COLORADO'S MEDICAL POT BUSINESS IS FOR-PROFIT, REGULATED AND THRIVING

Coming Monday: Check out Colorado's famously mellow, pot friendly
town dubbed Stonerville, USA.

DENVER After 15 years as a white-collar "corporate nomad," Dan
Rogers found his new career in the thriving green-collar industry of
Colorado, the only state in America with a for-profit medical marijuana market.

The equities trader and former investment banker now produces pot
breeds "Reclining Buddha" and "Heartland Cream" in a converted
printing press warehouse near downtown Denver.

In the nation's most heavily regulated medical cannabis industry, he
also works under constant video surveillance.

Electronic eyes, required by Colorado's year-old Medical Marijuana
Enforcement Division, track packaging of each shipment from Rogers'
warehouse to his four marijuana stores, called Greenwerkz.

He submits product manifests and delivery routes for state approval.
Still more cameras are recording as marijuana is unpacked and his
state-licensed employees sell to state-registered patients.

"Everything from seed to sales is on video," Rogers said. "You need
to know where every gram goes, where every plant is."

In Colorado, America's second-largest medical marijuana market behind
California, marijuana capitalism flourishes under strict regulations
approved by the state Legislature starting last year.

In California, dispensaries handling millions of dollars in
transactions are supposed to operate as nonprofits with medical
marijuana users giving "donations" to "reimburse" operators and
growers for costs.

Colorado stores simply pocket cash as profit. And, under new mandates
that stores grow at least 70 percent of the marijuana they sell, weed
industrialization is flourishing. It is happening despite U.S.
Justice Department warnings over attempted large-scale cultivation in
California or suspected medical pot profiteering in other states.

In Denver, the marijuana boom grows in old brick buildings and
shuttered factories that only five years ago were being converted
into artist lofts and live-work spaces for urban professionals.

A former truck and tractor parts factory now houses indoor farms for
eight marijuana stores. Elsewhere, real estate broker John Wickens
has leased a half-million square feet of space to medical pot
entrepreneurs including a 76,000-square-foot cultivation room for one store.

"This has helped the city tremendously," he said. "It steadied
commercial real estate. There are buildings with 40,000 square feet
sitting empty. Who else is going to take it?"

Denver interim city attorney David Broadwell said the city took in
$3.5 million in marijuana sales taxes last year and hundreds of
thousands in local licensing fees from 300 marijuana stores and other
cannabis businesses. Colorado's medical pot market may be one-sixth
of California's, yet Broadwell said Colorado's cannabis capitalism
took the Golden State model "and put it on steroids."

The industry worries Tom Raynes, a former deputy state attorney
general and local prosecutor who heads the Colorado District
Attorneys' Council. He says Colorado pot businesses operate as an
"assumption-of-risk industry" doomed to collapse if the U.S. Justice
Department, which considers all marijuana illegal, decides to intervene.

"I think they're inviting the federal battle," he said. "They're
poking the tiger."

But Tom Massey, a Republican state representative from central
Colorado who co-sponsored legislation regulating the industry, holds
Colorado up as a national model, one that eased federal concerns by
providing meticulous oversight to prevent diversion of medical
marijuana to the illegal market.

"I think the feds are thinking that as long as we keep it for its
intended use, they're going to turn a blind eye," he said.

Fees fund enforcement

In Colorado, where voters legalized medical marijuana use in 2000,
fees on 730 retail stores and more than 1,000 cultivation centers and
other cannabis businesses now fund the $10 million budget of the
Medical Marijuana Enforcement Division. It is part of the Department
of Revenue, which oversees the liquor and gambling industries.

Paul Schmidt is one of the division's medical marijuana G-men. An
enforcement director in a black pinstriped suit, he drops in on
marijuana stores and grow rooms, reviewing the security and integrity
of sales transactions and cataloging plants marked for state counting
with bar codes or special radio chips.

"It was really strange for me initially, because I used to call these
people defendants," said Schmidt, a retired Drug Enforcement
Administration agent who once directed federal raids on pot fields in
Oregon. "Now I call them an industry."

With 55 employees and more than 30 compliance officers, the medical
marijuana division licenses thousands of pot employees. Background
checks ban anyone with a felony drug conviction from owning,
investing or working in the marijuana businesses.

The state also registers all medical marijuana patients. Their
numbers nearly doubled in a year to 130,000, with 20,000 more under
review or rejected for improper paperwork. Last year, Colorado used
$9 million in $90-per-patient medical marijuana program fees to help
close a state budget gap.

Norton Arbelaez, a 31-year-old Tulane University law school graduate,
is one of the emerging faces of Colorado's medical marijuana
industry. He exuded professionalism as he led a tour of his River
Rock store and cultivation center in a former Denver bus terminal building.

Before Arbelaez showed off his "Jack Frost Sativa" with its "very
piney, very lush smell" or his "Bubba Kush" used by a favorite
patient for her cancer symptoms, he pointed out his 32 video cameras.

Arbelaez and his partners invested $45,000 in surveillance, meeting
state mandates that, by January 2012, will require all marijuana
businesses to maintain 20 hours of video feeds that Colorado
regulators can access online.

"We've waived our Fourth Amendment protections. We've given every
piece of personal information to the state," he said. "It's Big
Brother. Let's not kid ourselves."

Oversight costs are high

For Arbelaez and many others, it is also big business. He and
partners invested close to $1 million in their retail and growing
operation. They are only now close to turning a profit but the
future of his marijuana business looks prosperously green.

More than two dozen local Colorado jurisdictions have banned
marijuana businesses. But in places such as Denver, Boulder and even
conservative Colorado Springs, a medicinal Green Rush took off in
2009, before state regulation.

Denver's South Broadway Street was dubbed "Broadsterdam" or "the
Green Mile" as pot shops opened in a frenzy. Dozens remain mom and
pop stores such as the Little Green Pharmacy with its shimmering neon
marijuana leaf or the Little Brown House with its sign for "the house
of the $5 joints."

"The model before (regulation) was embarrassing, uncomfortable,
unwelcoming," said Alex Arguello, 25, who with two friends and his
father later opened Colorado Wellness Inc., a dispensary and
climate-controlled cultivation center. "I went into one business and
there was a guy behind a black trash bag. He pulled it back and said,
'What do you need?' "

Arguello and partner Edward "Chuck" McLamb, who both came out of the
jewelry and pawn shop business, are now comfortably operating in a
state-licensed marijuana store. But many stores went under, unable to
afford or deal with the demands and costs of new government oversight.

In Boulder, which took in $1 million in taxes and local fees on
marijuana businesses in 2010, the college town that once teamed with
more than 100 stores and grow rooms saw its industry shrink to an
estimated 45 retail centers.

"There were a lot of people who got into this thinking this was going
to be a real cash cow," said Michael Bellingham, 38, co-owner of the
Boulder MM Dispensary, one of the city's original pot stores. "But a
lot of them realized they were in over their heads."

Bellingham cashed out his 401(k) and borrowed from family members so
he and his partner could outfit a warehouse to meet the state's
marijuana store cultivation mandates. He said many stores merged with
pot growers in shotgun marriages that were destined to fail.

Pair sells cannabis foods

State regulation offered the lure of legitimacy for Scott Durrah, an
award-winning restaurateur known for his Caribbean-cuisine 8 Rivers
eatery in Denver. With wife Wanda James, a marketing executive and
leading Colorado fundraiser for Barack Obama's presidential campaign,
they secured state medical marijuana licenses as "infused products"
manufacturers.

Today, their Simply Pure kitchen makes cannabis foods from marinara
sauce and mango salsa to granola bars and gluten-free jam for 285
Colorado marijuana stores.

"We grow all our own cannabis. We don't buy anything from anyone,"
James said. "We cook with 100 percent bud."

She said their regulated, professionally run kitchen and their
personal standing in the community brought "a face to cannabis that
people couldn't demonize."

But Rogers, operator of the Greenwerkz stores and two cultivation
warehouses, decided he didn't want to stand out too much after Deputy
U.S. Attorney General James Cole issued a memo June 29.

It said "large-scale, privately-operated marijuana cultivation
centers" even if legal under state laws aren't immune from federal
prosecution.

Rogers and his partners were considering buying two other medical
marijuana retail chains a deal that would have made them the largest
pot provider in Colorado. They abruptly backed out.

"We decided there was no need to be the biggest," Rogers said. "We
don't need to be the target. You don't want to poke the dog. We just
walked away."