Joint Venture

With I-502 now in effect, Seattle has become ground zero for the state’s recreational pot market
| FROM THE PRINT EDITION |
 
 

Jim Willett has never smoked pot.

His teenage sons think he’s a square. A former Navy pilot, he spent a year doing drug interdiction flights along the Washington coast, checking for ships carrying bales of marijuana. For the graying retiree, voting against the state’s legalization of recreational weed (Initiative 502) was pretty much a given.

In January, Willett did an about-face. After learning about The ArcView Group, a San Francisco–based angel investment network for the marijuana industry, he signed on. “I was puttering around looking for things to do and this hit me like a lightning bolt,” says the 62-year-old Woodinville resident, who ran a waste recycling business for two decades. He has since invested more than $1 million in Washington’s and Colorado’s legal weed market. Think real estate, grow equipment, security systems, inventory tracking software and cannabis oil extraction devices—“basically everything except the plant.” Financing the production and sale of cannabis poses too great a risk for him. “I’m not a crusader,” he says. “I’m just in it for the money.”

Welcome to the green stampede. If all goes according to plan, the Washington State Liquor Control Board will begin accepting license applications from pot retailers, growers and processors this month and grant them to qualifying companies in December. Recreational stores could start cropping up early in 2014.

You’ve likely read about some of the region’s more high-profile “potpreneurs.” Butcher William von Schneidau, proprietor of BB Ranch at Pike Place Market, now sells bacon made from pot-fed pigs. Brendan Kennedy, CEO of Seattle-based private equity firm Privateer Holdings, which invests in ancillary cannabis companies, has become a media poster child for the squeaky clean, suit-and-tie-clad pot professional. Microsoft manager turned ganja convert Jamen Shively, who held a press conference with former Mexican President Vicente Fox this spring, boasted that his premium marijuana brand, Diego Pellicer, will “mint more millionaires than Microsoft.” Even Grey’s Anatomy star Patrick “McDreamy” Dempsey, who recently bought Tully’s, joked about selling cannabis at the coffee chain. (Above: Former Navy pilot Jim Willett, now an investor in the recreational marijuana market, photographed at his Woodinville home.)

These entrepreneurs aren’t just blowing smoke. The potential profits could be sky high. Trade publication Medical Marijuana Business Daily foresees national revenues from legal weed rising to $1.3 billion–$1.5 billion this year. (For those who haven’t been keeping score, medical marijuana is now legal in 18 states and Washington, D.C.) Add in the recreational pot shops opening in Washington and Colorado next year and those figures could jump to $2.5 billion–$3 billion, the publication reports.

How much cash the state’s 25 percent excise tax on licensed sellers, cultivators and makers of pot tinctures, balms, edibles and beverages will yield remains to be seen. The Liquor Board estimates it will collect “anywhere between $0 and $2 billion” in tax revenue during the first five years of legalization. The generous spread accounts for the fact that no one can predict whether the federal government—which still forbids possessing, growing and selling pot—will shut down the adult-use party.

“This is the greatest business opportunity since the falling of the Berlin Wall and the opening up of the free market in Europe,” says Steve DeAngelo, longtime marijuana activist and president of The ArcView Group, which drew “cannabusinesses” from around the country to two pitch slams in Seattle earlier this year. DeAngelo runs Harborside Health Center in Oakland, California, considered the world’s largest medical marijuana dispensary and featured on the Discovery Channel show Weed Wars. Harborside recently made headlines when the City of Oakland sued the federal government for trying to shut down the dispensary.

Beyond the dollar signs
Not everyone entering the recreational marketplace is motivated by money. Some are longtime marijuana enthusiasts pushing for social change. Others have come to appreciate marijuana’s pain-relieving properties after seeing a chronically ill loved one helped by the plant. Many live in the suburbs, drive minivans and would be hard-pressed to name a Grateful Dead song or demonstrate how to use a vaporizer.

“We grew up with ‘Just say no,’” says Bellingham resident Robi Hawley, 49, who plans to open a cannabis testing lab in Everett when she graduates from medical school this fall. “We go to church on Sundays. We’re those people.”

The Hawleys are still “those people,” only now they’re pro-pot: Three years ago, a difficult-to-diagnose chronic ailment left Hawley’s husband riddled with pain, unable to work and clinically depressed. Prescription drugs didn’t relieve his agony. Only after trying medical marijuana did Hawley’s husband gain some relief and start to reassemble his life. (Below: Seattle attorney Hilary Bricken of Canna Law Group, located downtown, advises local potpreneurs.)

Speaking by phone from the Caribbean, where she’s attending school, Hawley said she and her husband intend to sink their remaining savings into the lab, which Hawley is opening with three other medical professionals. “This is something we feel strongly about,” she says. “It’s not just about making a buck.”

Cale Burkhart shares the sentiment. A longtime fan of “the naturopathic and herbal thing,” the 35-year-old started using cannabis extracts in 2009 to alleviate migraines, insomnia, and neck and back pain. The following year, he developed Vita Verde, a collection of pot-infused topical creams now sold at 45 dispensaries around the Puget Sound region. He’s since added tinctures and edibles to his product line, and will apply for Washington producer and processor licenses this month. His plan: to grow artisan, organic marijuana strains for making his infused products, which he hopes to sell in Seattle’s recreational pot shops.

Burkhart, who lives in Greenwood, is hopeful the new market will boost his income. (“I made more money as a server than I make right now,” the former restaurant worker says.) But raising awareness of the plant and enabling more people to benefit from his products remain top priorities. “I love being a part of the growth of this whole thing and helping to push it out of the shadows and into the light,” he says. “It’s really exciting to be a part of making history.”

The booming ancillary market
Growers, sellers, processors and testing labs aren’t the only ones gathering at Washington’s adult-use starting line. A passel of attorneys, accountants, publicists, insurance agents, business consultants, software developers, security companies, and makers of vaporizers, oil extraction equipment and pot vending machines—many of them based in Colorado, California and other marijuana-friendly states—stand ready to support the budding recreational market. (Left: Brendan Kennedy, CEO of Seattle-based Privateer Holdings, which is reportedly the cannabis industry’s first private equity fund, photographed on the edge of Lake Union near his office.)

By not handling pot directly, these ancillary businesses skirt Washington’s three-month residency rule and Liquor Control Board licensing requirement. (Being a step removed from the plant also reduces the risk of being shut down, or worse, imprisoned by the federal government.)

“A big opportunity is in selling to the retailers,” says Troy Dayton, CEO of The ArcView Group, which brings together investors in peripheral pot businesses. According to Medical Marijuana Business Daily, 80 percent of the nation’s ancillary companies expect to see moderate or significant growth this year. Leafly, a Yelp-style review website for medical marijuana dispensaries and marijuana strains that gets 2.5 million visits a month, is a shining example. “We believe the legal risk is next to zero, intentionally so,” says Kennedy of Privateer Holdings, which purchased Leafly in 2011. “Nothing we do is in violation of any local, state or federal laws.”

There’s also Seattle attorney Hilary Bricken, who has spent the better part of the past three years advising local potpreneurs on how to comply with state and municipal laws. Her firm, Canna Law Group, a division of law firm Harris & Moure PLLC dedicated to the legal marijuana sector, represents more than 100 clients and holds Initiative 502 seminars for cannabis-curious lawyers and entrepreneurs.

During one of the 12-hour workdays she’s grown accustomed to since the Liquor Control Board regulations were released, Bricken kids about marijuana being all she thinks or dreams about. “While that may seem really appealing,” she says, “it’s actually really intense, because the laws keep changing.”

Daniel Williams comes to the Seattle market by way of Denver. His company, Canna Security America, installs alarms, cameras and other security equipment at legal marijuana facilities in a half-dozen states. Medical pot growers and sellers need reliable security, as many are cash-based operations. Washington’s new recreational marijuana rules—which include strict security requirements for state-licensed growers, processors and retailers—are a boon for Canna Security. Wearing a fleece jacket adorned with an innocuous, leaf-free company logo, Williams says he anticipates one-third of his sales originating here in the coming two years.

“Right now we’re just dumping money into setup, employees and training,” he says of the rapidly growing company’s expansion into Washington. He is also looking into downtown Seattle office space (as well as on Queen Anne and Phinney Ridge) and pricing billboards (the Liquor Control Board allows them, provided rules about location, message and not targeting minors are met).

“We want to show people in Seattle we’re there and we’re not going anywhere,” he adds. “It’s going to be a huge new market for us.”

Clearing the hurdles
None of this means the region is heading for a reefer free-for-all. Despite the changing legal tide, the barriers to entering the legal pot market remain steep.
“We have to jump through hoops that traditional businesses do not,” says Oscar Velasco-Schmitz, 36, director of Dockside Co-op, a medical cannabis provider in Fremont that opened in 2011. “Nothing is easy.”

Applying for a recreational retailer license is one hoop Velasco-Schmitz, a former software engineer and restaurant owner, is in no rush to jump through. (I-502 does not apply to medical marijuana operations, which remain loosely regulated and taxed by the state—a discrepancy the Legislature is working to resolve.) For now, he’s content waiting to see what solution the state comes up with. “If push comes to shove and we have to jump into the I-502 regulatory scene, then we’ll do whatever we have to do for our patients to have access,” he says.(Below: Oscar Velasco-Schmitz, director of Dockside Co-op, a medical marijuana dispensary in Fremont, is in no rush to apply for a recreational retailer license.)

For growers, processors and retailers ready to take the recreational plunge, startup costs can be significant, given the state’s security, insurance, testing, labeling and inventory-tracking rules. Would-be potpreneurs without personal savings, an ample credit line or well-heeled friends and family quickly learn that finding funding is a crapshoot. Bank loans are not an option. Most banks won’t even give pot shops a checking account or credit card. (Federal regulations require them to report customers suspected of breaking federal law.) Investors willing to gamble on companies that directly touch the plant are needles in haystacks, too.  

Location also can be tricky. Per I-502, cannabusinesses can’t be within 1,000 feet of a school, library, playground, park, rec center, day care center, public transit center or an arcade open to minors. Factor in municipal zoning restrictions and the options diminish further. The Seattle City Council, for example, plans to restrict new retailers from operating in residential areas and historic districts.

“There’s this mad dash to find compliant locations and owners that are OK with the use,” says Burkhart, the tincture maker, who has spent more than six months hunting for a commercial space for processing his products this year. “I’ve seen ads on Craigslist where it says, ‘Not marijuana friendly,’ because they’re going to get 20 calls from other kinds of businesses and they’re going to get hundreds of calls for cannabis use.”

For Burkhart, finding a compliant location entails checking Google maps for neighboring schools and day care centers, walking the neighborhood and, if necessary, hiring a surveyor.

Local landlords have their own concerns. Many of the landlords whom Seattle real estate attorney Brian Danzig counsels worry about the security, insurance and legal implications of leasing to a tenant in the cannabis business. A number of his clients say they’d be happy to lease to cannabusiness tenants, provided they’re not put at legal risk themselves. But the “vast majority” of them don’t want anything to do with tenants in the industry, says Danzig, a Gordon Thomas Honeywell partner and chair of their Seattle Real Estate group.

The list of obstacles goes on: Dispensaries and retailers aren’t eligible for the same federal tax deductions that most U.S. companies are, because the federal government considers them drug traffickers. Without a bank account or credit card, they’re stuck running a cash-based business. Those that do land a banker—often by presenting themselves as a “wellness provider” instead of a pot purveyor—run the risk of getting their personal and professional accounts closed once the bank catches on. Above all, receiving a shutdown letter from the Drug Enforcement Administration (DEA) is not outside the realm of possibility.

Betting on success
Washington has a lot to iron out before recreational weed can succeed here: whether quality control of regulated pot will be enough to entice black market customers; how to reconcile the unregulated medical cannabis market with the regulated recreational market; how to collect taxes and licensing fees from a cash-based industry; the best way to test drivers for cannabis DUIs; keeping adult-use marijuana out of the hands of minors, to name a few.

Along with Colorado, Washington’s success or failure could determine whether other states dive into the recreational-weed fray. (Although voters shot down Oregon’s Measure 80 in November, there’s talk of it reappearing on the ballot in 2014.)

“We’re in a very different place than we were with the repeal of alcohol prohibition,” says Alison Holcomb, drug policy director of Washington’s ACLU chapter and chief author of I-502. “In order to make sure other states aren’t going to worry that the sky’s going to fall, we need to make sure that we don’t have significant negative public health and public safety consequences.”

With the legal ban lifted, Holcomb anticipates more adults lighting up in the state, at least initially. She’s hopeful that public health strategies similar to those that have worked to reduce cigarette smoking among minors, including television bans on cigarette ads, will help thwart a rise in the number of kids using marijuana. Same goes for the Liquor Control Board bans on cannabis ads targeting minors. But, she concedes, the state’s pot regulations are a work in progress: “It’s going to continue evolving and changing. There’s going to be messiness.” (Above: Washington state’s strict security regulations for marijuana businesses are a boon for Daniel Williams of Canna Security America, based in Colorado.)

Washington’s potpreneurs say they’re up to the challenge.

“I think that as an agricultural crop, cannabis in Washington will be second only to apples,” says Privateer Holdings’ Kennedy. Having spent two months crunching the numbers “about 20 different ways,” he and his business partners are confident their gamble will bear fruit.

“The profit potential for the companies that we’re looking at and the companies that we’re investing in is very large,” Kennedy says. “Otherwise, we wouldn’t be doing what we’re doing.