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August 26, 2013 Barriers to entry

Growing pot in CT will be a high-rollers game

Photo | CNN Applications to open marijuana cultivation facilities, like the one shown here, have been sprouting up in cities and towns across the state, as Connecticut prepares to finalize regulations that will govern its new medical marijuana industry. Some prospective growers are raising concerns that the cost of entry into the market will be too high.
Photos | CNN
Medical marijuana is grown in cultivation fields and then treated in labs before being sold to patients.
William Rubenstein, Commissioner, DCP
By Matt Pilon

When the state legalized medical marijuana last year, health care information technologist James Dietz thought about vying for a license to grow the drug in Connecticut.

The Litchfield resident sees the potential for a lucrative industry to sprout, and he wanted a piece of the action.

But Dietz quickly realized that growing pot here won't be as simple as planting a garden: it will require a significant investment — as much as $5 million to $7 million, by his estimate — which will likely price smaller competitors like himself out of the market.

With only three to 10 cultivation licenses up for grabs, Dietz said he feels moneyed and established interests — some from other states — will likely dominate Connecticut's medical marijuana growing industry.

And as the unofficial field takes shape, there are several “gorillas” some perceive as favorites to win the coveted licenses when the application period begins in the coming months, Dietz said.

“That's a big hurdle for us to overcome and still have money left over for infrastructure and operating costs,” Dietz said. “Without raising somewhere in the magnitude of $5 million to $7 million, it's probably not viable.”

Dietz's concerns come at a critical time for the development of Connecticut's medical marijuana industry.

The state legislature's Regulations Review Committee will meet this week to potentially vote on proposed regulations that will in many ways determine how the state's medical marijuana market blossoms.

The 75 pages of regulations, drafted by the state Department of Consumer Protection which will oversee the industry, establishes rules for the sale, production and use of medical marijuana, and have already raised concerns similar to those expressed by Dietz.

Some prospective growers say the upfront costs to even compete for a license are too high.

Potential licensees, for example, are required to post $2 million in escrow, or an equivalent bond, and pay a nonrefundable $25,000 application fee.

There are also concerns that the escrow payment could be seized by the federal government since marijuana remains illegal under federal law.

The state has since tweaked some of the draft regulations, allowing the $2 million figure to be reduced as grow operations hit certain benchmarks.

Still, the high price of admission has Dietz preparing to opt for a less costly dispensary license instead. Seller licenses will be allocated based on the number of registered patients in the state, according to DCP. Sellers too will be tightly regulated with strict siting standards, background checks and pharmacist requirements.

It may not come as a surprise that well funded entities have an advantage in a strict licensing process, but Andrew Glassman, an attorney with Pullman & Comley, said the state is right to set minimum capital requirements, though he harbors concerns that banks will be too nervous about the federal status of marijuana to finance a growing operation in Connecticut.

“They've created significant barriers to entry with all these fees, but I think those barriers are appropriate,” Glassman said. “They're looking for legitimate businessmen and women who want to be in on the ground floor of what I think will be a significant industry in Connecticut.”

Glassman said he represents a client — who he declined to name — that has applied for local approvals for a grow facility, a first step he thinks potential industry competitors will need to complete before they can seriously contend for a cultivation license from the state.

“I don't think you can have a successful application if you don't have a site approved,” he said. “It looks like there might be four to five parties currently positioned to make the application.”

Applications for grow facilities have been filed in Middletown, Watertown, West Haven and Bridgeport. Middletown and West Haven have approved grow locations with Fairfield-based Greenbelt Management and Advanced Grow Labs, respectively.

DCP Commissioner William Rubenstein said his agency has juggled input from various players as best as it could, but the overall goal is to attract legitimate businesses into the industry.

“We want [potential growers] to be serious and to operate uninterrupted over a long period of time,” Rubenstein said.

He said the serious interest shown so far by potential growers proves that they believe it will be a lucrative and worthwhile investment.

“We looked at the regulatory structure and experience of every other state,” Rubenstein said.

As palliative pot laws have taken hold in nearly half the country over the past decade, Rubenstein said Connecticut will stand out in how much control enforcement authorities will have over the enterprise.

“Colorado had, at one point, over 1,100 licensed producers,” Rubenstein said. “Can you imagine the difference in regulatory oversight and control when you're overseeing 10 or fewer facilities?”

Joseph Palmieri, who owns an environmental firm and maintains a farm in Easton, said he plans to apply for a cultivation license. He's visited Colorado to view grow operations, and even designed a type of pod he plans to grow marijuana in if he wins a license. Right now, those pods are sprouting tomatoes.

Palmieri, however, is concerned that there may not be enough patients to sustain three or more grow operations in the state.

“I hope they start smaller,” Palmieri said. “With all the costs of doing this, if there's no demand you're in big trouble.”

Rubenstein admitted it's difficult to estimate what sort of market will develop in Connecticut, especially because of the state's strict qualifying conditions. So far, 850 patients have been certified by physicians to use marijuana, but Rubenstein said he expects that number to increase once dispensaries open and product starts flowing. “The experience with other states is in the first year, you get a ramp up,” Rubenstein said.

If the Regulations Review Committee doesn't make major changes to draft regulations created by DCP, Rubenstein said a license application period would likely begin within a few weeks.

The state would review applications for a few months, and marijuana would be legally for sale in Connecticut within three to six months.

Read more

State chooses four marijuana growing sites

Medical marijuana market

Connecticut's new medical marijuana law makes it legal for patients to use the drug for “palliative use.” A qualifying patient must be at least 18 years old and be diagnosed by a physician with one of the following debilitating medical conditions:

• Cancer

• Glaucoma

• HIV

• AIDS

• Parkinson's disease

• Multiple sclerosis

• Certain spinal cord injuries (specifically, damage to spinal cord nervous tissue)

• Epilepsy

• Wasting syndrome

• Crohn's disease

• Post-traumatic stress disorder

Fast Facts

State financial requirements

for medical marijuana growers:

 • Ability to post $2 million escrow or bond

• $25,000 nonrefundable application fee

Medical marijuana registration

as of Aug. 12, 2013:

• Doctors registered: 96  

• Patients registered: 850

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