Real estate agent Rona Hanson walks around a suburban home west of Denver that was recently put on the market by another realtor, liking what she sees. The 3,000-square-foot midcentury brick bungalow is in fine shape, with a picturesque horse farm across the street and front-porch views of the snow-topped Colorado foothills. But what most excites Hanson about it, why she’s eager to show it to her clients, is the 50-square-foot bedroom in the far corner of the basement, a bland space with small windows near the ceiling and a basic attached bathroom. Not your typical selling point for a house, but to Hanson, it’s perfect—a perfect grow room for a dozen recreational marijuana plants, the maximum Colorado residents are now allowed to cultivate per household.
The room offers high enough ceilings to accommodate grow lights, has easy access to water and drainage via the bathroom, and the small windows mean minimal aromas attracting nosy neighbors. This is the sort of stuff Hanson looks for. Since Colorado’s legalized marijuana rules went into effect on Jan. 1, Hanson has advertised her services on Craigslist and in the alt-weekly Westword as a marijuana-friendly realtor, helping people find the perfect property to grow marijuana for personal use, under the tag line “Need room to grow?”
“I think I found a niche,” says Hanson, who comes across more like a low-key grandmother than a high-pressure real estate agent or a pot-crazed zealot. “The last few weeks have been crazy. I’ve been getting 10 calls a day.” Within a day of advertising her services, Hanson, who says she smoked pot in the 1960s but doesn’t anymore, says she received more responses than she had in several months working in her previous specialty: handicapped-accessible housing. Half the calls are from people interesting in leasing pot-friendly residential properties to renters, while another quarter are out-of-state folks planning to move to weed-friendly Colorado. Some callers are looking for real estate for commercial grow facilities or pot shops, and these she directs to her commercial real estate partner. “That’s a whole different ballgame,” she says, adding that because of the high demand for such commercial spaces, plus legal limitations on where commercial marijuana businesses can locate, her partner is having major troubles finding viable properties. That’s why she’s sticking with the personal-consumption market, for whom this particular bungalow could be a great fit. Almost as an afterthought, she notes its upgraded appliances and granite countertop: “It would make a comfortable home to live in as you grow, as well.”
As Hanson is discovering, in the world of legalized marijuana, pot shops and grow facilities aren’t the only business opportunities; there are also all the ancillary businesses that service those pot shops, grow facilities, and the pot-smokers themselves. “You can relate it back to the gold rush,” says Ean Seeb, co-founder of the Denver Relief marijuana consulting company. “For every chunk of gold, you needed picks and shovels, a pan and a sifter, and the same thing applies to cannabis. For every gram of marijuana, you need a bag, labels, receipts, exit packaging, point-of-sale, a way to pay for it, staff, uniforms, a payroll company, insurance, and so on.” It’s why among Denver Relief’s clients is the 100-year-old Denver company Central Bag & Burlap Co., which is now a leading player in the marijuana wholesale packaging business thanks to its MMC Depot division, which sells all types of packaging, from “Root Pouch” fabric grow bags to “CoolJarz” screw-cap containers.
To judge by Colorado’s history, companies like Central Bag & Burlap are making a wise business move. It was the pick-and-shovel, service-and-supply hubs for the Colorado gold rush in the mid-19th century that would go on to become Denver, Boulder, and other established cities. Most of the communities built around actual gold mining in the mountains long ago dried up into ghost towns.
Ancillary businesses are particularly attractive to out-of-state investors. That’s because to have an equity interest in a Colorado marijuana business, state law requires at least two years of Colorado residency. So if you’re an out-of-state entrepreneur who wants to bet on the new industry today, the only choice you have is to invest in the picks and shovels—buying interest in megasized garden product stores, consolidating real estate portfolios to lease to Colorado-based pot-store owners, funding research and development for thumbprint-based security systems for grow facilities.
Plus, while buying recreational marijuana is starting to feel downright ho-hum here in Colorado, let’s not forget that selling, cultivating, and manufacturing marijuana remains prohibited by federal law. Thus, risk-averse businesspeople might prefer to invest in companies that are not directly involved in violating federal law. Ancillary marijuana businesses have another thing going for them: They are far more scalable than the companies they service. As Gregg Holtzman, a partner at Opus Group LLC, explains, “If you’re a marijuana business, you’re tied to one state.” For licensed marijuana businesses, moving to a new part of the country means complying with new sets of marijuana regulations each time. Marijuana side-businesses, however, don’t generally have to follow various state-specific rules, so it’s easier for them to expand into new territories as legalization expands.
Of course, just like regulating and operating licensed marijuana shops has led to all sorts of confounding challenges, launching an ancillary business in a new industry involves its own share of difficulties. Here’s a sampling of the marijuana side-businesses taking root in Colorado and the unique questions each is having to answer:
When you purchase a bottle of Maker’s Mark, you understand what each shot of it will do to you. But how do you determine the potency and consistency, not to mention chemical makeup, of the marijuana brownie you’re cooking up for sale? If you’re a producer, you turn to Genifer Murray, CEO of 3-year-old CannLabs Inc., Colorado’s longest-running marijuana testing facility, which aims to be among the first of its kind certified in the state once Colorado begins issuing marijuana testing licenses. (While marijuana and marijuana products need not be tested for contaminants or potency under Colorado law, if they are not tested, they must so indicate on their labels.) Murray, for one, says businesses like hers are desperately needed: “Consumers just don’t know what’s in this stuff.” For example, CannLabs found one edible that claimed to contain 300 milligrams of the medically beneficial component cannabidiol (CBD) contained just 16 milligrams it. “It’s like paying for Vicodin and getting sugar pills,” she says.
Unfortunately, while marijuana is made up of at least 85 different chemical compounds called cannabinoids, many of which have different properties, CannLabs only currently tests for nine of them. That’s because before CannLab’s equipment can identify a cannabinoid, it has to be calibrated using a drug reference standard of that cannabinoid—and such reference standards aren’t easy to come by. Since CannLabs doesn’t have a Drug Enforcement Administration license to produce Schedule I narcotics, it can’t produce its own reference standards, and purchasing them from pharmaceutical supply companies that do is expensive. So for the time being, determining all the risks and benefits contained in that pot brownie remains a bit of a mystery.
“The difference between a drug dealer and a legitimate operation is a point-of-sale system,” says Mark Goldfogel, co-founder of MJ Freeway, a POS, inventory control, and client-record system that’s been used in Colorado dispensaries since 2010. That’s because the only way to legitimize (i.e., tax) all that product is by systematically tracking inventory. And with marijuana, says Goldfogel, not any old POS system will do. In this business, your product literally disappears; over time, a percentage of the marijuana evaporates or degrades into “shake.” That product loss has to be built into the system or it could end up looking like theft or black-market diversion, not the sort of thing marijuana businesses want to be accused of.
Mergers and acquisitions
When Colorado first required medical marijuana businesses to vertically integrate in 2010, the industry was full of shotgun marriages—growers and retailers suddenly had to combine forces into a single entity to comply with the law. Now, as many of those businesses transition to recreational marijuana, some of the growers and retailers involved are going through divorces and shacking up (i.e., consolidating) with other operations. That’s where Chloe Villano comes in. She’s the CEO of Clover Leaf Consulting, which she believes is one of the only business firms in the country that specializes in marijuana-related mergers and acquisitions. Her website could be mistaken for a dating site, with separate areas for those seeking to sell a licensed cannabis business and those seeking to buy one—with Villano playing the matchmaker.
Villano says it can take months for her to find the right business for a potential buyer—she’s seen deals come apart for any number of reasons. In the beginning of her operation, she says that those running marijuana businesses were true believers; they’d seen medical marijuana help people they cared for. Now, she says, “you have big-business Wall Street guys” looking to get into the business. She has to explain to them Colorado licensing law and its residency requirements, byzantine local zoning ordinances, and the other regulatory hurdles. “There’s so much people don’t understand,” she says.
If a marijuana operation wants to comply with Colorado’s 12 dense pages of security rules—detailing everything from the location of security cameras to the dimensions of accompanying video monitors— the Denver-based Canna Security America is the company to go to, says CEO Daniel Williams. That’s because Williams and his partners helped write the rules in 2009 when they were part of the local security company Envision.
In the years since, Williams says the state’s medical marijuana industry hasn’t been the target of many sophisticated burglaries. (Among the more spectacular were the Boulder couple who dressed up as ninjas, complete with samurai swords, to hold up a dispensary for one jar of pot and the guy who belayed into a grow facility one night, Mission Impossible–style, only to realize he had no way to get back out before the police arrived.) In fact, says Williams, he’s only aware of two armed robberies of Colorado marijuana operations, a number he says is “ridiculously low” compared to the rates for liquor stores or gas stations.
That doesn’t mean the 12 pages of security rules aren’t necessary, says Williams. He says all those cameras and video monitors help to deter a much more common kind of theft in the industry: the internal kind, with a bit of pot pocketed here and there by budtenders or shop employees. “You’re dealing with a small cash crop that’s very valuable, very transportable, and hard to track,” he explains.
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Since most of these businesses don’t directly involve growing or selling marijuana, they appear to be on safe legal ground. (Though these days, the entirety of Colorado’s legal marijuana industry seems pretty secure, considering President Obama said that “it’s important for it to go forward” in a recent New Yorker profile.) But that doesn’t mean these ancillary businesses don’t have to be careful. After all, what if the tide shifts and the federal government changes its mind—are these side businesses really safe from any crackdowns? After all, according to federal law, if any part of your property is involved in the manufacture or distribution of controlled substances, that entire property can be seized by federal officials. That means Central Bag & Burlap Co. could lose its business, MJ Freeway’s detailed customer records could be confiscated, and that lovely suburban bungalow Hanson is shopping around to marijuana growers could be snatched up by the government.
Hanson, for one, isn’t too worried about the risk of mixing real estate and marijuana. “People buying a property should do their due diligence and seek an attorney’s advice,” she says. “But I don’t really see the feds coming in and grabbing property in Colorado. From the looks of it, that would really be a nightmare for the feds.”
Nor does she recommend that residential pot growers dismantle their in-home grow rooms before they look to sell or lease to someone else. As she’s come to discover, in Colorado these days, it’s not a liability: “It’s an added value to the property,” she says.
Next up: Colorado is awash in new pot sales—but what do you do with all that money? Because of federal rules, banks and credit card companies aren’t supposed to touch it. A look at how Colorado is trying to manage its pot-fueled cash flow.