Will Pot Barons Cash In on Legalization?

Full dark in downtown Denver, and inside one of the twinkling high-rises that make the skyline, drug dealers are putting money into envelopes. They're trying to be discreet. No one signed the security logbook in the lobby. All assume the room could be bugged. But if your image of the drug trade involves armed gangs or young men in parked cars, these dealers offer a surreal counterpoint. There's a finance veteran, two children of the Ivy League, multiple lawyers, and the son of a police chief. At their side is a Pulitzer Prize–winning communications consultant, two state lobbyists, and a nationally known political operative. And the guest of honor: a state senator who likes the look of those envelopes being stuffed.

"What's the maximum contribution?" one of the dealers asks. "Do you take cash?" wonders another. A third man breaks into a smile. "You better," he says, eyebrows dancing, "because the banks don't like doing business with us." Laughter fills the room as the envelopes are passed forward and slipped into a briefcase. "Huge thank you, everyone," the politician says, guiding the conversation back to the next legislative session and the kinds of legal changes this group would like to see. Here again, it's not what you'd expect: there's talk of a youth drug-abuse-prevention program and a bill to define "drugged" driving. When the politician finally rises to leave, after more than an hour, the dealers, in their pressed shirts and suit jackets, clap heartily. The average participant looks to be about 35, white and male, and on good terms with a barber. "Thank you," the politician says, bowing slightly. "Thank you for what you do."

What they do is sell marijuana. And not on street corners. Colorado is the developed world's only regulated for-profit cannabis market, and sales—to the 100,000 residents who have a thumbs up from their M.D.s—are closing in on $200 million this year, a sum that generates tens of millions of dollars in local, state, and federal taxes. (Yes, the IRS taxes marijuana operations, even as the Justice Department attempts to shut them down.) Colorado is not the world's only experiment in free-market pot, but it's the most sophisticated, pushing beyond the Netherlands' confusing ban on wholesale and California's hazy nonprofit status. Denver's former city attorney has called it California "on steroids."

While the cannabis market remains illegal under federal law, attitudes are changing quickly, and it's that fact that the Colorado growers are banking on. The number of regular pot users is up by 3 million in the past five years, and the rate of high-school experimentation is at a 30-year high. When a kid first lights up at about age 16, it's usually not with a cigarette. Twelve states now treat a personal stash like a minor traffic offense, 17 allow medical marijuana, and this Election Day, if current polls hold, voters in Washington State and Colorado will vote to legalize marijuana—not for medical purposes but, as Rolling Stone recently enthused, "for getting-high purposes."

That would close out a 40-year fight launched by boomers and carried through by a big tent of talented reformers, growing bigger all the time. "Weed is the new gay," says Ted Trimpa, a Democratic strategist who helped engineer Colorado's flip from red state to blue. He's now focused on marijuana reform. But what I saw in Colorado was something altogether new: self-described "social entrepreneurs," the Sergey Brins and Mark Zuckerbergs of the Green Rush. They could have done almost anything with their lives—"my brother is a physician" is the kind of thing one hears from them—but they chose to enter the pot business because they see it as a boom market, miracle cure, and social movement decades in the making and suddenly, thrillingly, near.

"This is our Facebook," says one of my hosts, Norton Arbelaez, the owner of two dispensaries and a commercial grow. "This is the same kind of environment, the same kind of setting, and the same kind of people." He was a founding member of the Medical Marijuana Industry Group (MMIG), a powerful young lobby that's buried the age of drum-circle activism and instead strives to partner with law enforcement and politicians. It was their board meeting in the high-rise downtown, a weekly gathering two blocks from the Capitol dome. And it is their goal to dress legal pot in a style as conservative as their own.

That's why they offered Newsweek unprecedented access. While the organization is officially neutral on legalization, many of its members privately support it and believe their example demonstrates that the drug most of the world knows as "herbal cannabis" can be regulated, taxed, and safely sold. "This is a botanical blockbuster," says Arbelaez, with a half-ironic flourish. That is, if it's not shut down by the federal government before the lobby can win mainstream acceptance. "We're the tortoise, not the hare," says Arbelaez. "But the tortoise wins, eventually."

Heading West toward the Rocky Mountains, Denver rises like a city in a snow globe, but before you reach the exits for downtown, there's a stark industrial ring, a hard-hat zone of freight trains, heavy equipment, and all-purpose warehouse space. This is home to Colorado's pot business, housed in at least a million square feet—more than all the office space in the city's tallest skyscraper. Over the course of two bright, warm days this month, accompanied by members of MMIG's self-described "nerd herd" of pot entrepreneurs, I toured three of these warehouses.

They are each as boring as a soundstage until the moment one actually sees the plants. One second you're in the gray, empty cold of a warehouse, your mind hypnotized by the dull hum of electricity. The next you're standing in a perfect simulacrum of summer sunshine with hundreds of gorgeous green plants gently waving, stirred by fans and soothed by classical music (or energized by hard rock, depending on what the master grower says the plant "likes").

It's always harvest time in some of these rooms. Always processing time in others. A magic garden with no sun or bugs. Old-school American pot, smuggled in by boat or plane, was dirty: doused in ocean spray, soaked in fuel, or infested with spiders. This is a beautiful, and explicitly professional, product: hundreds of acorn-size buds flecked with crystals of THC, the chemical without which these plants might as well be ferns.

"Look at this fat boy," says Arbelaez, cupping the flowering buds of a short, stocky plant. "Ain't that beautiful?" I nodded. His whole operation had an aesthetic to it, with different seasons being replicated inside different rooms and a team of growers acting as botanical gods: thanks to sensors in each growing room, if the conditions slip, the plant minders get a text message.

But the most impressive space was the one in sync with the natural world, a stand of marijuana plants fed by natural light through the roof, the pot leaves looming up overhead, casting shadows. Arbelaez appears over my shoulder. "What are you writing down?" he asks. I show him the page. "BIG TREES," it says, and he laughs, bending down to wrap his hand around a three- or four-inch trunk. "That is a tree, bro."

Arbelaez came to Colorado with Jon Salfeld, a friend from Tulane Law School. The two are a bit of an odd couple. Arbelaez is tall, olive-skinned, and voluble. The son of a General Motors assembly-line worker, he went to the University of Oklahoma on scholarship and came out comfortable in a suit. Salfeld is shorter and more soft-spoken. The son of a lawyer, he went to Cornell—by way of Manhattan—and came out with hair to his collar. Walking around Denver with them, with Salfeld's eyes on his BlackBerry and Arbelaez's on everything else, sometimes felt like a night out with a tour manager and his talent.

But there's no doubt they have a bond. After meeting at Tulane, they recognized a shared enthusiasm for marijuana, and after graduation in 2006, they roomed together, working uninspiring jobs in medical malpractice and real estate. Then the economy collapsed. Salfeld lost his job. And in the hands-on-head discussions of what opportunities might emerge, Arbelaez suggested pot in Colorado. "I didn't even know if was legal out there," says Salfeld. They researched it and found a compelling case: good weather, a pot-friendly population, and a strong legal footing.

They arrived in the summer of 2009, just a few weeks before an Obama administration memo steered law enforcement away from medical marijuana shops in "unambiguous compliance" with state laws. Overnight thousands of people galloped into business. Colorado soon had more pot shops than Starbucks, and a two-mile stretch of Broadway became a thicket of smoke-in-your-face entrepreneurs. Bikini girls hawked $5 joints, bums in sandwich boards advertised two-for-one ounces, and former black-market dealers reportedly dragged their trash bags of weed into the light.

It was as troubling a scene as Arbelaez and Salfeld could imagine. Unless legal weed was done properly—with rules and regulations and clean-shaven owners in suits—they knew the effort was doomed. So they joined up with other marijuana entrepreneurs to help pass Bill 1284: a controversial, seed-to-sale framework for controlling the industry. It banned felons and in many cases put up six-figure barriers to entry. The licensing alone cost as much as $18,000, necessary to help fund a special-enforcement division. As much as half the industry was wiped out by the new rules. Salfeld even lost a store, deemed too close to another that predated his. But it was all necessary. As even law-enforcement officials admit, it created the basis for safe and limited legal weed in America.

Owner operators like Salfeld and Arbelaez are now working hard to uphold those standards, each pouring more than a million dollars into their operations, much of it compliance-related. "There's no bulls--t," says Arbelaez. In the grow houses, there are security cameras, inventory reports, and detailed delivery systems accounting for every gram of pot, from every plant, all accessible to Colorado authorities 24 hours a day. Their biggest concern in agreeing to this article was an almost genteel respect for law enforcement. "We're about transparency," says Arbelaez. "We're about trust."

But there's only so much the industry can do to legitimize itself right now. Every morning outside the unmarked bottling factory, home to Dixie Elixirs, America's first multistate cannabis-infused-soda maker, men in suits hold the door for 20-somethings in spider-web-patterned skullcaps and sweatpants. I met Salfeld's highest-paid employee, his master grower, Joe, wearing flannel pajama pants and a "420 Weed" T-shirt, as he threw out a doughnut box. Arbelaez's careful tour was interrupted by the arrival of one of his trimmers, the wizard-bearded host of a Web show called "Tokin." All the best talent is de facto, developed in violation of federal law.

And this tension between the shadowy roots of pot and the direct light of legalization pervades the industry, which employs more than 4,000 people in Colorado, hundreds of them in six-figure jobs. At River Rock, Arbelaez's two-store operation, and Local Product of Colorado, Salfeld's upmarket boutique, more than 100 people are on staff. Fleets of contractors collecting checks cycle through, along with gardening wholesalers, business consultants, and software developers. The whole state has been buoyed by marijuana sales without evident decay.

But because Arbelaez and Salfeld, and the rest of the industry, are technically felonious under federal law, they struggle for basic business services. Banks and landlords hesitate to take their money. They can't get traditional loans, or insurance, or health coverage. Credit-card companies won't process transactions in their stores. Judges won't enforce their contracts. The IRS forbids normal business deductions, bankrupting many operations. But that's the only deduction allowed. "Not a whole lot of money is being made," says Arbelaez. "We've all had sleepless nights," adds Salfeld. "We've all had scares."

This in-between nature of the business is present in the very product, too. Does medicinal pot help people? Absolutely. It eases pain and nausea, generates appetite, encourages sleep, and generally comforts the seriously afflicted. Yet it's also a euphoric drug that parks itself in a part of the brain named after the Sanskrit word for "bliss." It's both—a medicine you like to take—which is why some patients with pot prescriptions have cancer or glaucoma, but others are young to middle-aged men with vague complaints of pain. "Skateboarders with bruises," is the running aside from critics.

The prescribing of medical marijuana is also a bit of a slapstick routine. Oh, you have cancer? Try this wonder medicine called Pineapple Grenade or Alien Dog or Face Wreck. Oh, you have a doctor's recommendation? Try smoking this dab of hash with a butane torch, some foil, and what looks like a crack pipe. And then there are the festivals, so-called cannabis cups that blend the sobriety of a bar crawl with the crowd behavior of the Adult Video News awards, all doctor-approved. Sometimes there's even a doctor on site writing scrips. "It can be very, very annoying," says Salfeld of these more antisocial aspects of his market. But just inside the door of his flagship store, two blocks from the Denver Art Museum, is a five-foot-tall bonglike trophy: an industry award for "patient" care.

The future can be perhaps be glimpsed in what's locally described as the biggest dispensary business in Colorado, a chain of MMIG-supported stores called the Clinic. It does an admirable job of trying to blend the medicine and lifestyle ends of the business. "Our patients live better" is its tagline, which one imagines being cut to just "Live better" if legalization passes. The Clinic has a presence at the festivals, but it's also expanding in an upscale direction that's reminiscent of liquor. Earlier this year it debuted Reserva Privada, a new strain of smokable bud branded like a faux-old style of rum or bourbon—it's not the Purple Kush of dorm block 12. Meanwhile, it's no coincidence that Salfeld's and Arbelaez's companies use brand names (Local Product, River Rock) that could work for any upscale, bourgeois bohemian product. The names can grow, in other words.

And ultimately that might be the biggest concern to have about Colorado's cannabis market: its growth. Even as they curtsy to law and politics, the new moguls of pot revel in their historic role, talking like the future subjects of a Ken Burns–style documentary, the pioneers who emerged from a dysfunctional prohibition. One framed the federal letter warning him that his store was too close to a school. Others brighten as they describe the signs of DEA surveillance—the clicks on the phone, unmarked vans in the lane.

They say that even if legalization passes in state, they'll respect the federal law and focus on "patients." But they also know big money awaits on the other side: at least 10 times the available market, an extra billion dollars in potential revenue. "I think we all saw dollar signs in our eyes," admits one board member, describing his entry into the business. "The horizon is bright," says another. Tripp Keber, owner of Dixie Elixirs, the marijuana-infused-soda company, is the most openly avaricious. He's in his 40s and wealthy, with two homes in Aspen, a preteen daughter, and less idealism than a younger man. "I make companies to sell companies," he says, a blue-faced Rolex on his wrist. "Make me an offer, and I'll ride off into the sunlight with saddlebags of gold."

He's not just blowing smoke when he talks about selling out to the highest bidder. It's already widely rumored that Philip Morris has leased warehouse space in the area. The company denies it, as do its top-tier competitors, but "I've heard a lot of talk about it," says Keith Burdick, a partner at Xcalibur, one of the biggest independent generic-brand tobacco companies in the country. "You're going to get cigarette companies in here. I'm sure of it," says John Wickens, a real-estate agent who has sold or leased acres of commercial space to marijuana growers. Peter Bourne, the drug czar under Jimmy Carter, recently told Newsweek that tobacco executives shared their marijuana contingency plans with him.

The alcohol and tobacco industries traditionally get 80 percent of their profits from heavy users, and there's every reason to believe that marijuana sellers will need the same ratio. That would mean Colorado's burgeoning pot business could be the basis for a third huge, blood-sucking vice industry, dependent on converting kids and supporting heavy users. "No way," says Arbelaez, when I raised this possibility with him. He talked passionately about medicine, and social progress, and it was moving, convincing stuff. "These people have families, and they employ families. They're about helping people, not hurting people," he said of his peers.

I want to believe him, but something happened after the board meeting. About eight of us went out for a drink. I found myself not in one of Denver's dive bars, but the Churchill Bar, a smoking club inside the city's poshest hotel, the Brown Palace. There, as a Bond-girl waitress delivered round after round of top-shelf conviviality and an electronic joint prototype appeared, it was easy to see my hosts 30 years from now, when legalization is here, sitting in the same woozy affluence—fatter, balder, and famously rich.