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Medical Marijuana Industry Struggles Amid Competition, Regulation

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A system that mimics daylight illuminates Lono Ho'ala's grow room at the Eagle's Nest Wellness Center in Cascade, where cannabis plants as tall as corn stalks are pampered in a temperature-controlled and specially ventilated environment that's laced with carbon dioxide to accelerate growth.

Ho'ala is patient, waiting until leaves start to turn yellow to harvest the sticky, ripe buds, the only part of the plant that's used to make the medicinal products that he sells.
Lush green buds may be the only thing America's latest cash crop is yielding: Profits from growing and selling cannabis are vapor thin, owners of local medical marijuana businesses say.

Dispensaries and grow operations have been scrambling to meet state and local regulations that will go in to effect Friday and spending tens of thousands of dollars in the process. This is leading to a shakeout in the industry as weaker players are forced to close or sell. In Colorado Springs, the number of active sales tax licenses issued by the city to dispensaries and grow operations has declined from a high of 205 in June of 2010 to 160 in April.

"A lot of people thought they were going to get into a lot of money" in this business, said Tanya Garduno, president of the Colorado Springs Medical Cannabis Council. "With the market saturated, there wasn't a lot of money out there, and the fees slowly killed them."

Nevertheless, dispensary operators who came in with clear heads and sound business plans are surviving, Garduno said, and the recent extension of a moratorium on new marijuana-business-license applications has created a booming market for licenses from businesses that are closing.

Basic supply and demand is one of the biggest challenges facing the industry. Medical marijuana dispensaries are required to grow 70 percent of what they sell, which has created a glut of supply among individual caregivers who used to provide the dispensaries with products, Ho'ala said. That's driven down prices, and some centers are using the black market to boost revenue to stay in business, Ho'ala said.

"Most of the dispensaries are already hurting," he said. "Some are selling it out of state to survive."

Ho'ala said 3.5 grams of medical marijuana sells for what 1 gram cost a year ago.

Market saturation was another cause of decreased prices, said Tony Carmendy, an owner of Pikes Peak Alternative Health and Wellness south of downtown Colorado Springs.

"Centers are trying to keep patients coming to keep up with the money needed for city fees, state fees, attorney fees, equipment and employees," he said.

Profits are negligible, business owners say.

Judy Negley, who owns three dispensaries in Colorado Springs called Indispensary, said the businesses "are meeting our expectations."

"We're covering our bills, and that's what we expected," she said. "Our first and foremost goal was not to chase a dollar. We're here because of the moral imperative and we knew it would take a significant investment."

Negley and her business partners, who also own three Independent Records stores in Colorado Springs, haven't advertised but have attracted enough patients to sustain their operations, Negley said.

"Colorado Springs has had one of the highest concentrations of dispensaries in the state, and we're seeing the market sorting itself out as people can't afford to come into compliance" with the various regulations, she said.

Because medical marijuana is still illegal on the federal level – even though 15 states including Colorado have legalized its use – marijuana providers face unique business challenges. The federal government uses what center owners call "back door methods" to get the businesses to close by putting pressure on the services dispensaries use. For example, last month, without notice, Ho'ala said his credit card processing system was cut off overnight, as American Express announced it would no longer accept transactions for medical marijuana nationwide, and other companies followed suit.

Carmendy said that after federally insured banks quit doing business with medical marijuana sellers and growers last year, he had to switch banks and could find only one private local bank in Colorado Springs that would take his account.

"We had been doing business with Wells Fargo for two years, and they told us to leave," he said.

Current tax laws require medical marijuana businesses to report all revenue, but they deny deductions, meaning taxes must be paid on all income with no write-offs.

"If that sticks, we'll see every dispensary closing," Ho'ala said. "The law is oriented like it's an evil devil weed, and you're treated like a criminal because the pharmaceutical companies and drug cartels don't want the medicine legalized."

And there are mounting costs for applications, licensing and compliance with regulations that include new scales, video cameras and badges for employees.

"They're charging us to police the industry, which affects our ability to produce for the patient," Carmendy said.

Like the liquor industry, state and local fees charged to medical marijuana businesses cover costs of law enforcement, application processing and other expenses in order to prevent tax money from being used.

Julie Postlethwait, spokeswoman for the Colorado Department of Revenue's Medical Marijuana Enforcement Division, said there have been growing pains for the industry and regulators. The division is in the process of verifying license applications, even while it hires what will eventually be a force of about 50 inspectors and support staff.

"You have to remember that the industry was alive and well for 10 years before we came on board," Postlethwait said. "Basically, the horses are out of the barn and we're getting them in the right pasture."

Rules on ownership and growing have forced many operators into hasty business marriages, and those shifting alliances slow the licensing process, she said. It may be the end of the year before the division has a good handle on how many medical marijuana providers will make it all the way through the licensing process.

Still, Postlethwait said, most providers are bending over backward to work with the state and are eager to be fully recognized by state law.

"It's been really refreshing," she said. "I kind of expected resentment. This is really valuable to them – they want to be regulated."

Rob Corry, a Denver attorney who specializes in marijuana issues, disagrees. He said the regulatory regime is stifling an industry still taking baby steps and is stigmatizing businesses that are obeying all the rules.

"It was way too much too soon," he said of the state licensing requirements. "This was a brand-new sector that should have been able to spread its wings first."

It's a mixed bag, Garduno said. The licensing is a huge headache, but it also means that Colorado's dispensary owners know where they stand with regard to state law, which gives the industry the opportunity to mature, she said.

"The way that Colorado has put their laws together, while they're very difficult, restrictive and overreaching, they also give us a way to function," Garduno said. "We're just hoping that we can stay in business and operate legally. We'd love to get out of this constant battle mode and this constant defense mode."

News Hawk- Jacob Ebel 420 MAGAZINE
Source: gazette.com
Author: Debbie Kelly, Andrew Wineke
Contact: Contact Us
Copyright: Freedom Communications
Website: Medical marijuana industry struggles amid competition, regulation
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