.

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,” Romer said.

With a new law in place, a retired liquor regulator and onetime 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.”

Denver Relief’s grow site, in a nondescript warehouse in northeast Denver, is a midsize 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-size 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.