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

By John Maxfield – Jan 5, 2014 at 10:43AM

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In many states, legitimate businessmen and women are getting rich from the marijuana industry. Nowhere is this truer than in Colorado, one of two states that have legalized the drug for recreational use. On the cusp of this historic change, Motley Fool contributor John Maxfield gives readers an inside look at the growing commercialization of cannabis.

"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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