Legalized Drug Dealing: An Inside Look at Colorado’s Massive Marijuana Industry

"We can't grow the stuff fast enough to sell it," the co-founder of a massive medical marijuana company said as we stand amid thousands of six-foot-high cannabis plants in his cultivation facility in Southern Colorado. In what's being termed the "Green Rush" -- reminiscent of the gold rush that populated much of the region in the 1860s -- budding entrepreneurs and businessmen are pouring into the state in search of newfound riches from legalized marijuana.

Few people personify this opportunity better than my guide for the day. Five years ago, he was working as a line cook in a nearby ski resort. Today, he owns and oversees multiple medical marijuana retail outlets as well as a huge industrial growing facility (a second and even larger one is under construction). "We help customers every minute of every day," one of his retail managers tells me. And I believe it. As we shuttle between locations, my guide is behind the wheel of 2014 Porsche Cayenne.

Marijuana: One of the fastest-growing industries in America

Inside one of 13 flowering rooms at a massive medical marijuana growing facility in Denver. Photo by author.

While medical marijuana dispensaries are as ubiquitous as liquor stores in much of Colorado, there's little evidence of the large-scale commercial growing facilities now scattered throughout the state's biggest metropolitan areas. By one estimate, between one and two million square feet of industrial real estate is dedicated to pot production in Denver alone. And according to Tim Leigh, one of the busiest commercial real estate brokers in the area, the business "saved the industrial real estate sector in Colorado Springs," the state's second-largest city.

"After 3D printing and cloud computing, marijuana is one of the fastest growing industries in the country," a local institutional investor told me. In the most recent fiscal year, medical marijuana sales in Colorado soared by 50%, exceeding even the most optimistic projections. According to data from the state's Marijuana Enforcement Division, the body in charge of regulating the trade, retailers reported revenue of $329 million from July 1, 2012 through June 30, 2013. That equates to an average of roughly $633,000 in sales at each of the state's 520 dispensaries, and more than $9 million in tax revenue for the state.

Nowhere was this growth more apparent than during my visit to what is reputed to be the second largest medical marijuana farm in Southern Colorado. The nondescript front door opens into a small office filled with a desk, a computer, and multiple devices that run a sophisticated security system -- the latter of which is mandatory under state rules governing cannabis cultivation. "The camera outside the door takes a picture of every person that enters and exits the building," says my guide, who gives off the vibe of a professional skier. "And it immediately uploads the pictures into the cloud in the event that our phone and network cables are cut during a burglary."


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There are two things that strike you about a facility like the one I'm in. The first is that there's very little superfluous space. Aside from a small area dedicated to processing harvests, the rest of the building is packed with plants of various sizes and maturity. "I never like to see light hitting the floor," the facility's owner tells me. And, at least by my observation, he's probably satisfied. The only available floor space in each of the rooms is reserved for walking paths -- and even those are more akin to an airplane aisle than, say, the Champs d-Elysees in Paris.

Recently cloned cannabis plants. Photo by author.

The second thing that strikes you is that the layout of the roughly 6,000-square-foot industrial space is designed around the five stages of a cannabis plant's lifecycle. The first is the cloning stage, during which the branch of an existing female plant is severed and inserted into a propagation block for seven to 12 days. The objective is for the newly independent plant to grow its own set of roots. The second is the "veg" state, during which a cloned plant is subjected to light 24 hours a day for approximately two months. The halide bulbs used in this step mimic the summer sun, thereby signaling to a plant that it's time to grow.

The most important is the third stage, during which a plant flowers and thereby produces the buds that are then sold to customers. For 50 to 75 days, the by-now three-foot-high plant is switched to 12-hour light cycles under sodium lights. The softer, reddish tint of the bulbs, as well as the cycle itself, mimics the fall season, and in doing so signals to the plant that it's time to bud. The fourth and fifth stages, meanwhile, consist of processing the plant and then curing the saleable products by allowing them to dry out on tiered screens. Altogether, a good facility should be able to complete five full cycles like this a year.


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The risks and rewards of marijuana cultivation

While even large-scale growing facilities like the ones I visited appear rudimentary to the untrained eye, running a highly productive operation is easier said than done. To maximize yield, plants in the flowering stage need to be grown at precisely "78 degrees, with 48% humidity, and a light breeze," explained Van McConon, a senior consultant with Colorado Cannabis Systems in Boulder. Additionally, given that you're dealing with plants, there's always the threat of pests and other types of diseases that can ruin an entire crop over the course of an evening.

The exterior of one of Colorado's largest medical marijuana grows. Photo by author.

There are also structural issues that plague the industry. They don't have access to banks -- or, at least, they don't so long as the bank knows what they're doing. They can't deduct costs associated with selling marijuana on their federal income taxes because it's still an illegal activity as far as the Internal Revenue Service is concerned. And there remains the ever-present threat that the federal government will reverse course on its current policy of forbearance. In the middle of November, for instance, federal agents raided a Denver facility with alleged links to a Colombian drug cartel.

But for those that can navigate these pitfalls, there's money to be made. Speaking generally, a 10,000-square-foot growing facility -- which isn't large by any stretch of the imagination nowadays -- can house upwards of 300 lamps. Each of the lamps dedicated to the flowering stage, which generally equate to two-thirds of the total fixture count, will yield in the neighborhood of 6.25 pounds of cannabis through the five annual cycles. In this case, that equates to 1,250 pounds a year. At current wholesale prices, that's $2.75 million worth of marijuana. Meanwhile, it costs only $1.25 million to produce, translating into a profit of $1.5 million and a net margin of 55%. Suffice it to say, it's easy to see why so many people are scrambling to get into the industry before heightened competition inevitably drives profits like these down.

The new frontier of legalized marijuana

There are any number of arguments that can be made both in favor of and opposed to the legalization of marijuana for medical and now recreational use. But whatever you believe about the issue, there's simply no question that it's here and growing. With the opening up to recreational sales in 2014, the market in Colorado alone could double if not quadruple over the course of 12 months -- all dependent on the availability of supply. This is big business, in other words, and it's a business that enterprising investors may want to consider sooner rather than later.

For more on John's exploration of this booming industry, click here.

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Read/Post Comments (35) | Recommend This Article (41)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 05, 2014, at 11:53 AM, powderdayfortad wrote:

    Thanks John for coming out to Colorado Springs and touring our facilities. We are all trying to make the right decisions within our communities given our responsibilities. As your previous article states, public display or consumption of marijuana is still illegal. We have worked to ensure a safe environment for all guests coming to Colorado to visit on vacation. Whether one consumes marijuana or not, Colorado is a wonderful place to be and is a vibrant place to live, work and enjoy. Thank you to all across the country who helped make this possible.

  • Report this Comment On January 05, 2014, at 12:21 PM, MidnightMoses1 wrote:

    I understand you cannot obtain a license to open one of these marijuana distributorships if you are a convicted felon. But, how does that work now that it is legal if your felony was for selling pot in the first place? Insult to irony.

  • Report this Comment On January 05, 2014, at 12:22 PM, handyb wrote:

    To invest in the marijuana industry check out publicly traded companies like Growlife Inc, symbol PHOT. They sell equipment for large and small scale grow operations like these. They are also lending growers money and equipment to get started. Do your own due diligence and good luck in this exciting new industry. Get your own piece of the pie.

  • Report this Comment On January 05, 2014, at 12:32 PM, VROD2003 wrote:

    The new cash crop for the new american entitlement nation. Get high, no work, let the government support me, I don't wanna work. Let's here it for da gimme's and da tokens. We are certainly moving forward. Can't wait to buy my land be a marijuana contributor. Nothing like providing the best for our tokers. Ain't life grand?~! Any thing goes. Every thing in reverse. Smoke a bowl and be on the public Dole!

  • Report this Comment On January 05, 2014, at 12:35 PM, handyb wrote:

    At least weed doesn't kill hundreds of thousands of people each year like alcohol and tobacco combined. If you wanna buy it, buy it. It should be like any other product sold in stores. Just be sure to use it, not abuse it.

  • Report this Comment On January 05, 2014, at 12:36 PM, dreamflyer wrote:

    "Legalized drug dealing" has been going on ever since prohibition of alcohol was abolished in 1933. Alcohol is a drug and a potent one at that! And lets not forget the legalization of tobacco that kills many people every year. I feel it's an irresponsible and undermining way this article states that somehow the legalization of marijuana is a terrible thing. Compared to alcohol and cigarettes, marijuana at least is medically proven to help sick people. Alcohol and cigarettes just add insult to injury.

  • Report this Comment On January 05, 2014, at 12:38 PM, dreamflyer wrote:

    @VROD2003 Really??!! We're you claiming entitlement with a glass of wine in your hand, or perhaps a shot of whiskey??!! Hypocrite!!

  • Report this Comment On January 05, 2014, at 12:56 PM, oldmutt1949 wrote:

    Invest in a product that has 424 compounds in which no study has shown they are all safe for human consumption.

    Invest in a product that turns into over 2000 compounds when smoked releasing such poisons as hydrogen cyanide and carbon monoxide.

    Invest in a product know to cause cancer regardless of all the contrary propaganda.

    Invest in a product found by the French Academy of Science that long term use of marijuana can alter a persons DNA. ( Science Daily )

    Are your investors ready for the class action law suits that will cost them billions?

    The tobacco companies lied forty years ago and paid the price so will the advocates of marijuana lying to the public by obstructing the truth that marijuana has inherit dangers the public has a right to be informed of.

    Legal marijuana with no disclaimer or warning labels, just lie upon lie to hook the innocent into believing marijuana is so pure, so natural, so medically perfect, so harmless it can be used for recreational purposes.

    Have you noticed how many emergency rooms in Denver are treating children who have been poisoned by this crap?

    The law suits are coming like a blizzard that will bury Colorado till the next ice age.

  • Report this Comment On January 05, 2014, at 12:59 PM, markcirillo wrote:

    oldmutt1949 is jealous. Your still living in 1949.

  • Report this Comment On January 05, 2014, at 1:23 PM, jenkins94 wrote:

    @oldmutt1949

    how about prescription drugs that are highly addictive and sold out of Florida like is candy?

    how about i live next to a bar and every night watch people stumble out of there and get in there cars and drive home?

    tobacco is still legal even after law suits, they dont even let them advertise on tv anymore yet its still legal and very harmful?

    get over it, marijuana is more safe than taking Tylenol, the movie reefer madness that you watched back in the day is nothing but lies, you sound like my father who says marijuana is a hallucinogenic....whatever they told you back in the 50's-60's is all lies....again everyone get over this being legal it is not a big deal. Do you see the lines of people coming out of these stores? GET OVER IT

  • Report this Comment On January 05, 2014, at 1:24 PM, jenkins94 wrote:

    oh ya and if you were smart...youd invest in this, the money would be coming at you like a blizzard oldmutt1949

  • Report this Comment On January 05, 2014, at 2:41 PM, johnnyr wrote:

    heck wait until the government subsidies start.

  • Report this Comment On January 05, 2014, at 3:24 PM, harbor1223 wrote:

    Geeze some of you haters need to burn one. Seriously! Marijuana is less harmful to your portfolio than the government is.

  • Report this Comment On January 05, 2014, at 3:32 PM, Salem3 wrote:

    Can Americans actually legalize this product without having to sell out to the corporations or have it overtaxed by our government? Yes they can! If they get involved and stay involved before and after it is legal. Americans need to make sure that individuals can grow their own marijuana, so that the public can have affordable access to the product, especially when it comes to medical issues.

    I can see where companies will push for making it illegal for individuals to grow their own in order to increase their profits. Is America about freedom and individual rights or is it about greed and more greed.

  • Report this Comment On January 05, 2014, at 3:34 PM, sucktheheads wrote:

    The title of this article is terrible. After all, aren't liquor stores and pharmacies legalized "drug dealers" as well? Great way to keep up the "reefer madness" stigma around marijuana.

  • Report this Comment On January 05, 2014, at 3:48 PM, NOTvuffett wrote:

    they call this stuff 'dope' for a reason

  • Report this Comment On January 05, 2014, at 5:54 PM, fkupusy wrote:

    For all the pot smokers out there. I have smoked bud since i was 13. You have to be a complete dumass to think pot is so pure and unharmful. Its smoke! no kind of smoke is good for you. Weed smoke is two times thicker then cigerette smoke. im not bashing on weed. Im bashing on the people that give weed a bad rap.

  • Report this Comment On January 05, 2014, at 6:41 PM, goatsonharleys wrote:

    Its about time, I hope the other states follow soon.

  • Report this Comment On January 05, 2014, at 7:11 PM, LadyMantle wrote:

    I can imagine those inside grow operations would be very expensive in terms of the "lamps" needed 24/7. Is there any LED technology out there now that would mimic the sun and thus use less electricity? Ideally, it should be grown outside during the summer season under lock and key, of course.

  • Report this Comment On January 05, 2014, at 7:13 PM, lbj007 wrote:

    How will they file tax returns at the federal level to the IRS?

  • Report this Comment On January 05, 2014, at 7:56 PM, tristinstone wrote:

    I wish I would have grown up a pot head now, these people here in my home state of Colorado are making a fuqqen killing!

  • Report this Comment On January 05, 2014, at 8:00 PM, eagle2758 wrote:

    Thanks to all of you pot smokers, growers, head shop owners and now the legal dealers for paying those taxes. The people that don't work really need it.

  • Report this Comment On January 05, 2014, at 8:16 PM, nhnorml wrote:

    The carcinogenic effects of smoking cannabis are counteracted by anti-cancer cannabinoids, flavanoids and terpenes. Before you make such a proclamation that cannabis smoke is worse for you than tobacco smoke or any type of smoke, do your homework.

    #dontdrinkthewater

  • Report this Comment On January 05, 2014, at 8:45 PM, powderdayfortad wrote:

    New technology including LED's, plasma, induction, light emitting ceramics, and hi tech greenhouses are some of the newest energy efficient lighting solutions.

    Colorado allows for deductions at the state level on the retail sale costs, however until congress or IRS makes changes at the federal level, the industry has to file in accordance with 280e.Cost of goods are an allowable deduction though.

    Vaporizing or edibles are presumed to be the safest form of imbibing.

  • Report this Comment On January 05, 2014, at 8:59 PM, msta333 wrote:

    Looks like a plant to me...

  • Report this Comment On January 05, 2014, at 9:18 PM, bigsunday wrote:

    Marijuana was legal for thousands of years. It only became illegal in the 1930's when DuPont and the Cotton Industry wanted a greater market share in the clothing industry. Hemp clothing is far superior than cotton or synthetic clothing from DuPont. Since alcohol was made legal, they used scare tactics and movies like refer madness to convince folks that marijuana was bad.Funny how nobody had a problem with it since the beginning of time. The Constitution was written on hemp paper, rope was made of hemp too. Why is everybody so concerned about it when we have thousands of years of use.

  • Report this Comment On January 05, 2014, at 11:03 PM, bugmenot wrote:

    A child has already been treated in an emergency room because the kid got into some weed based product. How many children will die to keep Liberals high?

  • Report this Comment On January 06, 2014, at 3:17 AM, macarony wrote:

    Some weed based product? What else was in it? Sounds like a partial story. no one has ever died from the consumption of marijuana. That's right, no overdoses. Cant say the same for alcohol or aspirin, or cancer from cigs, can ya? get your facts.

  • Report this Comment On January 06, 2014, at 10:21 PM, laemmidoc wrote:

    Nobody has died from smoking pot. the only people who end up in the hospitals have consumed weed that was laced with chemicals. Instead, the hospitals are full of people who abuse legal alcohol and prescription drugs and cause millions in wasted healthcare dollars... Regulate it, tax it, let the states get millions in revenue, and for that matter, let these entrepreneurs make millions to invest somewhere else then.

    From an investor standpoint, it would be interesting to find out (from the fool) which company produces the most commonly used high pressure sodium bulbs these guys are using for their successful grow operations. because they will be used, a lot, in the future

  • Report this Comment On January 10, 2014, at 1:46 PM, davekiss17 wrote:

    George Washington grew it. It was so valuable for rope that nearly everyone grew it. You do not have to smoke it, you can turn it into oil and bake w it, and eat the product. What I'm most interested in is lending money to growing businesses because i heard you can get a nice ROE as banks will not lend to those in the pot industry.

  • Report this Comment On January 10, 2014, at 2:10 PM, gudway wrote:

    Where's the BEEF!

    What about some company names and trading symbols. This is about INVESTING and TRADING

  • Report this Comment On January 10, 2014, at 5:12 PM, cmalek wrote:

    @lbj007:

    The IRS has NO problems with taxing illegal activities. They got Al Capone for TAX EVASION not murder, bootlegging, loan sharking, prostitution, etc. Had he paid taxes on his illegal activities, he would have remained a free man.

    As far as the IRS is concerned, if you declare the amount of your income truthfully and pay taxes on that, they do not care how you made your income. IF everyone involved in drugs paid taxes on their income, the national deficit would be much lower.

  • Report this Comment On January 10, 2014, at 5:31 PM, messianic wrote:

    The problem with this may cut down on drug enforcers losing their jobs also I believe the most of the people against this are people that like to drink liquor.

    As a Vietnam veteran for P T S D I rather take this instead of the chemicals they are putting in my body right now also for chronic pain.

    .

    The staff has determine that this will not work so let us not use it.

  • Report this Comment On March 27, 2014, at 4:28 PM, investinthyself wrote:

    I agree more company names and trading symbols please.

  • Report this Comment On March 27, 2014, at 4:32 PM, investinthyself wrote:
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