By Olivier Uyttebrouck / Albuquerque Journal

Published on February 13, 2016

Copyright © 2016 Albuquerque Journal

Eric Howard takes great pride in his “ladies,” each of which can yield up to 16 ounces of medical cannabis in a 16-week life cycle.

“They get so heavy, they fall over right at the end,” said Howard, master grower at an 11-acre growing facility in Bernalillo owned by Ultra Health LLC. A trellis system is needed to support the heavy flowering branches of the mature plants.

Howard urges a visitor to feel one of the dense flowers, which leaves a sticky resin on the fingers.

“I’m very proud,” he said. “A lot of care goes into these ladies.”

Duke Rodriguez, the principal of Ultra Health, also expresses pride in the facility, where he grows 450 marijuana plants at a time, the maximum allowed under state Department of Health regulations.

But Ultra Health is not one of the state’s 35 licensed nonprofit producers authorized by the New Mexico Department of Health to grow and sell medical marijuana. Instead, Ultra Health owns and manages the growing operation and several dispensaries under an agreement with a licensed nonprofit producer.

Such management agreements between licensed nonprofit producers and for-profit management companies are becoming the norm in New Mexico, say some producers.

They say such agreements highlight the failure of the Department of Health’s nonprofit model, which requires that nonprofits produce and sell marijuana to sustain an industry that requires lots of cash to build and expand.

The nonprofit model has become “window dressing” for an industry that is fast becoming owned and managed by for-profit companies, said Rodriguez.

The state Department of Health says management agreements between nonprofit producers and for-profit companies are legal, subject to approval by the state.

“The regulations don’t prohibit management agreements,” said agency spokesman Kenny Vigil in a written statement. “Any time an LNPP (licensed nonprofit producer) proposes an amendment to their operational plan, the Department of Health carefully reviews and evaluates it based on the statute and regulations.”

The $7.4 million medical cannabis industry remains murky in New Mexico, in part because existing Department of Health regulations offer confidentiality for the LNPPs, which hides from public view their identities and other details of their business operations.

The department, which is considering new regulations that would disclose more information about LNPPs, declined to be interviewed further for this story.

But, in the meantime, several for-profit producers did agree to be interviewed – and provided tours of their facilities – shedding some light on the big business of growing medical marijuana in New Mexico.

‘We are the landlords’

Ultra Health’s operation in Bernalillo produces about 1,200 pounds of medical pot a year, Rodriguez estimated.

He has even larger ambitions for the Bernalillo facility – a former plant nursery that features a 68,000-square-foot greenhouse.

“We are probably using 10 percent of our capacity,” he said. He estimates that Ultra Health could produce up to 12,000 pounds of medical pot a year without adding capacity. “The ideal situation is to have an unlimited plant count to keep production up and cost down.”

Ultra Health’s ability to scale up production would position the company well for a day when New Mexico legalizes marijuana for adult use, which Rodriguez considers inevitable.

Rules adopted last year by the Department of Health allow for a maximum of 450 plants, up from the previous cap of 150. Ultra Health grows the maximum number allowed.

Ultra Health is unusual, if not unique, among the state’s marijuana producers in that it is not a New Mexico-based entity. Ultra Health is a limited liability corporation based in Scottsdale, Ariz., where Rodriguez said he maintains his business operations.

Though based in Arizona today, Rodriguez served as chief financial officer at Lovelace Medical Center in Albuquerque in the late 1980s and early 1990s. He also served as secretary of the state Human Services Department in 1996-97 under then-Gov. Gary Johnson.

Ultra Health owns and manages the growing operation and four dispensaries in Albuquerque, Bernalillo, Hobbs and Santa Fe under a 2014 agreement with New Mexico Top Organics, a licensed nonprofit producer.

“We are the landlords” for New Mexico Top Organics, Rodriguez said. “Top Organics doesn’t own the assets and they don’t take the risks.” Instead, Ultra Health “bears the risk of the cost of operations of the licensee,” he said.

New Mexico Top Organics itself has no employees and owns no property or equipment. The nonprofit has a five-member board, one of whom is Leonard Salgado, Ultra Health’s director of New Mexico operations.

The Ultra Health name is listed on all its properties and the products it sells

Sharing resources

“Essentially, the model we are working under is very similar” to Ultra Health’s, said Willie Ford, managing director of R. Greenleaf and Associates, a for-profit company that has management agreements with three licensed nonprofits. They are R. Greenleaf Organics and Medzen Services, both of Albuquerque, and G&G Genetics of Grants.

“We are a collection of licensees, utilizing a common management team,” Ford said. “The three nonprofits are sharing resources.”

Ford offered an example of how the three nonprofits share resources. When R. Greenleaf Organics built a new growing facility in Albuquerque, Medzen Services moved into Greenleaf Organic’s old facility in the North Valley.

Medzen is now building its own growing facility. Once completed, G&G Genetics will occupy the North Valley site.

The management firm, R. Greenleaf and Associates, will own all three facilities and lease them to the nonprofits – an arrangement often called a lease-back agreement, Ford said.

“Those resources are owned and managed by a for-profit, but they are utilized by the nonprofits to make them more efficient and effective,” he said. “We have a number of different facilities we see as assets and we can move our licensees around in them.”

R. Greenleaf and Associates’ largest growing facility in Albuquerque is not a greenhouse. The grow facility is housed in a concrete building with no natural lighting. About a dozen plants are grown in each of 27 rooms – a system intended to minimize the risk of cross-contamination by insects or plant diseases. Each room is equipped with 10,000 watts of high-pressure sodium vapor lights that fill the rooms with brilliant light. The facility’s electricity bill is $20,000 a month, Ford said.

R. Greenleaf Organics and Medzen are the state’s two largest cannabis producers, Ford said, together producing more than a quarter of the cannabis grown in New Mexico.

Not well thought out

Management agreements are attractive because LNPPs are ill equipped to start or expand costly cannabis operations, Ford and others say.

LNPPs are not recognized by the IRS as true nonprofits, because they are producing a product that remains illegal under federal law. As such, they can’t borrow money from a bank or deduct business expenses.

“We are required to have a state corporation that is a nonprofit,” Ford said of the state regulations. But the nonprofits lack federal 501(c)3 status, he said. “If you really get down to it, none of us are really nonprofits.”

Rodriguez said the industry is fast becoming owned and managed by for-profit companies.

“This is the norm in Arizona, and it’s clearly going to be the norm in New Mexico,” Rodriguez said of management agreements.

“The way the state agency created these nonprofits wasn’t well thought out.”

Nonprofits can’t raise capital, borrow money from a bank, or make the large investments required to grow and sell medical pot, he said.

“In reality, it comes down to making a calculated risk by business people to invest in very large operations and in people,” he said. “It’s nearly impossible to find a nonprofit that has asset resources to successfully launch one of these ventures.”

The nonprofit status of medical pot producers may soon be reviewed by a judge.

An association of LNPPs filed a lawsuit last year against the state Department of Health, asking a judge to eliminate the requirement that cannabis producers must be nonprofits.

“Right now, the producer that wants to raise capital as a nonprofit, can’t,” said Jason Marks, an attorney representing Cannabis Producers of New Mexico, an association of about 16 LNPPs.

“Cannabis producers are not able to get debt financing from commercial lenders. They can’t take equity financing as nonprofits.”

Marks acknowledged that management agreements between nonprofits and for-profit “affiliates” have become common.

“If we fix the regulation, that necessity will go away and producers would be able to raise capital themselves,” he said.

The suit, filed in March in the 1st Judicial District Court in Santa Fe against the Department of Health, contends that the regulation requiring that only nonprofits can be licensed as producers contradicts the state’s medical cannabis law.

The Department of Health denied the allegation in June, but did not elaborate. No trial date has been scheduled in the case.

Legalization inevitable

Rodriguez and Ford take differing views on the issue of legalization.

Rodriguez helped fund a recent survey that found that 61 percent of New Mexicans support legalizing, taxing and regulating cannabis for adults 21 and older. He contends that legalization is inevitable in New Mexico and that the state would benefit from legalizing sooner rather than later.

“New Mexico could become a leader in this industry,” he said. “This thing is destined to become a $400 million to $500 million industry in New Mexico in the next few years. There’s just no way to stop this train.”

Ford said he takes no position on the issue and contends that legalization poses potential hazards for cannabis patients.

“Our business is medical cannabis,” he said. In Colorado, legalization in 2012 initially caused a shortage for patients as cannabis was diverted to the recreational market. “If cannabis is being diverted to the recreational market – which is more lucrative – it could harm patients.”