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The Bu$ine$$ Of Medical Marijuana

Industry Growing Despite Crackdowns, Presenting Unique Opportunities For Entrepreneurs And Investors

By Joshua H. Silavent
Staff Writer

November 20th, 2012 – When voters in Colorado and Washington State passed initiatives to legalize the recreational use of marijuana on November 6, it put Long Beach’s tortuous history with medically sanctioned use back in the spotlight for one very compelling reason: Money.

The wholesale legalization of marijuana, whereby the cultivation, sale and distribution is regulated similarly to alcohol or tobacco, promises big bucks for cash-strapped municipalities and state governments.

The medical cannabis industry alone was worth about $1.7 billion in 2011, according to a report by the financial news firm See Change Strategy. That figure could reach nearly $9 billion nationwide in five years, as more states are likely to legalize marijuana for medicinal purposes. On Election Day, Massachusetts became the nation’s 18th state to advance medical marijuana. Even Washington, D.C., the seat of federal law – which still defines marijuana as a Schedule I drug on par with heroin – allows patients to receive a prescription to get high.

The much-maligned medical marijuana dispensaries and retail storefronts catering to patients present enticing opportunities for entrepreneurs and investors. California represents the single biggest market in this industry, but Colorado lawmakers and law enforcement are the most receptive to these emerging businesses, See Change Strategy reports. The proliferation of federal raids in California, in conjunction with local municipalities, in recent years makes this fact seem obvious to even periphery viewers of the medical marijuana industry.

The National Cannabis Industry Association reports that the medical marijuana industry in 10 Colorado cities generated more than $10 million for government coffers in 2011 through licensing fees and taxes. Of course, this windfall is likely to rise exponentially with the wholesale legalization of marijuana.

This newfound revenue closes budget shortfalls, supports public safety services, keeps teachers in classrooms and the street lights on, said Tripp Keber, managing director of Dixie Elixirs and Edibles, LLC, which produces 65 marijuana-infused products at its Denver-based plant. “I try to tie it back to two things: taxes and jobs,” he added. “The winner at the end of the day is two-part: the government . . . as well as the consumer.”

More than 500 medical marijuana dispensaries currently operate in Colorado, servicing more than 100,000 patients and employing an estimated 10,000 people in directly related jobs, Keber said.

Because California lacks the same control and regulatory oversight of medical marijuana dispensaries, it is unknown how many are currently operating in the Golden State. But Los Angeles alone has seen hundreds of shops open doors in recent years. “California is still kind of the Wild West,” said Derek Peterson, CEO of Terra Tech Corp., a publicly traded firm specializing in hydroponics equipment. Peterson is a former investment banker who lives in Orange County.

Despite the fact that medical marijuana is legal in the state, coupled with widespread decriminalization of recreational use, California spends an estimated $2 billion annually enforcing prohibition, according to Jeffrey Miron, director of undergraduate studies at Harvard University. How much of this spending is related to interdiction of medical marijuana is unclear, but it’s safe to say, based on the increasing number of federal and local raids on dispensaries, that more and more state and federal resources have poured into California cities to fight the growth of this sector in recent years.

And this speaks to Keber’s point: Regulation, and by consequence eliminating the need for interdiction or prohibition, could save American taxpayers potentially tens of billions of dollars each year, money that might be better directed at shoring up budget deficits that plague so many states and municipalities across the country.

Furthermore, the government-sponsored National Survey on Drug Use and Health reports that in 2009 in excess of 28 million Americans admitted to having used marijuana in the previous 12 months. In addition, an estimated 100 million Americans or more have tried marijuana in their lifetime. Any objective analysis of marijuana prohibition (whether medical or recreational) must, therefore, consider the efficacy of a law that one-third of the nation’s population has chosen to defy. And when it comes to the business of marijuana, these figures promise untold expansion in the industry, a prospect not lost on entrepreneurs, investors and everyday businesspeople looking to profit from a cash crop that has so much room for growth.

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Cliff Schaffer, editor of MarijuanaBusinessNews.com, told the Business Journal that the size of the marijuana market has the potential to rival the size of the beer and wine industry.

Keber agrees. “Big Alcohol, Big Tobacco, Big Pharma clearly are watching,” he said. Of course, California’s role is likely to remain limited for the foreseeable future. Legalization of marijuana for recreational use lacks popular support, but Colorado and Washington State might one day prove to be the tipping points, driving other states to follow their lead.

Nevertheless, medical marijuana is here to stay in the Golden State. And this side of the industry promises profound growth in its own right, so long as municipalities like Long Beach choose to capitalize on it.

“There’s a lot of high-tension activity going on right now,” said Councilmember Suja Lowenthal, referring to a recent spate of raids on dispensaries in the city following a ban set in place earlier this year. She added that she’d like to see the city regulate the industry by setting parameters and limiting the number of licensed medical marijuana dispensaries. Doing so will push out the bad actors and drive new revenues to the city.

“I’m looking at it as a local policymaker,” she said. “We’re leaving money on the table.”

More and more, those in the marijuana industry are advocating for regulation. For example, Keber said the number of dispensaries in Colorado has been on the decline. Part of this might simply reflect natural market forces as consumers become more discerning. At any rate, “That attrition has been necessary and important,” he said. “At the end of the day – and I’m not detracting from any specific person – I don’t have dreadlocks, I don’t have a Bob Marley T-shirt. I have Ph.D.s, food scientists, bio-engineers. The reality is that we’re doing things right. Ideally, the federal government . . . will embrace us as an industry and help us regulate. We welcome that.”

For all of California’s trials and tribulations with the medical marijuana industry, Oakland might prove to have designed a model for municipalities across the country. City officials have actively worked with the medical marijuana industry to write sensible regulations, limit the unchecked proliferation of dispensaries and ensure the safety of communities where they operate by restricting location sites.

For example, Peterson opened a dispensary called Blüm (pronounced “bloom”) in mid-November in the city’s downtown sector following an extensive review, permitting and licensing process. Peterson said he developed a strong business plan to address city leader’s concerns and that his store pays a 5 percent special purpose tax (or sin tax) on top of a 9.75 percent sales tax. “It goes to fund public services,” he said.

Peterson estimates that he will likely do $9 to $10 million in sales by 2014 and support up to 40 jobs. He is hopeful that with the backing of city officials, Blüm will not face federal interdiction.

But moneymaking and investment opportunities are not limited to these kinds of retail centers. In fact, the industry supports a plethora of ancillary businesses that are booming these days, all of which lack many of the legal and financial risks associated with operating storefront dispensaries.

For example, businesses that produce consumption devices and cultivation products have rapidly developed.

“I do think that, as the laws change, the way that cannabis gets consumed and the ways that it gets grown, and who consumes it and who cultivates it, that may change,” said Troy Dayton, founder and CEO of the ArcView Group, a national firm headquartered in the Bay Area that connects accredited investors to the burgeoning ancillary market. “So there is a lot of opportunity for making money in noticing where those shifts are going to be and picking the right companies that are going to capitalize appropriately on those shifts.”

But the number of ancillary businesses springing forth to support the medical marijuana industry doesn’t end there. Dayton identified a number of sectors, including product standards testing; consumer information advocacy, such as media and publishing groups; advertising and promotion; human resources; trade shows and educational institutions; and, certainly not to be overlooked, the production of hemp, which can be used to make fibers, plastics and in a litany of industrial applications.

When investing in these markets, Peterson said people need to consider and analyze the same things they would when looking to throw money into any other market, such as competitors, traffic, risks and rewards. Trade shows like the National Marijuana Business Conference, which was held in Denver in early November, help support emerging investors and entrepreneurs navigate the fast-evolving world of the legal marijuana industry.

In an ironic way, the Great Recession has played a significant role in the growth of the medical marijuana market and shifting public opinion in favor of legalization, both for medicinal and recreational use. Whereas arguments once centered on moral questions, such as the societal value of imprisoning hundreds of thousands of users, the economic equation has now taken the lead.

“There has never been a more powerful mechanism for change in the world than profit,” Dayton said. “If you can figure out how to make something profitable, you can get that thing done faster.”

Peterson concurs. “If we hadn’t had the market crash (he was working at Wachovia Securities at the time) . . . I don’t think we would have seen certain cities become so progressive in their support,” he said.

Dayton said business leaders supportive of the industry need to be proactive in promoting policies and policymakers that understand the economic upsides of a legitimate, structured, licensed medical marijuana market. “We’re at a crossroads from an industry perspective,” he added.

“I cannot tell you how many political campaigns I personally have donated to, as well as our industry,” Keber said. “I personally, as an entrepreneur and businessperson, have received incredible support.”

But even if the economics make sense, it will take a sea change in political thought to ultimately drive growth in the medical marijuana industry and ensure its legality. But more politicians of all stripes are answering the bell.

“The misnomer here that all our states have to come to grips with is, whether you legalize it or not, this industry is live and in full color,” Councilmember Lowenthal said. “But you drive it underground, those transactions continue and municipalities that bear the brunt of the public safety challenge will never be remunerated a dime for those impacts. Saying that it’s illegal does not make it go away.”