INNOVATIVE INDUSTRIAL PROPERTIES
INC
FORM 10-K
(Annual Report)
Filed 02/21/25 for the Period Ending 12/31/24
Address
1389 CENTER DRIVE
SUITE 200
PARK CITY, UT, 84098
Telephone
(858) 997-3332
CIK
0001677576
Symbol
IIPR
SIC Code
6500 - Real estate
Industry
Specialized REITs
Sector
Financials
Fiscal Year
12/31
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2024
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _______to ________
Commission File Number: 001-37949
Innovative Industrial Properties, Inc.
(Exact name of registrant as specified in its charter)
Maryland
81-2963381
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1389 Center Drive, Suite 200, Park City, UT 84098
(858) 997-3332
(Address of principal executive offices)
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
New York Stock Exchange
Series A Preferred Stock, par value $0.001 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO ◻
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. YES ◻ NO þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ◻
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YES þ NO ◻
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See
the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ◻
Non-accelerated filer ◻
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the Registrant included in the filing reflect the correction
of an error to previously issued financial statements. ◻
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the Registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ◻
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☑
The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $3.0 billion, based upon the last reported sale price of $109.22 per share
on the New York Stock Exchange on June 28, 2024, the last business day of the Registrant’s most recently completed second quarter.
As of February 21, 2025, there were 28,331,833 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Innovative Industrial Properties, Inc.’s Proxy Statement with respect to its 2025 Annual Meeting of Stockholders to be filed not later than 120 days after the end of
the Registrant’s fiscal year are incorporated by reference into Part III hereof.
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2
INNOVATIVE INDUSTRIAL PROPERTIES, INC.
FORM 10-K – ANNUAL REPORT
DECEMBER 31, 2024
TABLE OF CONTENTS
PART I
Item 1.
Business
5
Item 1A.
Risk Factors
23
Item 1B.
Unresolved Staff Comments
59
Item 1C.
Cybersecurity
59
Item 2.
Properties
60
Item 3.
Legal Proceedings
60
Item 4.
Mine Safety Disclosures
60
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
61
Item 6.
[Reserved]
62
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
63
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
79
Item 8.
Financial Statements and Supplementary Data
80
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
80
Item 9A.
Controls and Procedures
80
Item 9B.
Other Information
82
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
82
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
82
Item 11.
Executive Compensation
83
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
83
Item 13.
Certain Relationships and Related Transactions, and Director Independence
83
Item 14.
Principal Accounting Fees and Services
83
PART IV
Item 15.
Exhibit and Financial Statement Schedule
84
Item 16.
Form 10-K Summary
85
SIGNATURES
Signatures
86
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3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We make statements in this report that are “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and
Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). In particular, our statements
regarding anticipated growth in our funds from operations and anticipated market and regulatory conditions, our strategic
direction, demographics, results of operations, plans and objectives are forward-looking statements. Forward-looking
statements involve numerous risks and uncertainties, and you should not rely on them as predictions of future events.
Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be
able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will
happen at all). You can identify forward-looking statements by the use of forward-looking terminology such as “believes,”
“expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates” or the negative
of these words and phrases or similar words or phrases, as well as by discussions of strategy, plans or intentions. The
following factors, among others, could cause actual results and future events to differ materially from those set forth or
contemplated in the forward-looking statements:
●
rates of default on leases for our assets;
●
our ability to re-lease properties upon tenant defaults or lease terminations for the rent we currently receive, or at all;
●
concentration of our portfolio of assets and limited number of tenants;
●
the estimated growth in and evolving market dynamics of the regulated cannabis market;
●
the demand for regulated cannabis facilities;
●
inflation dynamics;
●
the impact of pandemics on us, our business, our tenants, or the economy generally;
●
war and other hostilities, including the conflicts in Ukraine and Israel;
●
our business and investment strategy;
●
our projected operating results;
●
actions and initiatives of the U.S. or state governments and changes to government policies and the execution and
impact of these actions, initiatives and policies, including the fact that cannabis remains illegal under federal law;
●
availability of suitable investment opportunities in the regulated cannabis industry;
●
our understanding of our competition and our potential tenants’ alternative financing sources;
●
the expected medical-use or adult-use cannabis legalization in certain states;
●
shifts in public opinion regarding regulated cannabis;
●
the potential impact on us from litigation matters, including rising liability and insurance costs;
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4
●
the additional risks that may be associated with certain of our tenants cultivating, processing and/or dispensing adult-
use cannabis in our facilities;
●
the state of the U.S. economy generally or in specific geographic areas;
●
economic trends and economic recoveries;
●
our ability to access equity or debt capital;
●
financing rates for our target assets;
●
our level of indebtedness, which could reduce funds available for other business purposes and reduce our operational
flexibility;
●
covenants in our debt instruments, which may limit our flexibility and adversely affect our financial condition;
●
our ability to maintain our investment grade credit rating;
●
changes in the values of our assets;
●
our expected portfolio of assets;
●
our expected investments;
●
interest rate mismatches between our assets and our borrowings used to fund such investments;
●
changes in interest rates and the market value of our assets;
●
the degree to which any interest rate or other hedging strategies may or may not protect us from interest rate
volatility;
●
the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters;
●
how and when any forward equity sales may settle;
●
our ability to maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal income tax
purposes;
●
our ability to maintain our exemption from registration under the Investment Company Act of 1940 (the “Investment
Company Act”);
●
availability of qualified personnel; and
●
market trends in our industry, interest rates, real estate values, the securities markets or the general economy.
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We
disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise. For a further discussion of these and other factors that could impact our future results, performance or
transactions, see Item 1A, “Risk Factors.”
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5
Market data and industry forecasts and projections used in this Annual Report on Form 10-K have been obtained from
independent industry sources. Forecasts, projections and other forward-looking information obtained from such sources are
subject to similar qualifications and uncertainties as other forward-looking statements in this report.
PART I
ITEM 1. BUSINESS
General
As used herein, the terms “we”, “us”, “our” or the “Company” refer to Innovative Industrial Properties, Inc., a Maryland
corporation, and any of our subsidiaries, including IIP Operating Partnership, LP, a Delaware limited partnership (our
“Operating Partnership”).
We are an internally-managed REIT focused on the acquisition, ownership and management of specialized industrial
properties in the United States. Our properties are leased to experienced, state-licensed operators for their regulated cannabis
facilities. We have acquired and intend to continue to acquire our properties through sale-leaseback transactions and third-
party purchases. We have leased and expect to continue to lease our properties on a triple-net lease basis, where the tenant is
responsible for all aspects of and costs related to the property and its operation during the lease term, including structural
repairs, maintenance, real estate taxes and insurance.
We were incorporated in Maryland on June 15, 2016. We conduct our business through a traditional umbrella partnership
real estate investment trust, or UPREIT structure, in which our properties are owned by our Operating Partnership, directly or
through subsidiaries. We are the sole general partner of our Operating Partnership and own, directly or through subsidiaries,
100% of the limited partnership interests in our Operating Partnership. As of December 31, 2024, we had 22 full-time
employees.
Our corporate office is located at 1389 Center Drive, Suite 200, Park City, Utah 84098. Our telephone number is
(858) 997-3332.
2024 Business Update
Investments
During 2024, we acquired two new properties and made additional investments into existing properties under
development or redevelopment. As of December 31, 2024, we owned 109 properties comprising an aggregate of 9.0 million
rentable square feet (including 666,000 rentable square feet under development/redevelopment) in 19 states. As of
December 31, 2024, we had invested an aggregate of $2.4 billion across our property portfolio (consisting of purchase price
and funding of draws for improvements submitted by tenants, if any, but excluding transaction costs) and had committed an
additional $38.3 million to fund draws to certain tenants and vendors for improvements at our properties. Of the $38.3 million
committed to fund draws to certain tenants and vendors for improvements at our properties, $11.4 million was incurred but not
funded as of December 31, 2024.
Of these 109 properties, we include 106 properties in our operating portfolio, which were 98.3% leased as of December
31, 2024, with a weighted-average remaining lease term of 13.7 years.
We do not include in our operating portfolio the following properties (all of which were under
development/redevelopment as of December 31, 2024, and together are expected to comprise 491,000 rentable square feet
upon completion of development/redevelopment):
●
63795 19th Avenue in Palm Springs, California (pre-leased);
●
Inland Center Drive in San Bernardino, California; and
●
Leah Avenue in San Marcos, Texas.
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6
For more information regarding our properties and tenants, see the sections entitled “— Tenant Concentration” and “—
Geographic Concentration” below.
Property Sale
In May 2024, we sold a property in Los Angeles, California for $9.1 million (excluding closing costs) to a third-party
buyer. Concurrently with the sale, pursuant to a separate agreement previously executed between us and the tenant, the tenant
paid us a lease termination fee of $3.9 million and paid for the closing and other costs incurred by us in connection with the
sale of the property. In connection with this sale, we recognized a disposition-contingent lease termination fee of $3.9 million,
which is included in rental revenue (including tenant reimbursements) on our consolidated statements of income, and a loss on
sale of real estate of $3.4 million.
In March 2023, we sold the portfolio of four properties in California previously leased to affiliates of Medical Investor
Holdings, LLC (“Vertical”) for $16.2 million (excluding transaction costs) with a secured loan for $16.1 million with the
buyer of the properties. The transaction did not qualify for recognition as a completed sale since not all of the criteria were
met. Accordingly, we have not derecognized the assets transferred. All consideration received, as well as any future payments,
from the buyer is recognized as a deposit liability and is included in other liabilities on our consolidated balance sheets until
such time the criteria for recognition as a sale have been met. In addition, as we have not met all of the held-for-sale criteria,
land and building and improvements with gross carrying values of $3.4 million and $13.9 million, respectively, and
accumulated depreciation of $2.0 million as of December 31, 2024, remain on the consolidated balance sheets, and the
buildings and improvements continue to be depreciated. During the year ended December 31, 2024, we received cash interest
payments of $1.1 million, which have been recorded as a liability as of December 31, 2024.
Financial Results
Years Ended December 31, Percentage
2024
2023
Change
(dollars in thousands, except per share data)
Rental revenues (including tenant reimbursements)
$ 306,936
$ 307,349
(0)%
Net income attributable to common stockholders
$ 159,857
$ 164,236
(3)%
Net income attributable to common stockholders per share – diluted
$
5.52
$
5.77
(4)%
AFFO(1)
$ 256,144
$ 256,497
(0)%
AFFO per share – diluted(1)
$
8.98
$
9.08
(1)%
Dividends per share of common stock declared
$
7.52
$
7.22
4 %
(1)
For a definition and discussion of adjusted funds from operations (“AFFO”) and a reconciliation of AFFO to net income attributable to common
stockholders, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Capital Activities
In May 2024, we terminated the previously existing “at-the-market” offering program (the “Prior ATM Program”) and
entered into new equity distribution agreements with four sales agents, pursuant to which we may offer and sell from time to
time through an “at-the-market” offering program (the “ATM Program”), including on a forward basis, shares of our common
stock and 9.00% Series A Cumulative Redeemable Preferred Stock, $0.001 par value per share (the “Series A Preferred
Stock”), up to an aggregate offering price of $500.0 million. During the year ended December 31, 2024, we sold 123,224
shares of our common stock pursuant to the Prior ATM Program for net proceeds of $11.8 million. During the year ended
December 31, 2024, we sold 402,673 shares of our Series A Preferred Stock pursuant to the ATM Program for net proceeds of
$9.6 million.
In October 2023, our Operating Partnership entered into a loan and security agreement (the “Loan Agreement”) with a
federally regulated commercial bank, as lender and as agent for lenders that become party thereto from time to time, which
matures on October 23, 2026. The Loan Agreement provides $50.0 million in aggregate commitments for secured revolving
loans (the “Revolving Credit Facility”), the availability of which is based on a borrowing base consisting of real properties
owned by subsidiaries (the “Subsidiary Guarantors”) of the Operating Partnership that satisfy eligibility
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7
criteria set forth in the Loan Agreement. The obligations of the Operating Partnership under the Loan Agreement are
guaranteed by the Company and the Subsidiary Guarantors, and are secured by (i) operating accounts of the Operating
Partnership into which lease payments under the real property included in the borrowing base are paid, (ii) the equity interest
of the Subsidiary Guarantors, (iii) the real estate included in the borrowing base and the leases and rents thereunder, and (iv)
all personal property of the Subsidiary Guarantors. Borrowings under the Revolving Credit Facility bear interest at a variable
rate based on the greater of the prime rate and an applicable margin based on deposits with the participating bank(s) and a
stipulated interest rate. The Revolving Credit Facility is subject to an unused line of credit fee, calculated in accordance with
the Loan Agreement. The Loan Agreement is subject to certain liquidity and operating covenants and includes customary
representations and warranties, affirmative and negative covenants and events of default. The Loan Agreement also allows the
Operating Partnership, subject to the satisfaction of certain conditions, to request additional revolving loan commitments up to
a specified amount. In November 2024, our Operating Partnership entered into an amendment to the Loan Agreement,
pursuant to which the aggregate commitments under the Revolving Credit Facility were increased from $50.0 million to
$87.5 million. There were no amounts outstanding under the Revolving Credit Facility as of December 31, 2024.
During the year ended December 31, 2024, we issued 28,408 shares of our common stock and paid $4.3 million in cash
upon exchange by holders of $4.3 million principal amount of our 3.75% Exchangeable Senior Notes due 2024 (the
“Exchangeable Senior Notes”) and paid off the remaining $0.1 million principal amount at maturity in February 2024, in
accordance with the terms of the indenture for the Exchangeable Senior Notes.
Our Properties
Generally
We have acquired and intend to continue to acquire specialized industrial real estate assets in the United States, operated
by state-licensed cannabis operators, through sale-leaseback transactions and third-party purchases. In sale-leaseback
transactions, concurrently upon closing of the acquisition, we lease the properties back to the sellers under long-term, triple-
net lease agreements. Based on our properties and ongoing review of potential acquisitions, indoor cultivation facilities
generally have similar shells as standard light industrial buildings or greenhouses. However, based on our diligence, the
regulated cannabis cultivation process typically requires a finely tuned environment to achieve consistent high quality and
specificity in cannabinoid levels and to maximize yields, which translates into certain capital improvements in the building’s
infrastructure. These improvements can include enhanced HVAC systems for climate and humidity control, high capacity
electrical and plumbing systems, specialized lighting systems, and sophisticated building management, cultivation monitoring
and security systems. Through our sale-leaseback strategy, we serve as a source of capital to our tenants, allowing them to
redeploy their sale proceeds into their core operations to grow their business and achieve higher returns. We may also
purchase properties from third parties and fund the necessary improvements through a long-term lease with an identified
tenant, which provides those tenants with increased cash flow to deploy in their operating businesses.
The following table sets forth certain information regarding our property portfolio by property type for the year ended and
as of December 31, 2024 (dollars in thousands):
Rentable Square Feet
Contractual Rent
Under
Collected for
Percentage
Number of
Development or
the Year Ended
of
Property Type
Properties
Operating
Redevelopment
December 31, 2024(1)
Total
Industrial(2)(3)
68
7,782,000
603,000
$
262,279
92 %
Retail
33
150,000
—
6,981
3
Industrial/Retail(3)
8
423,000
63,000
15,435
5
Total
109
8,355,000
666,000
$
284,695
100 %
(1)
Contractual rent collected includes base rent and property management fees, including amounts collected for one property and portions of two other
properties that did not satisfy the requirements for sale-leaseback accounting and therefore are primarily recognized as other revenue on our
consolidated statements of income, and amounts collected for two leases related to two properties that are classified as sale-type leases, which is
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8
recognized as a deposit liability and included in other liabilities on our consolidated balance sheets. Contractual rent collected excludes tenant
reimbursements.
(2)
Number of properties and rentable square feet include one property acquired in January 2022 which did not satisfy the requirements for sale-leaseback
accounting and therefore, the investment is recognized as a note receivable and is included in other assets, net on our consolidated balance sheets.
(3)
“Industrial” reflects facilities utilized or expected to be utilized for regulated cannabis cultivation, processing and/or distribution activities, which can
consist of industrial and/or greenhouse space. Also includes two properties (one located in San Bernardino, California and one located in Palm Springs,
California), where we are evaluating alternative non-cannabis uses for the properties, due in part to changes in the zoning that no longer allow for
regulated cannabis cultivation and processing.
As of December 31, 2024, the tenants at our leased properties are generally responsible for paying (or reimbursing us) for
all structural repairs, maintenance expenses, insurance and real estate taxes related to the property during the term of the
applicable lease.
Our Competitive Strengths
We believe that we have the following competitive strengths:
●
Experienced Management Team. Alan Gold, our executive chairman, and other members of our senior management
team have substantial experience in all aspects of the real estate industry, including acquisitions, dispositions,
construction, development, management, finance and capital markets. In particular, in August 2004, Mr. Gold and
Gary Kreitzer, vice chairman of our board of directors, founded BioMed Realty Trust, Inc. (formerly NYSE: BMR)
(“BioMed Realty”), an internally-managed REIT focused on acquiring, developing, owning, leasing and managing
laboratory and office space for the life science industry, an industry they believed to be underserved by commercial
property investors and lenders and poised for significant growth. Mr. Gold served as chairman of the board of
directors and chief executive officer and Mr. Kreitzer served as executive vice president and a member of the board
of directors from the founding of BioMed Realty in 2004 through the acquisition of BioMed Realty by an affiliate of
The Blackstone Group, L.P. in 2016.
●
Recurring Revenue with Contractual Escalations. As of December 31, 2024, we owned 109 properties. Of these
109 properties, we include 106 properties in our operating portfolio, which were 98.3% leased as of December 31,
2024, with a weighted-average remaining lease term of 13.7 years, and which are subject to contractual rental rate
increases. Along with our existing portfolio, we expect to continue to enter into additional similar transactions
structured to provide recurring revenue with contractual escalations.
●
Demonstrated Investment Acumen. We utilize rigorous underwriting standards for evaluating acquisitions and
potential tenants to ensure that they meet our strategic and financial criteria. Our extensive experience and
relationships in the real estate and regulated cannabis industry enable us to identify, negotiate and close on
acquisitions and leases with established operators and other operators which meet our criteria.
●
Regulated Cannabis Industry Growth Trends. Based on the strong historical and projected growth in sales for the
regulated cannabis industry, we expect to see continued spending by state-licensed cannabis operators on their
existing and new state-licensed cannabis facilities, presenting an opportunity for us to be a key capital provider in
their expansion initiatives.
Our Business Objectives and Growth Strategies
Our principal business objective is to maximize stockholder returns through a combination of (1) distributions to our
stockholders, and (2) sustainable long-term growth in cash flows from increased rents, which we hope to pass on to
stockholders in the form of increased distributions. Our primary strategy to achieve our business objective is to acquire and
own a portfolio of specialized industrial properties, including regulated cannabis facilities leased to tenants holding the
requisite state licenses to operate in the regulated cannabis industry. We may diversify our portfolio, however, by also
investing in properties that are not related to the cannabis industry if they provide return characteristics consistent with our
investment objective.
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9
Our strategy includes primarily the following components:
●
Owning Specialized Industrial Properties and Related Real Estate Assets for Income. We primarily acquire
regulated cannabis facilities from licensed operators who will continue their cultivation, processing and/or
dispensing operations after our acquisition of the property. We expect to hold acquired properties for investment,
with the goal of generating stable and increasing rental income from leasing these properties to licensed operators.
●
Expanding as Additional States Enact Regulated Cannabis Programs. We acquire properties in the United States,
with a focus on states that have established regulated cannabis programs. As of December 31, 2024, we owned
properties in 19 states, and we expect that our acquisition opportunities will continue to expand as additional states
establish regulated cannabis programs and license new operators.
●
Providing Expansion Capital to Existing Tenants as an Additional Source of Income. We have provided expansion
capital for many of our existing tenant operators as they expand operations in additional states and locations within a
state, as well as capital for continued enhancements of production capacity at existing facilities that these operators
lease from us, which correspond to adjustments in rent under the applicable leases and other provisions in certain
cases. We expect to continue to focus on executing on these expansion initiatives with our tenant operators.
●
Preserving Financial Flexibility on our Balance Sheet. We are focused on maintaining a flexible capital structure
for financing our growth initiatives. As of December 31, 2024, our only debt comprised of $300.0 million principal
amount of our 5.50% Senior Notes due May 2026 (the “Notes due 2026”), equating to low leverage of 11% of our
total gross assets of $2.6 billion.
In order to capitalize on the appropriate acquisition opportunities, we may modify or expand our growth strategy from
time to time. For example, we may invest in any type of real estate investment that we believe to be in the best interests of our
stockholders, including other real estate funds or REITs. We may acquire additional properties through joint venture
investments in the future or sell a percentage of our existing properties to a joint venture partner, which may result in the
deconsolidation of properties we already own. From time to time, we may invest in debt, mezzanine loans, preferred equity or
other forms of joint venture equity.
Our Target Markets
Our target markets include states that have established regulated cannabis programs. As of December 31, 2024, we owned
109 properties located in 19 states. According to the Marijuana Business Daily, as of December 31, 2024, 41 states and the
District of Columbia have legalized cannabis for medical use, and 24 states and the District of Columbia have legalized
cannabis for adult-use.
Although these states have approved the regulated use of cannabis, the applicable state and local laws and regulations
vary widely. For example, most states’ laws allow commercial production and sales through dispensaries and set forth rigorous
licensing requirements; in other states the licensing rules are unclear. In some states, dispensaries are mandated to operate on a
not-for-profit basis. Some states permit home cultivation activities. The states also differ on the form in which they permit
cannabis to be sold. For example, some states do not permit cannabis-infused products such as concentrates, edibles and
topicals, while other states ban smoking cannabis.
In addition, we expect other factors will be important in the development and growth of the regulated cannabis industry in
the United States, including the timeframes for developing regulations and issuing licenses in states that recently passed laws
allowing for regulated cannabis; continued legislative authorization of cannabis at the state level; support from local
municipalities within a state; federal, state and local taxation of regulated cannabis products; and the level of enforcement
against illicit, non-licensed cannabis activities in a state. Progress in the regulated cannabis industry is not assured and any
number of factors could slow or halt progress in this area.
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10
Market Opportunity
The Regulated Cannabis Industry
Overview
In the United States, the development and growth of the regulated cannabis industry has generally been driven by state
law and regulation, and accordingly, the market varies on a state-by-state basis. State laws that legalize and regulate medical-
use cannabis allow patients to consume cannabis for medicinal reasons with a designated healthcare provider’s
recommendation, subject to various requirements and limitations. States have authorized numerous medical conditions as
qualifying conditions for treatment with medical-use cannabis, which vary significantly from state to state and may include,
among others, treatment for cancer, glaucoma, HIV/AIDs, wasting syndrome, pain, nausea, seizures, muscle spasms, multiple
sclerosis, post-traumatic stress disorder (PTSD), migraines, arthritis, Parkinson’s disease, Alzheimer’s, lupus, residual limb
pain, spinal cord injuries, inflammatory bowel disease and terminal illness.
Industry Trends
According to BDSA, state-legal cannabis sales in the United States are projected to grow from $29.5 billion in 2023 to
$45.6 billion by 2028, representing a compound annual growth rate of approximately 9.1%.
As the industry continues to evolve, new ways to consume regulated cannabis products are being developed in order for
patients to have the treatment needed for their condition and provide consumers safe, consistent and appealing options. In
addition to smoking and vaporizing of dried leaves, cannabis can be incorporated into a variety of edibles, pills, spray
products, transdermal patches, beverages, and topicals, including salves, ointments, lotions and sprays with low or high levels
of delta-9-tetrahydrocannabinol (“THC”), the principal psychoactive constituent of the cannabis plant.
As with any nascent but growing industry, operational and business practices evolve and become more sophisticated over
time. We believe that the quality and experience of industry participants and the development of sound business, operational
and compliance practices have strengthened significantly over time, increasing the attractiveness for investment in the
regulated cannabis industry.
Shifting Public Attitudes and State Law and Legislative Activity
We believe that the growth of the regulated cannabis industry has been fueled, in part, by the rapidly changing public
attitudes in the United States. In a Pew Research Survey released in January 2024, 88% of Americans support legal adult-use
and/or medical cannabis.
As of December 31, 2024, 41 states, plus the District of Columbia, have passed laws allowing their citizens to use
medical cannabis. The first state to permit the use of cannabis for medicinal purposes was California in 1996, upon adoption
of the Compassionate Care Act. The law allowed doctors to recommend cannabis for serious medical conditions and patients
were permitted to use, possess and grow cannabis themselves. Several other states adopted medical-use cannabis laws in 1998
and 1999, and the remaining medical-use cannabis states adopted their laws on various dates through 2024. In addition, as of
December 31, 2024, 24 states, plus the District of Columbia, have legalized cannabis for adult-use.
Following the approval of state-regulated cannabis, state programs must be developed and businesses must be licensed
before commencing cannabis sales. Some states have developed the necessary procedures and licensing requirements quickly,
while other states have taken years to develop their programs for production and sales of cannabis. Even where regulatory
frameworks for regulated cannabis production and sales are in place, states tend to revise these rules over time. These
revisions often impact sales, making it difficult to predict the potential of new markets. States may restrict the number of
regulated cannabis businesses permitted; impose significant taxes on regulated cannabis products, in addition to taxes imposed
by local municipalities; take limited enforcement actions against non-licensed cannabis operators; restrict the method by
which cannabis can be consumed; restrict the ability of alternative health care providers to recommend medical cannabis for
treatment; limit the medical conditions that are eligible for cannabis
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treatment; or require registration of doctors and/or patients, each of which can limit growth of the regulated cannabis industry
in those states. Alternatively, states may relax their initial regulations relating to regulated cannabis production and sales and
take other actions to support the growth of the regulated cannabis program, which would likely accelerate growth of the
regulated cannabis industry in such states.
Access to Capital
To date, the status of state-licensed cannabis under federal law has limited the ability of state-licensed industry
participants to fully access the U.S. banking system and traditional financing sources. These limitations, when combined with
the high costs of maintaining licensed and stringently regulated cannabis facilities, substantially increase the cost of
production. While future changes in federal and state laws may ultimately open up financing options that have not been widely
available to date in this industry, we believe that our sale-leaseback and other real estate solutions to state-licensed industry
participants will continue to be attractive capital options for regulated operators.
Market Opportunity and Associated Risks
We focus on purchasing specialized industrial real estate assets for the regulated cannabis industry. We believe that our
sale-leaseback and other real estate solutions offer an attractive alternative to state-licensed cannabis operators who may have
limited access to traditional financing alternatives. We have acquired and intend to continue to acquire regulated cannabis
facilities in states that permit regulated cannabis operations.
Notwithstanding the foregoing market opportunity and trends, and despite legalization at the state level, we continue to
believe that the current state of federal law creates significant uncertainty and potential risks associated with investing in
regulated cannabis facilities, including but not limited to potentially heightened risks related to the use of such facilities for
adult-use cannabis operations, if a state passes such laws. For a more complete description of these risks, see the sections
“— Governmental Regulation” below and “Risks Related to Regulation” under Item 1A, “Risk Factors.”
Market Dynamics in Regulated Cannabis State Programs
States vary significantly in their market dynamics, driven by many factors, including, but not limited to, regulatory
frameworks, enforcement policies with respect to illicit, unlicensed cannabis operations, taxation and licensing structures.
Ineffective enforcement policies with respect to illicit cannabis sales in a particular state may significantly limit the growth
and profitability of operators in that state’s regulated cannabis market.
Unit Pricing for Regulated Cannabis Products
Many states have experienced declines in unit pricing for regulated cannabis products, with that decline more pronounced
in certain states than in others, which compresses operating margins for operators. As a result, certain regulated cannabis
operators have consolidated operations or shuttered certain operations to reduce costs, which could have a negative impact on
operators’ demand for regulated cannabis facilities, including our existing tenants.
Inflation and Supply Chain Constraints
The U.S. economy has experienced a sustained increase in inflation rates in recent years, which we believe is negatively
impacting our tenants. This inflation has impacted costs for labor and production inputs for regulated cannabis operators, in
addition to increasing costs of construction for development and redevelopment projects. Labor shortages and global supply
chain issues also continue to adversely impact costs and timing for completion of these development and redevelopment
projects, which are resulting in cost overruns and delays in commencing operations on certain of our tenants’ projects.
Capital Availability for Tenants
Recently, financial markets have been volatile, reflecting heightened geopolitical risks and material tightening of financial
conditions since the U.S. Federal Reserve began increasing interest rates in spring of 2022 and continued uncertainty
regarding monetary policy.
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Driven in part by overall macroeconomic conditions, capital availability has declined for regulated cannabis operators
over the last several years. According to Viridian Capital Advisors (“Viridian”), worldwide cannabis capital raises in 2024
increased over 2023, with less than $2.3 billion in total capital raises, versus over $1.9 billion in 2023, $4.3 billion in 2022 and
over $12.0 billion in 2021. Also according to Viridian, mergers and acquisitions activity in the North American regulated
cannabis industry declined in 2024 to $1.2 billion, down from $1.8 billion in 2023.
Capital raising activities by U.S. REITs continued to increase in 2024 with $85 billion of capital raised compared to $62
billion in 2023. According to the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”), U.S. REIT 2024
capital raising was higher than 2022 and 2023, but remained lower than 2019-2021 levels.
Tenant Concentration
As of December 31, 2024, all of our rental revenues were derived from 109 properties. The following table sets forth
certain information regarding the top ten tenants in our property portfolio that represented the largest total invested and
committed capital as of and for the year ended December 31, 2024 (dollars in thousands):
Contractual Rent
Total Invested
Collected for
Percentage
Number of
and Committed
the Year Ended
of
Tenant(1)
Properties
Capital(2)
December 31, 2024(3)
Total
PharmaCann Inc. ("PharmaCann")
11
$
337,172
$
48,269
17 %
Ascend Wellness Holdings, Inc. ("Ascend")
4
214,050
30,261
11
Green Thumb Industries, Inc. ("Green Thumb")
3
176,800
21,931
8
Curaleaf Holdings, Inc. ("Curaleaf")
8
175,047
20,175
7
The Cannabist Company
21
147,834
17,785
6
Trulieve Cannabis Corp. ("Trulieve")
6
146,503
19,128
7
Cresco Labs Inc. ("Cresco")
5
120,845
16,456
6
4Front Ventures Corp. ("4Front")(4)
4
120,750
9,266
3
Gold Flora, LLC ("Gold Flora")
3
117,137
8,631
3
SH Parent, Inc. ("Parallel")
2
107,900
15,666
5
Total
67
$ 1,664,038
$
207,568
73 %
(1)
Includes leases with affiliates of each entity, for which the entity has provided a corporate guaranty.
(2)
Total invested and committed capital includes development and improvements allowance not funded as of December 31, 2024.
(3)
Contractual rent collected includes base rent and property management fees, including amounts collected for one property and portions of two other
properties that did not satisfy the requirements for sale-leaseback accounting and therefore are primarily recognized as other revenue on our
consolidated statements of income, and amounts collected for two leases related to two properties that are classified as sale-type leases, which is
recognized as a deposit liability and included in other liabilities on our consolidated balance sheet. Contractual rent collected excludes tenant
reimbursements.
(4)
Number of properties and total invested and committed capital include one property acquired in January 2022 which did not satisfy the requirements for
sale-leaseback accounting and therefore, the investment is recognized as a note receivable and is included in other assets, net on our consolidated
balance sheet.
Many of our tenants have limited histories of operations, and have not yet been profitable, or have been profitable only
for a short period of time. For some or all of 2025, we expect that many of our tenants will continue to incur losses as their
expenses increase in connection with the expansion of their operations and the current operating environment, and that they
have made and will continue to make rent payments to us from proceeds from the sale of the applicable property or cash on
hand, and not funds from operations. Furthermore, each of our leases does not prohibit the tenant from conducting adult-use
cannabis operations at the applicable property, provided such operations are in compliance with applicable state and local
laws. As such, our tenant may conduct adult-use cannabis operations at the property it leases from us, which in turn could
expose that tenant, us and our property to different and greater risks, including heightened risks of enforcement of federal
laws. For example, Arizona, California, Colorado, Illinois, Maryland, Massachusetts, Michigan, Missouri, Nevada, New
Jersey, New York, Ohio, Virginia and Washington permit licensed adult-use cannabis operations, and our leases with tenants in
those states allow for adult-use cannabis operations to be conducted at the properties in compliance with state and local laws.
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In July 2022, Kings Garden, Inc. (“Kings Garden”) defaulted on its obligations to pay rent at all of the properties it leases
with us, and pursuant to a confidential, conditional settlement agreement executed on September 11, 2022 between us and
Kings Garden, we terminated the leases for two properties that were in development or redevelopment as of December 31,
2023 and regained possession of those properties. In September 2023, we regained possession of the four remaining properties
that Kings Garden had occupied, where Kings Garden paid stipulated rent during its period of occupancy until September 20,
2023.
In November 2022, Parallel defaulted on its obligations to pay rent at one of our properties in Pennsylvania, and we
regained possession of that property in October 2023. In February 2023, Parallel also defaulted on its obligations to pay rent
at one of our properties in Texas, and we regained possession of that property in March 2023.
In November 2022, Green Peak Industries, Inc. (“Green Peak”) defaulted on its obligations to pay rent at one of our
properties in Michigan. During 2023, a receiver was appointed over substantially all of Green Peak’s assets and we regained
possession of one property that was under redevelopment as a regulated cannabis cultivation and processing facility and three
retail properties in Michigan. In February 2024, we regained possession of the remaining regulated cannabis cultivation and
processing facility that was leased to Green Peak. At December 31, 2024, Green Peak leases three of our retail properties in
Michigan.
In 2023, as previously reported in our periodic filings, we also executed limited rent deferrals for Holistic (at two
properties in California and Michigan), Calyx Peak, Inc. at one property in Missouri, Temescal Wellness of Massachusetts,
LLC (“Temescal Wellness”) at one property in Massachusetts and 4Front at one property in Illinois.
In January 2024, we entered into lease amendments with subsidiaries of 4Front at the four properties we lease to them in
Illinois, Massachusetts and Washington, extending the term of each lease. We amended the Illinois lease to reduce base rent
owing for the nine months ending September 30, 2024, defer the payback of the security deposit applicable to the lease (with
the security deposit being subject to future pro-rata monthly payback), and increase the base rent for the remainder of the term
commencing November 1, 2024.
In May 2024, Temescal Wellness defaulted on its obligations to pay rent at one of our properties in Massachusetts and we
regained possession of that property in September 2024.
In December 2024, PharmaCann defaulted on its obligations to pay rent for the month of December under six of its
eleven leases for properties located in Illinois, Massachusetts, Michigan, New York, Ohio and Pennsylvania. December rent,
including base rent, property management fees and estimated tax and insurance payments, totaled $4.3 million for these six
properties. In January 2025, we entered into lease amendments with PharmaCann with respect to nine of its leases for
properties located in New York, Illinois, Pennsylvania, Ohio, and Colorado. Those amendments reduced cumulative total base
rent from $2.8 million per month to $2.6 million per month, with cash rent payments commencing February 1, 2025, and
provided for pro-rata replenishment of security deposits over thirty-six months commencing February 1, 2027. We also
entered into amendments with PharmaCann with respect to two of its leases for cultivation properties in Michigan and
Massachusetts. Those amendments provide that monthly base rent of $1.3 million for these two properties will be abated in
full effective February 1, 2025 and, if the properties have not been transitioned to new tenant(s) by August 1, 2025, we will
regain full control over the properties. We applied security deposits held by us pursuant to all of the PharmaCann leases for the
payment in full of all defaulted rent for December 2024 and January 2025 and certain penalties. If PharmaCann is not able to
refinance its existing senior secured credit facility maturing June 30, 2025, all modifications to our leases with PharmaCann
described above will immediately be null and void and the leases will revert to the terms in effect as of January 1, 2025.
See each of the discussions under Item 1A, “Risk Factors,” under the captions “Many of our existing tenants are, and we
expect that many of our future tenants will be, companies with limited histories of operations and may be unable to pay rent
with funds from operations or at all, which could adversely affect our cash available to make distributions to our stockholders
or otherwise impair the value of our common stock,” “Continuing unfavorable market dynamics affecting the regulated
cannabis industry could adversely affect our business, liquidity and financial condition, and overall results of operations,” and
“Because we lease our properties to a limited number of tenants, and to the extent we
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depend on a limited number of tenants in the future, the inability of any single tenant to make its lease payments could
adversely affect our business and our ability to make distributions to our stockholders.”
Geographic Concentration
The following table sets forth certain state-by-state information regarding our property portfolio for the year ended and as
of December 31, 2024 (dollars in thousands):
Contractual Rent
Collected for
Percentage
Number of
Rentable
Total Invested and
the Year Ended
of
State
Properties
Sq. Ft.(1)
Committed Capital(2)
December 31, 2024(3)
Total
Arizona
3
377,000
$
27,738 $
4,343
2 %
California
8
814,000
193,013
11,208
4
Colorado
27
233,000
83,340
7,723
3
Florida
5
1,153,000
209,550
25,823
9
Illinois
7
965,000
307,300
36,096
12
Maryland
4
294,000
93,835
11,439
4
Massachusetts(4)
10
989,000
306,200
38,517
13
Michigan
14
946,000
297,164
28,950
10
Minnesota
1
89,000
9,710
1,817
1
Missouri
1
83,000
28,250
4,382
1
Nevada
1
43,000
9,600
1,591
1
New Jersey
4
291,000
103,985
13,387
5
New York
2
623,000
220,858
31,815
11
North Dakota
3
42,000
15,849
2,009
1
Ohio
5
374,000
115,795
16,992
6
Pennsylvania
10
1,361,000
385,930
40,642
14
Texas
2
148,000
30,231
2,442
1
Virginia
1
82,000
19,750
2,929
1
Washington
1
114,000
17,500
2,590
1
Total
109
9,021,000
$
2,475,598 $
284,695
100 %
(1)
Includes 666,000 square feet under development/redevelopment.
(2)
Total invested and committed capital includes development and improvements allowances not funded as of December 31, 2024.
(3)
Contractual rent collected includes base rent and property management fees, including amounts collected for one property and portions of two other
properties that did not satisfy the requirements for sale-leaseback accounting and therefore are primarily recognized as other revenue on our
consolidated statements of income, and amounts collected for two leases related to two properties that are classified as sale-type leases, which is
recognized as a deposit liability and included in other liabilities on our consolidated balance sheet. Contractual rent collected excludes tenant
reimbursements.
(4)
Number of properties and rentable square feet include one property acquired in January 2022 which did not satisfy the requirements for sale-leaseback
accounting and therefore, the investment is recognized as a note receivable and is included in other assets, net on our consolidated balance sheet.
See discussion under Item 1A, “Risk Factors,” under the caption “Our properties are, and are expected to continue to be,
geographically concentrated in states that permit licensed cannabis operations, and we will be subject to social, political and
economic risks of doing business in these states and any other state in which we may own property.” The regulated cannabis
market is in its early stages; is generally subject to strict regulations providing for, among other things, comprehensive product
testing and tracking systems, limited medical conditions for treatment with medical-use cannabis, limitations on the form in
which medical cannabis can be consumed and enhanced registration requirements for patients and physicians; is subject in
many instances to significant taxation burdens at the federal, state and local levels; competes in many instances with non-
licensed cannabis operators due in part to limited enforcement by state and local authorities; and may face opposition from
local municipalities within a state, any of which may contribute to a particular market not growing and developing in the way
that we or our tenants projected.
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Our Financing Strategy
We intend to meet our long-term liquidity needs through cash flow from operations and the issuance of equity and debt
securities, including common stock, preferred stock and notes, and draws from our Revolving Credit Facility. Where possible,
we also may issue limited partnership interests in our Operating Partnership to acquire properties from existing owners
seeking a tax-deferred transaction. We expect to issue equity and debt securities at times when we believe that we can reinvest
the proceeds of such an offering in accretive property acquisitions. We may also issue common stock to permanently finance
properties that were previously financed by debt securities or draws from our Revolving Credit Facility. However, we cannot
assure you that we will have access to the capital markets at times and on terms that are acceptable to us. Our ability to access
the capital markets and to obtain other financing arrangements is also significantly limited by our focus on serving the
regulated cannabis industry. Our investment guidelines provide that our aggregate borrowings (secured and unsecured) will
not exceed 50% of the cost of our tangible assets at the time of any new borrowing, subject to our board of directors’
discretion.
We intend to file an automatic shelf registration statement, which may permit us, from time-to-time, to offer and sell
common stock, preferred stock, warrants, debt securities and other securities to the extent necessary or advisable to meet our
liquidity needs.
Capital raising activities by U.S. REITs continued to increase in 2024 with $85 billion of capital raised compared to $62
billion in 2023. According to the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”), U.S. REIT 2024
capital raising was higher than 2022 and 2023, but remained lower than 2019-2021 levels.
Financial markets for REITs and the cannabis industry have been volatile in general for an extended period of time, which
has also significantly reduced our access to capital. This has contributed to a significant decrease in our investments in new
properties in 2023 and 2024. If sustained, this would have a material adverse effect on our business, financial condition and
results of operations, including our ability to continue to make acquisitions of new properties and fund investments for
improvements at existing properties.
Risk Management
As of December 31, 2024, we owned 109 properties located in 19 states. Many of our tenants are tenants at multiple
properties. We will continue to attempt to diversify the investment size and location of our portfolio of properties in order to
manage our portfolio-level risk. Over the long term, we expect that no single property will exceed 20% of our total assets and
that properties leased to a single tenant (individually or together with its affiliates) will not exceed 20% of our total assets.
Notwithstanding the foregoing, the industry continues to experience significant consolidation among regulated cannabis
operators, and certain of our tenant operators may combine, increasing the concentration of our tenant portfolio with those
consolidated operators.
We expect that single tenants will continue to occupy our properties pursuant to triple-net lease arrangements in general
and, therefore, the success of our investments will be materially dependent on the financial stability of these tenants. Many of
our existing tenants have limited histories of operations, and have not yet been profitable, or have been profitable only for a
short period of time. As such, we expect that many of our current and future tenants will continue to incur losses as their
expenses increase in connection with the expansion of their operations, and that they have made and will make rent payments
to us from proceeds from the sale of the applicable property or cash on hand, and not funds from operations. We also expect
the success of our tenants, and their ability to make rent payments to us, to significantly depend on the projected growth and
development of the applicable state market; as many of these state markets have a very limited history, and other state markets
are still forming their regulations, issuing licenses and otherwise establishing the market framework, significant uncertainty
exists as to whether these markets will develop in the way that we or our tenants project.
We evaluate the credit quality of our tenants and any guarantors on an ongoing basis. In addition, we monitor the payment
history data for all of our tenants and, in some instances, we monitor our tenants by periodically conducting site visits and
meeting with the tenants to discuss their operations. In many instances, we will generally not be entitled to
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financial results or other credit-related data from our tenants. See the section “Risks Related to Our Business” under Item 1A,
“Risk Factors.”
Competition
The current market for properties that meet our investment objectives is limited. In addition, we believe finding properties
that are appropriate for the specific use of allowing regulated cannabis operators may be limited as more competitors enter the
market, and as regulated cannabis operators obtain greater access to alternative financing sources, including but not limited to
equity and debt financing sources.
We face significant competition from a diverse mix of market participants, including but not limited to, other companies
with similar business models, independent investors, hedge funds and other real estate investors, hard money lenders, and
cannabis operators themselves, all of whom may compete with us in our efforts to acquire real estate zoned for regulated
cannabis facilities. In some instances, we will be competing to acquire real estate with persons who have no interest in the
cannabis industry, but have identified value in a piece of real estate that we may be interested in acquiring.
These competitors may prevent us from acquiring desirable properties or may cause an increase in the price we must pay
for properties. Our competitors may have greater financial and operational resources than we do and may be willing to pay
more for certain assets or may be willing to accept more risk than we believe can be prudently managed. In particular, larger
companies may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and
enhanced operating efficiencies. Our competitors may also adopt transaction structures similar to ours, which would decrease
our competitive advantage in offering flexible transaction terms.
In addition, due to a number of factors, including but not limited to potential greater clarity of the laws and regulations
governing regulated cannabis by state and federal governments, the number of entities and the amount of funds competing for
suitable investment properties may increase substantially, resulting in increased demand and increased prices paid for these
properties. Furthermore, changes in federal regulations pertaining to cannabis as well as the rescheduling of cannabis from
Schedule I to Schedule III under the Controlled Substances Act of 1970 (the “CSA”) could also lead to increased access to
U.S. capital markets for our competitors and for regulated cannabis operators (including but not limited to access to the
Nasdaq Stock Market and/or the New York Stock Exchange). We compete for the acquisition of properties primarily based on
purchase price and the lease terms (including rental rates, lease duration and improvement allowances, among others) in our
sale leaseback and other real estate capital transactions. If we pay higher prices for properties or offer lease terms that are less
attractive for us, our profitability may decrease, and you may experience a lower return on our common stock. Increased
competition for properties may also preclude us from acquiring those properties that would generate attractive returns to us.
Governmental Regulation
Federal Laws Applicable to the Regulated Cannabis Industry
Cannabis (with the exception of hemp containing no more than 0.3% THC by dry weight) is illegal under U.S. federal
law. The U.S. federal government regulates drugs through the CSA. The CSA classifies marijuana (cannabis) as a Schedule I
controlled substance, and as such, the manufacture, distribution and dispensing of marijuana is illegal under U.S. federal law.
Moreover, on two separate occasions the U.S. Supreme Court ruled that the CSA trumps state law. That means that the federal
government may enforce U.S. drug laws against companies operating in accordance with state cannabis laws, creating a
climate of legal uncertainty regarding the production and sale of cannabis. Unless and until Congress amends the CSA with
respect to cannabis (and the President approves such amendment), there is a risk that the federal law enforcement authorities
responsible for enforcing the CSA, including the U.S. Department of Justice (“DOJ”) and the Drug Enforcement Agency
(“DEA”), may enforce current federal law.
Under the Obama administration, the DOJ previously issued memoranda, including the so-called “Cole Memo” on
August 29, 2013, providing internal guidance to federal prosecutors concerning enforcement of federal cannabis prohibitions
under the CSA. This guidance essentially characterized as inefficient the use of federal law enforcement resources to
prosecute those complying with state laws allowing the use, manufacture and distribution of cannabis where
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states have enacted laws legalizing cannabis in some form and have also implemented strong and effective regulatory and
enforcement systems to control the cultivation, processing, distribution, sale and possession of cannabis, conduct in
compliance with those laws and regulations was not a priority for the DOJ. Instead, the Cole Memo directed U.S. Attorney’s
Offices discretion not to investigate or prosecute state law compliant participants in the medical cannabis industry who did not
implicate one or more specifically identified federal government priorities, including preventing interstate diversion or
distribution of cannabis to minors.
On January 4, 2018, then-U.S. Attorney General Jeff Sessions issued a written memorandum rescinding the Cole Memo
and related internal guidance issued by the DOJ regarding federal law enforcement priorities involving cannabis (the
“Sessions Memo”). The Sessions Memo instructed federal prosecutors to enforce the laws enacted by Congress and to follow
well-established principles that govern all federal prosecutors when deciding whether to pursue prosecutions related to
cannabis activities. As a result, federal prosecutors could, and still can, use their prosecutorial discretion to decide to
prosecute actors compliant with their state laws. The Sessions Memo states that “these principles require federal prosecutors
deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the
Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of
particular crimes on the community.” The Sessions Memo went on to state that given the DOJ’s well-established general
principles, “previous nationwide guidance specific to marijuana is unnecessary and is rescinded, effective immediately.”
Although there have not been any identified prosecutions of state law compliant cannabis entities, there can be no assurance
that the federal government will not enforce federal laws relating to cannabis in the future and it remains unclear what impact
the Sessions Memo will have on the regulated cannabis industry, if any.
Jeff Sessions resigned as U.S. Attorney General on November 7, 2018.
On February 14, 2019, William Barr was confirmed as U.S. Attorney General. However, in a written response to
questions from U.S. Senator Cory Booker made as a nominee, Attorney General Barr stated “I do not intend to go after parties
who have complied with state law in reliance on the Cole Memo.” The DOJ under Mr. Barr did not take a formal position on
federal enforcement of laws relating to cannabis. Merrick Garland served as U.S. Attorney General from 2021 to January 20,
2025. The DOJ under Mr. Garland also did not take a formal position on federal enforcement of laws relating to cannabis.
Pamela Bondi was confirmed by the United States Senate as Attorney General of the United States on February 4, 2025.
During her tenure as Attorney General in the State of Florida, Bondi routinely opposed the softening of anti-cannabis laws,
including opposition to ballot initiatives to broaden access to medical cannabis, but she also generally faithfully enforced state
cannabis laws to maintain a well-regulated medical cannabis market. Bondi has not provided a clear policy directive for the
United States as it pertains to state-level cannabis-related activities, and there can be no assurances that DOJ or other law
enforcement authorities will not seek to vigorously enforce current U.S. federal laws. It is generally expected that Bondi will
closely follow the Trump Administration’s enforcement priorities.
In August 2023, the U.S. Department of Health and Human Services (“HHS”) recommended to the DEA that cannabis be
reclassified from a Schedule I drug to a Schedule III drug under the CSA. HHS based this recommendation on a Food and
Drug Administration (“FDA”) review of cannabis’ classification pursuant to President Biden’s executive order in October
2022. On May 16, 2024, the DEA issued a Notice of Proposed Rulemaking, which proposed to schedule cannabis as a
Schedule III substance under the CSA. During the 60-day comment period that followed publication of the notice in the
Federal Register, the majority of commenters favored either the proposed rescheduling or the complete removal of cannabis as
a scheduled substance under the CSA.
The prospects for this reclassification effort under the Trump administration remain unclear. A DEA administrative law
judge canceled the rulemaking hearing on this issue that was set to begin on January 21, 2025 following a series of challenges
by various parties, including parties seeking to remove the DEA from the proposed rulemaking process. Since that
postponement, President Trump has appointed Derek Maltz to lead the DEA. Neither Trump nor Maltz has released any
official policy directive related to rescheduling. No further hearings have been scheduled beyond a status update slated for
April 2025.
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If successful, this reclassification effort could also allow cannabis companies to take certain tax deductions, including for
depreciation or interest expense, in their federal taxes. Currently, cannabis companies are barred from taking these deductions
by Code Section 280E, which prevents businesses from deducting these expenses if they are engaged in the “trafficking” of
Schedule I or Schedule II substances. If cannabis were rescheduled to a Schedule III drug, our tenants may no longer be
subject to Code Section 280E and could be able to deduct the same business expenses as other companies, decreasing their tax
liability although many interpretive issues are likely to exist in connection with the change in treatment. However, it remains
unclear if reclassification will occur and if so how long the reclassification process will take or whether reclassification will
result in cannabis companies no longer being subject to Code Section 280E.
One legislative safeguard for the medical cannabis industry, appended to federal appropriations legislation, remains in
place. Commonly referred to as the “Rohrabacher-Blumenauer Amendment”, this so-called “rider” provision has been
appended to the Consolidated Appropriations Acts since 2015. Under the terms of the Rohrabacher-Blumenauer rider, the
federal government is prohibited from using congressionally appropriated funds to enforce federal cannabis laws against
regulated medical cannabis actors operating in compliance with state and local law. On December 20, 2024, Congress passed a
continuing resolution to extend government funding, extending the application of the Rohrabacher-Blumenauer Amendment
until March 14, 2025. There is no assurance that Congress will approve inclusion of a similar prohibition on DOJ spending in
the appropriations bills for future years. In USA vs. McIntosh, the United States Circuit Court of Appeals for the Ninth Circuit
held that this provision prohibits the DOJ from spending funds from relevant appropriations acts to prosecute individuals who
engage in conduct permitted by state medical-use cannabis laws and who strictly comply with such laws. However, the Ninth
Circuit’s opinion, which only applies in the states of Alaska, Arizona, California, Hawaii and Idaho, also held that persons
who do not strictly comply with all state laws and regulations regarding the distribution, possession and cultivation of
medical-use cannabis have engaged in conduct that is unauthorized, and in such instances the DOJ may prosecute those
individuals.
Furthermore, our leases do not prohibit cannabis cultivation for adult-use that is permissible under the state and local laws
where our facilities are located. Consequently, certain of our tenants cultivate, process and/or dispense adult-use cannabis now
(and may in the future) in our facilities that are permitted by such state and local laws, which may in turn subject the tenant, us
and our properties to greater and/or different federal legal and other risks than exclusively medical-use cannabis facilities,
including not providing protection under the above Congressional spending provision.
Federal prosecutors have significant discretion and no assurance can be given that the federal prosecutor in each judicial
district where we purchase a property will not choose to strictly enforce the federal laws governing cannabis production,
processing or distribution. Any change in the federal government’s enforcement posture with respect to state-licensed
cultivation of cannabis, including the enforcement postures of individual federal prosecutors in judicial districts where we
purchase properties, would result in our inability to execute our business plan, and we would likely suffer significant losses
with respect to our investment in regulated cannabis facilities in the United States, which would adversely affect the trading
price of our securities. Furthermore, following any such change in the federal government’s enforcement position, we could be
subject to criminal prosecution, which could lead to imprisonment and/or the imposition of penalties, fines, or forfeiture. See
Item 1A, “Risk Factors – Risks Relating to Regulation.”
State Laws Applicable to the Regulated Cannabis Industry
In most states that have legalized cannabis in some form, the growing, processing and/or dispensing of cannabis generally
requires that the operator obtain one or more licenses in accordance with applicable state requirements. In addition, many
states regulate various aspects of the growing, processing and/or dispensing of cannabis. Local governments in some cases
also impose rules and regulations on the manner of operating cannabis businesses. As a result, applicable state and local laws
and regulations vary widely, including, but not limited to, regulations governing the medical cannabis program (such as the
type of cannabis products permitted under the program, qualifications and registration of health professionals that may
recommend treatment with medical cannabis, and the types of medical conditions that qualify for medical cannabis), product
testing, the level of enforcement by state and local authorities on non-licensed cannabis operators, state and local taxation of
regulated cannabis products, local municipality bans on operations and operator licensing processes and renewals. As a result
of these and other factors, if our tenants default
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under their leases, we may not be able to find new tenants that can successfully engage in the cultivation, processing or
dispensing of regulated cannabis on the properties.
There is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed, amended
or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective
jurisdictions. Unless and until the United States Congress amends or repeals the CSA with respect to medical and/or adult-use
cannabis (and as to the timing or scope of any such potential amendment or repeal there can be no assurance), there is a
significant risk that federal authorities may enforce current federal law. If the federal government begins to enforce federal
laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable state laws are
repealed or curtailed, our business, results of operations, financial condition and prospects would be materially adversely
affected.
Laws Applicable to Financial Services for the Regulated Cannabis Industry
All banks are subject to federal law, whether the bank is a national bank or state-chartered bank. At a minimum, all banks
maintain federal deposit insurance which requires adherence to federal law. Violation of federal law could subject a bank to
loss of its charter. Financial transactions involving proceeds generated by cannabis-related conduct can form the basis for
prosecution under the federal money laundering statutes, unlicensed money transmitter statutes and the Bank Secrecy Act. For
example, under the Bank Secrecy Act, banks must report to the federal government any suspected illegal activity, which would
include any transaction associated with a cannabis-related business. These reports must be filed even though the business is
operating in compliance with applicable state and local laws. Therefore, financial institutions that conduct transactions with
money generated by cannabis-related conduct could face criminal liability under the Bank Secrecy Act for, among other
things, failing to identify or report financial transactions that involve the proceeds of cannabis-related violations of the CSA.
Despite these laws, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a
memorandum on February 14, 2014 (the “FinCEN Memorandum”) outlining the pathways for financial institutions to provide
services to state-sanctioned cannabis businesses consistent with Bank Secrecy Act obligations and in alignment with federal
enforcement priorities. The FinCEN Memorandum sets forth extensive requirements for financial institutions to meet if they
want to offer bank accounts to cannabis-related businesses and echoed the enforcement priorities of the Cole Memo. Under
these guidelines, financial institutions must submit a Suspicious Activity Report (“SAR”) in connection with all cannabis-
related banking activities by any client of such financial institution, in accordance with federal anti-money laundering laws.
These cannabis-related SARs are divided into three categories – cannabis limited, cannabis priority, and cannabis terminated –
based on the financial institution’s belief that the business in question follows state law, is operating outside of compliance
with state law, or where the banking relationship has been terminated, respectively. Concurrently with the issuance of the
FinCEN Memorandum, the DOJ issued supplemental guidance (the “2014 Cole Memorandum”) directing federal prosecutors
to consider the federal enforcement priorities enumerated in the Cole Memo with respect to federal anti-money laundering,
unlicensed money transmitter and Bank Secrecy Act offenses based on cannabis-related violations of the CSA. The 2014 Cole
Memorandum has been rescinded as of January 4, 2018, removing guidance that enforcement of applicable financial crimes
against state-compliant actors was not a DOJ priority.
The rescission of the Cole Memo and the 2014 Cole Memorandum has not yet affected the status of the FinCEN
Memorandum, nor has the Department of the Treasury given any indication that it intends to rescind the FinCEN
Memorandum itself.
In subsequent guidance not directly related to cannabis-related businesses, FinCEN has indicated financial institutions
should continue to rely on and follow the FinCEN Memorandum. In December 2019, FinCEN and other federal banking
regulators released an interagency statement on Providing Financial Services to Customers Engaged in Hemp-Related
Businesses (“FinCEN Hemp Statement”). In June 2020, FinCEN issued further guidance regarding Due Diligence
Requirements under the Bank Secrecy Act for Hemp-Related Business Customers (“FinCEN Hemp Guidance”). The FinCEN
Hemp Statement and FinCEN Hemp Guidance provided financial institutions with anti-money laundering risk considerations
for hemp-related businesses to ultimately enhance the availability of financial services for, and the financial transparency of,
hemp-related businesses in compliance with federal law. In the FinCEN Hemp
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Statement and FinCEN Hemp Guidance, FinCEN directed banks, within the context of cannabis-related businesses, to
continue relying on and following the guidance in the FinCEN Memorandum. The FinCEN Hemp Statement and FinCEN
Hemp Guidance do not replace or supersede the FinCEN Marijuana-Related Guidance.
Although the FinCEN Memorandum remains intact, it is unclear whether the current administration will continue to
follow the guidelines of the FinCEN Memorandum. The DOJ continues to have the right and power to prosecute crimes
committed by banks and financial institutions, such as money laundering and violations of the Bank Secrecy Act, that occur in
any state including states that have in some form legalized the sale of cannabis. Further, the conduct of the DOJ’s enforcement
priorities could change for any number of reasons. A change in the DOJ’s priorities could result in the DOJ’s prosecuting
banks and financial institutions for crimes that were not previously prosecuted.
As a result, many banks are hesitant to offer any banking services to cannabis-related businesses, including opening bank
accounts. While we currently maintain banking relationships, our inability to maintain those accounts or the lack of access to
bank accounts or other banking services in the future, would make it difficult for us to operate our business, increase our
operating costs, and pose additional operational, logistical and security challenges. Similarly, if our proposed tenants are
unable to access banking services, they will not be able to enter into triple-net leasing arrangements with us, as our leases will
require rent payments to be made by check or wire transfer.
In addition, for our tenants that are publicly traded companies, securities clearing firms may refuse to accept deposits of
securities of those tenants, which may negatively impact the trading and valuations of such tenants and have a material
adverse impact on our tenants’ ability to finance their operations and growth through the capital markets.
The increased uncertainty surrounding financial transactions related to cannabis activities may also result in financial
institutions discontinuing services to the cannabis industry. See Item 1A, “Risk Factors – Risks Relating to Regulation.”
Agricultural Regulation
The properties that we acquire are used primarily for cultivation and production of regulated cannabis and are subject to
the laws, ordinances and regulations of state, local and federal governments, including laws, ordinances and regulations
involving land use and usage, water rights, treatment methods, disturbance, the environment, and eminent domain.
Each governmental jurisdiction has its own distinct laws, ordinances and regulations governing the use of agricultural
lands. Many such laws, ordinances and regulations seek to regulate water usage and water runoff because water can be in
limited supply, as is the case in certain locations where our properties are located. In addition, runoff from rain or from
irrigation is governed by laws, ordinances and regulations from state, local and federal governments. Additionally, if any of
the water used on or running off from our properties flows to any rivers, streams, ponds, the ocean or other waters, there may
be specific laws, ordinances and regulations governing the amount of pollutants, including sediments, nutrients and pesticides,
that such water may contain.
We believe that our existing properties have, and other properties that we acquire in the future will have, sources of water
that provide sufficient amounts of water necessary for the current operations at each location. However, should the need arise
for additional water from wells and/or surface water sources, we may be required to obtain additional permits or approvals or
to make other required notices prior to developing or using such water sources. Permits for drilling water wells or
withdrawing surface water may be required by federal, state and local governmental entities pursuant to laws, ordinances,
regulations or other requirements, and such permits may be difficult to obtain due to drought, the limited supply of available
water within the districts of the states in which our properties are located or other reasons.
In addition to the regulation of water usage and water runoff, state, local and federal governments also seek to regulate the
type, quantity and method of use of chemicals and materials for growing crops, including fertilizers, pesticides and nutrient
rich materials. Such regulations could include restricting or preventing the use of such chemicals and materials near residential
housing or near water sources. Further, some regulations have strictly forbidden or significantly limited the use of certain
chemicals and materials. Licenses, permits and approvals must be obtained from
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governmental authorities requiring such licenses, permits and approvals before chemicals and materials can be used at grow
facilities. Reports on the usage of such chemicals and materials must be submitted pursuant to applicable laws, ordinances,
and regulations and the terms of the specific licenses, permits and approvals. Failure to comply with laws, ordinances and
regulations, to obtain required licenses, permits and approvals or to comply with the terms of such licenses, permits and
approvals could result in fines, penalties and/or imprisonment.
The use of land for agricultural purposes in certain jurisdictions is also subject to regulations governing the protection of
endangered species. When agricultural lands border, or are in close proximity to, national parks, protected natural habitats or
wetlands, the agricultural operations on such properties must comply with laws, ordinances and regulations related to the use
of chemicals and materials and avoid disturbance of habitats, wetlands or other protected areas.
Because properties we own may be used for growing cannabis, there may be other additional land use and zoning
regulations at the state or local level that affect our properties that may not apply to other types of agricultural uses. For
example, certain states in which our properties are located require stringent security systems in place at grow facilities, and
require stringent procedures for disposal of waste materials.
As an owner of agricultural lands, we may be liable or responsible for the actions or inactions of our tenants with respect
to these laws, regulations and ordinances.
Environmental Matters
Our properties and the operations thereon are subject to federal, state and local environmental laws, ordinances and
regulations, including laws relating to water, air, solid wastes and hazardous substances. Our properties and the operations
thereon are also subject to federal, state and local laws, ordinances, regulations and requirements related to the federal
Occupational Safety and Health Act, as well as comparable state statutes relating to the health and safety of our employees and
others working on our properties. Although we believe that we and our tenants are in material compliance with these
requirements, there can be no assurance that we will not incur significant costs, civil and criminal penalties and liabilities,
including those relating to claims for damages to persons, property or the environment resulting from operations at our
properties. Furthermore, many of our properties have been repurposed for regulated cannabis operations, and historically
were utilized for other purposes, including heavy industrial uses, which expose us to additional risks associated with historical
releases of substances at the properties.
Real Estate Industry Regulation
Generally, the ownership and operation of real properties are subject to various laws, ordinances and regulations,
including regulations relating to zoning, land use, water rights, wastewater, storm water runoff and lien sale rights and
procedures. These laws, ordinances or regulations, such as the Comprehensive Environmental Response and Compensation
Liability Act and its state analogs, or any changes to any such laws, ordinances or regulations, could result in or increase the
potential liability for environmental conditions or circumstances existing, or created by tenants or others, on our properties.
Laws related to upkeep, safety and taxation requirements may result in significant unanticipated expenditures, loss of our
properties or other impairments to operations, any of which would adversely affect our cash flows from operating activities.
Changes to zoning, land use and other laws, ordinances and regulations may also prevent us from leasing a property for
regulated cannabis cultivation, processing and/or dispensing in the future. For two of our properties (one located in San
Bernardino, California and one located in Palm Springs, California), we continue to evaluate alternative non-cannabis uses for
the properties, due in part to changes in the zoning of the properties that no longer allow for regulated cannabis cultivation and
processing.
Our property management activities, to the extent we are required to engage in them due to lease defaults by tenants or
vacancies on certain properties, will likely be subject to state real estate brokerage laws and regulations as determined by the
particular real estate commission for each state.
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Americans with Disabilities Act (“ADA”) and Other Building Regulations
All of our properties are required to comply with the Americans with Disabilities Act (“ADA”), which generally requires
that buildings be made accessible to people with disabilities. Compliance with ADA requirements may require removal of
access barriers, and noncompliance may result in imposition of fines by the U.S. government or an award of damages to
private litigants, or both. The tenants to whom we lease space in our properties are generally obligated by law to comply with
the ADA provisions, and typically under tenant leases are obligated to cover costs associated with compliance. We are
required to operate the properties in compliance with fire and safety regulations, building codes and other land use regulations,
as they may be adopted by governmental entities and become applicable to the properties.
Seasonality
Our business has not been, and we do not expect it to become subject to, material seasonal fluctuations.
Available Information
We make available to the public free of charge through our website our Definitive Proxy Statement, Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange as soon as reasonably practicable after we electronically file such
reports with, or furnish such reports to, the SEC. Our internet website address is www.innovativeindustrialproperties.com. The
SEC also maintains electronic versions of the Company’s reports on its website at www.sec.gov. You can also access on our
website our Code of Business Conduct and Ethics, Corporate Governance Guidelines, Audit Committee Charter,
Compensation Committee Charter, and Nominating and Corporate Governance Committee Charter. The content of our
website is not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with
the SEC, and any references to our website are intended to be inactive textual references only.
Human Capital
Our employees are our most valuable asset, and we believe we have an inclusive and engaging work environment, where
each person is an integrated member of the team and is critical to our company’s continued success. We meet regularly as a
full team where each member is encouraged to actively participate in a wide range of topics relating to our company’s
execution.
We believe that attracting, developing, engaging and retaining our team is an absolute priority. To that end, we believe we
offer a highly competitive compensation (including salary, bonuses and equity) and benefits package for each member of our
team, which include the following:
●
Comprehensive health insurance, including medical, dental and vision, to each employee and every member of his or
her immediate family at no cost to the employee, with the same benefits to every employee, regardless of title;
●
Four weeks of paid time off each year for each employee (increasing to five weeks after five years of service and to
six weeks after ten years of service), which are in addition to Company holidays;
●
A severance plan applicable to all non-executive employees that assists with each employee’s financial security in
the event his or her employment is terminated without cause or he or she resigns for good reason;
●
A 401(k) plan with matching contributions from the Company;
●
Disability insurance;
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●
Company sponsorship of continuing education courses related to our Company’s business, including commercial real
estate, cannabis, property management, legal and accounting courses;
●
Company reimbursement of up to $200 per year for each employee’s health and wellness activities, materials,
equipment and/or classes; and
●
Matching contribution by the Company, dollar-for-dollar, up to $2,500 per year per employee for donations to
qualifying educational institutions.
We also coordinate periodic team and individual community giving activities (both in terms of hands-on volunteering and
continued financial contributions), soliciting input from our employees regarding charitable organizations and community
activities that they would like to support.
We are also proud to be an equal opportunity workplace and employer. We are committed to the principle of equal
employment opportunity for all employees and to providing employees with an inclusive work environment free of
discrimination and harassment. All employment decisions are based on qualifications, merit and business needs, without
regard to race, color, creed, gender, religion, sex, national origin, ancestry, pregnancy, age, marital status, registered domestic
partner status, sexual orientation, gender identity, protected medical condition, genetic information, physical or mental
disability, veteran status, or any other status protected by the laws or regulations in the locations where we operate.
ITEM IA. RISK FACTORS
Certain factors may have a material adverse effect on our business, financial condition, and results of operations. You
should consider carefully the risks and uncertainties described below, in addition to other information contained in this
Annual Report on Form 10-K, including our consolidated financial statements and related notes. The risks and uncertainties
described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently
believe are not material, may also become important factors that adversely affect our business. If any of the following risks
actually occurs, our business, financial condition, results of operations, and future prospects could be materially and
adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all of your
investment.
Risk Factors Summary
The following is a summary of the principal risks and uncertainties that could adversely affect our business, cash flows,
financial condition and/or results of operations, and these adverse impacts may be material. This summary is qualified in its
entirety by reference to the more detailed descriptions of the risks and uncertainties included in this Item 1A below and you
should read this summary together with those more detailed descriptions. These principal risk and uncertainties relate to,
among other things:
Risks Related to Our Business
●
Many of our tenants are, and we expect that many of our future tenants will be, companies with limited histories of
operations and may be unable to pay rent with funds from operations or at all.
●
Continuing unfavorable market dynamics affecting the regulated cannabis industry could adversely affect our
business, liquidity and financial condition, and overall results of operations.
●
The inability of any single tenant to make its lease payments could adversely affect our business.
●
We are focused on properties leased to licensed cannabis operators, and a decrease in demand for these types of
facilities would have a greater impact on us than if we had a more diversified property portfolio.
●
Our real estate investments consist of primarily properties suitable for cultivation and production of cannabis, which
may be difficult to sell or re-lease upon tenant defaults or lease terminations.
●
The assets we acquire may be subject to impairment charges.
●
We face significant risks associated with the development and redevelopment of properties that we acquire.
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●
We are currently subject to securities lawsuits and we may be subject to litigation in the future, which may divert
management’s attention and have a material adverse effect on us.
●
Inflation may adversely affect our business and our tenants’ financial condition and results of operations.
●
Competition for the acquisition of properties suitable for regulated cannabis operations and alternative financing
sources for licensed operators may make new acquisitions difficult or less economically attractive.
●
Our growth will depend upon future acquisitions of regulated cannabis facilities.
●
There may only be a limited number of cannabis facilities operated by suitable tenants available for acquisition.
●
Our and our tenants’ businesses may be materially and adversely affected by global pandemics.
●
Our tenants may be unable to renew or otherwise maintain their licenses for their cannabis operations.
●
We acquire our properties “as-is,” which increases the risk of costs to remedy defects without recourse.
●
Our property portfolio is and will be geographically concentrated in certain states.
●
Some of our tenants could be susceptible to bankruptcy.
●
Our tenants may be subject to Section 280E of the Internal Revenue Code of 1986, as amended (the “Code”).
●
We have acquired and may continue to acquire and lease cannabis retail stores and dispensaries, which present
additional risks in comparison to properties for the cultivation and production of regulated cannabis.
●
We are exposed to the potential impacts of future climate change.
●
Liability for uninsured losses could adversely affect our financial condition.
●
Our properties’ access to adequate water and power supplies could be interrupted.
●
We may have a difficult time obtaining the insurance policies with our focus on the regulated cannabis industry.
●
Construction loans involve an increased risk of loss and other risks that are different from owning properties.
●
We may purchase properties subject to ground leases or engage in other transactions involving ground leases.
Risks Related to Regulation
●
Cannabis remains illegal under federal law, and therefore, strict enforcement of federal laws regarding cannabis
would likely result in our inability and the inability of our tenants to execute our respective business plans.
●
Certain of our tenants engage in operations for the adult-use cannabis industry, which may subject us and our
properties to additional risks associated with such adult-use cannabis operations.
●
New laws adverse to the business of our tenants may be enacted, and current favorable national, state or local laws or
enforcement guidelines relating to cannabis operations may be modified or eliminated in the future.
●
Our ability to grow our business depends on state laws pertaining to the cannabis industry.
●
FDA regulation of cannabis facilities could negatively affect the regulated cannabis industry.
●
We and our tenants may have difficulty accessing the service of banks and other financial institutions.
●
Property owners located in close proximity to our properties may assert claims against our cannabis facilities.
●
Laws and regulations affecting the regulated cannabis industry are constantly changing, which could materially
adversely affect our operations, and we cannot predict the impact that future regulations may have on us.
●
Assets leased to cannabis businesses may be forfeited to the federal government.
●
We may have difficulty accessing bankruptcy courts.
●
The properties that we acquire are subject to extensive regulations, which may result in significant costs.
●
Compliance with environmental laws could materially increase our operating expenses.
Risks Related to Financing Our Business
●
Our growth depends on external sources of capital, which may not be available on favorable terms or at all.
●
Our existing and future indebtedness could reduce our distributable cash and expose us to default risk.
●
A downgrade in our investment grade credit rating could adversely affect our business and financial condition.
●
Our Notes due 2026 include restrictive covenants that limit our operational flexibility.
Risks Related to Our Organization and Structure
●
Our senior management team manages our portfolio subject to very broad investment guidelines.
●
Our board of directors may change our investment objectives and strategies without stockholder consent.
●
Certain provisions of Maryland law could inhibit changes in control.
●
Our authorized but unissued shares of common and preferred stock may prevent a change in our control.
●
Severance agreements with our executive officers could be costly and prevent a change in our control.
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●
We depend on our Operating Partnership for cash flow and are structurally subordinated in right of payment.
●
Our Operating Partnership may issue additional limited partnership interests to third parties without the consent of
our stockholders, which would reduce the distributions we can make to our stockholders.
●
If we issue limited partnership interests in our Operating Partnership in exchange for property, the value placed on
such partnership interests may not accurately reflect their market value, which may dilute your interest in us.
●
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
●
Our charter provisions make it difficult to remove directors, and to effect changes in management as a result.
●
Ownership limitations may restrict change in control or business combination opportunities in which our
stockholders might receive a premium for their shares.
●
We plan to continue to operate our business so as not to require registration under the Investment Company Act.
Risks Related to Our Securities
●
The market prices and trading volumes of our capital stock have been and may continue to be volatile.
●
Capital stock eligible for future sale may have material and adverse effects on our share price.
●
We cannot assure you of our ability to make distributions in the future.
●
Our charter permits us to pay distributions from any source and, as a result, the amount of distributions paid at any
time may not reflect the performance of our properties or as cash flow from operations.
●
The market price of our capital stock could be materially, adversely affected by our level of cash distributions.
●
We may enter into forward sale transactions that subject us to certain risks.
Risks Related to Our Taxation as a REIT
●
Our failure to qualify as a REIT would reduce our distributable cash and negatively impact us.
●
The REIT distribution requirements could adversely affect our ability to execute our business plan, and require us to
make unfavorable borrowing decisions or subject us to tax.
●
If Section 280E of the Code applies to us, tax deductions may be disallowed, resulting in federal income tax and
potentially jeopardizing our REIT status.
●
Complying with REIT requirements may cause us to forego attractive business opportunities or asset sales.
●
The tax on prohibited transactions could limit what transactions we make or subject us to a 100% penalty tax.
●
Our board of directors has the ability to revoke our REIT election without stockholder approval.
●
Dividends payable by REITs do not qualify for the reduced tax rates on dividends from regular corporations.
●
REIT requirements may limit our ability to hedge our liabilities effectively and result in tax liabilities.
●
Re-characterization of sale-leaseback transactions may cause us to lose our REIT status.
●
Non-U.S. stockholders will generally be subject to withholding tax with respect to our ordinary dividends.
●
Legislative, regulatory or administrative changes could adversely affect us or our stockholders.
●
Any repurchase of our Notes due 2026 at a discount may result in cancellation of debt income.
General Risk Factors
●
We are dependent on our key personnel for our success.
●
The occurrence of cyber incidents or cyberattacks could disrupt our operations and damage our business.
●
Contingent or unknown liabilities could materially and adversely affect our business.
Risks Related to Our Business
Many of our existing tenants are, and we expect that many of our future tenants will be, companies with limited histories
of operations and may be unable to pay rent with funds from operations or at all, which could adversely affect our cash
available to make distributions to our stockholders or otherwise impair the value of our common stock.
Single tenants currently occupy our properties generally, and we expect that single tenants will occupy our properties that
we acquire in the future. Therefore, the success of our investments will be materially dependent on the financial stability of
these tenants. We rely on our management team to perform due diligence investigations of our
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potential tenants, related guarantors and their properties, operations and prospects, of which there is generally little or no
publicly available operating and financial information. We may not learn all of the material information we need to know
regarding these businesses through our investigations, and these businesses are subject to numerous risks and uncertainties,
including but not limited to regulatory risks and the rapidly evolving market dynamics of each state’s regulated cannabis
program. As a result, it is possible that we could enter into a sale-leaseback arrangement with tenants or otherwise lease
properties to tenants that ultimately are unable to pay rent to us, which could adversely impact our cash available for
distributions.
Many of our existing tenants are, and we expect that many of our future tenants will be, companies with limited histories
of operations that are not profitable when they enter triple-net leasing arrangements with us and therefore, may be unable to
pay rent with funds from operations. Many of our current tenants are not profitable and have experienced losses since
inception, or have been profitable for only a short period of time. As a result, many of our current tenants have made, and we
expect that many of our future tenants will make, initial rent payments to us from proceeds from the sale of the property, in the
case of sale-leaseback transactions, or other cash on hand, including cash received from debt financings.
In addition, in general, our tenants are more vulnerable to adverse conditions resulting from federal and state regulations
affecting their businesses or industries or other changes in the marketplace for their products, and have limited access to
traditional forms of financing. For example, during the COVID-19 pandemic, our tenants were generally not able to access
federal assistance programs that were available to companies in other industries, due to cannabis being a Schedule I controlled
substance under the CSA. The success of our tenants will also heavily depend on the growth and development of the state
markets in which the tenants operate, many of which have a very limited history or are still in the stages of establishing the
regulatory framework. For example, in California, the illicit market for cannabis remains a much larger portion of overall sales
in the state according to Global Go Analytics, and state and local authorities have assessed significant taxes on regulated
cannabis products, both of which have had the impact of significantly limiting the growth and profitability for operators in the
state’s regulated cannabis market. In recent months, pricing for regulated cannabis products has dropped significantly, driven
in part by the lack of effective enforcement on the illicit market, while input costs, including labor, supplies and construction
materials, have increased significantly as a result of the broader higher inflationary environment.
Some of our tenants may be subject to significant debt obligations and may rely on debt financing to make rent payments
to us. Tenants that are subject to significant debt obligations may be unable to make their rent payments if there are adverse
changes in their business plans or prospects, the regulatory environment in which they operate or in general economic
conditions. In addition, the payment of rent and debt service may reduce the working capital available to tenants for the start-
up phase of their business. Furthermore, we may be unable to monitor and evaluate tenant credit quality on an on-going basis.
Any lease payment defaults by a tenant could adversely affect our cash flows and cause us to reduce the amount of
distributions to stockholders. In the event of a default by a tenant, we may also experience delays in enforcing our rights as
landlord and may incur substantial costs in protecting our investment and re-leasing our property as operators of regulated
cannabis cultivation and production facilities are generally subject to extensive state licensing requirements, including limited
licenses in certain states. In addition, applicable state licensing authorities may have little experience re-leasing a cannabis
property, which may extend the delays we experience in re-leasing a property. Furthermore, we will not operate any of the
facilities that we purchase.
Continuing unfavorable market dynamics affecting the regulated cannabis industry could adversely affect our business,
liquidity and financial condition, and overall results of operations.
Market dynamics in the regulated cannabis industry have negatively impacted our tenants’ ability to make their lease
payments on the properties they lease from us. Regulated cannabis operators have experienced, among other things:
●
federal, state and local taxation and regulatory burdens;
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●
declines in unit pricing for regulated cannabis products;
●
ineffective state and local law enforcement efforts to curtail the illicit production and sale of cannabis; and
●
limited access to capital on acceptable terms or at all.
As a result of these unfavorable market dynamics, certain regulated cannabis operators, including some of our tenants,
have consolidated operations or shuttered certain operations to reduce costs, which may lead to increased default rates on the
leases for our properties.
In November 2022, Green Peak Industries, Inc. (“Green Peak”) defaulted on its obligations to pay rent at one of our
properties in Michigan. During 2023, a receiver was appointed over substantially all of Green Peak’s assets and we regained
possession of one property that was under redevelopment as a regulated cannabis cultivation and processing facility and three
retail properties in Michigan. In February 2024, we regained possession of the remaining regulated cannabis cultivation and
processing facility that was leased to Green Peak.
In May 2024, Temescal Wellness defaulted on its obligations to pay rent at one of our properties in Massachusetts and we
regained possession of that property in September 2024.
In December 2024, PharmaCann defaulted on its obligations to pay rent for the month of December under six leases for
properties located in Illinois, Massachusetts, Michigan, New York, Ohio and Pennsylvania.
See “Business – Tenant Concentration” for a discussion of our recent tenant defaults.
Failure by any of our tenants to comply with the terms of its lease agreement with us could require us to seek another
lessee for the applicable property. We cannot assure you that we will be able to re-lease that property for the rent we currently
receive, or at all, or that a lease termination would not result in our having to sell the property at a loss. In addition, we may
experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-
leasing properties on which any of our tenants default on their lease obligations. The result of any of the foregoing risks could
materially and adversely affect our business, liquidity, financial condition and results of operations and our ability to make
distributions to our stockholders.
Because we lease our properties to a limited number of tenants, and to the extent we depend on a limited number of tenants
in the future, the inability of any single tenant to make its lease payments could adversely affect our business and our
ability to make distributions to our stockholders.
As of December 31, 2024, we owned 109 properties. As of such date, five of our tenants, PharmaCann (at eleven of our
properties), Ascend (at four of our properties), Green Thumb (at three of our properties), Holistic (at five of our properties)
and Curaleaf (at eight of our properties), represented 17%, 11%, 8%, 7% and 7%, respectively, of our rental revenues
(including tenant reimbursements) for the twelve months ended December 31, 2024. Lease payment defaults by any of our
tenants or a significant decline in the value of any single property would materially adversely affect our business, financial
position and results of operations, including our ability to make distributions to our stockholders. Our lack of diversification
also increases the potential that a single underperforming investment or tenant could have a material adverse effect on our
cash flows and the price we could realize from the sale of our properties. Any adverse change in the financial condition of any
of our tenants, including but not limited to the state cannabis markets not developing and growing in ways that we or our
tenants projected, or any adverse change in the political climate regarding cannabis where our properties are located, would
subject us to a significant risk of loss.
In addition, failure by any of our tenants to comply with the terms of its lease agreement with us could require us to find
another lessee for the applicable property. We may experience delays in enforcing our rights as landlord and may incur
substantial costs in protecting our investment and re-leasing that property. Furthermore, we cannot assure you that we will be
able to re-lease that property for the rent we currently receive, or at all, or that a lease termination would not result in our
having to sell the property at a loss. The result of any of the foregoing risks could materially and adversely affect our business,
financial condition and results of operations and our ability to make distributions to our stockholders.
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Because our real estate investments consist of primarily industrial and greenhouse properties suitable for cultivation and
production of cannabis, our rental revenues are significantly influenced by demand for these facilities generally, and a
decrease in such demand would likely have a greater adverse effect on our rental revenues than if we owned a more
diversified real estate portfolio.
Because our portfolio of properties primarily consists of industrial and greenhouse properties used in the regulated
cannabis industry, we are subject to risks inherent in investments in a single industry. A decrease in the demand for cannabis
cultivation and processing facilities would have a greater adverse effect on our rental revenues than if we owned a more
diversified real estate portfolio. Demand for cannabis cultivation and processing facilities has been and could be adversely
affected by changes in current favorable state or local laws relating to cultivation and production of cannabis or any change in
the federal government’s current enforcement posture with respect to state-licensed cannabis operations, among others,
including but not limited to changes to local zoning and other laws that no longer allow a facility to be utilized for regulated
cannabis activities. To the extent that any of these conditions occur, they are likely to affect demand and market rents for
cannabis cultivation and processing facilities, which could cause a decrease in our rental revenue. Any such decrease could
impair our ability to make distributions to investors. Other than with respect to one property located in San Bernardino,
California and one property located in Palm Springs, California, where we are evaluating alternative non-cannabis uses as of
December 31, 2024, we do not currently have any material investments in other real estate or businesses to hedge against the
risk that industry trends might decrease the profitability of our facilities leased for cannabis operations.
Our real estate investments consist of primarily industrial and greenhouse properties suitable for cultivation and
production of cannabis, which may be difficult to sell or re-lease upon tenant defaults or lease terminations, either of
which would adversely affect returns to stockholders.
While our business objectives consist of principally acquiring and deriving rental income from industrial and greenhouse
properties used in the regulated cannabis industry, we expect that at times we will deem it appropriate or desirable to sell or
otherwise dispose of certain properties we own. These types of properties are relatively illiquid compared to other types of real
estate and financial assets. This illiquidity could limit our ability to quickly dispose of properties in response to changes in
regulatory, economic or other conditions. Therefore, our ability at any time to sell assets may be restricted and this lack of
liquidity may limit our ability to make changes to our portfolio promptly, which could materially and adversely affect our
financial performance. We cannot predict the various market conditions affecting the properties that we expect to acquire that
will exist in the future. Due to the uncertainty of regulatory and market conditions which may affect the future disposition of
the real estate assets we expect to acquire, we cannot assure you that we will be able to sell these assets at a profit in the
future. Accordingly, the extent to which we will realize potential appreciation (or depreciation) on the real estate investments
we have acquired and expect to acquire will depend upon regulatory and other market conditions. In addition, in order to
maintain our REIT status, we may not be able to sell properties when we would otherwise choose to do so, due to market
conditions or changes in our strategic plan.
Furthermore, we may be required to make expenditures to correct defects or to make improvements before a property can
be sold and we cannot assure you that we will have funds available to correct such defects or to make such improvements.
With these kinds of properties, if the current lease is terminated or not renewed, we may be required to make expenditures and
rent concessions in order to lease the property to another tenant.
In addition, in the event we are forced to sell or re-lease the property, we may have difficulty finding qualified purchasers
who are willing to buy the property or tenants who are willing to lease the property at our current rental rates, or at all. As our
properties are concentrated in the regulated cannabis industry, a shift in property preferences by regulated cannabis operators,
including but not limited to changing preferences regarding location and types of improvements, could have a significant
negative impact on the desirability of our properties to prospective tenants when we need to re-lease them, in addition to other
challenges, such as obtaining the necessary state and local authorizations for a new tenant to commence operations at the
property. These and other limitations may affect our ability to sell or re-lease properties, which may adversely affect returns to
our stockholders. Certain regulated cannabis operators have consolidated operations or shuttered certain operations to reduce
costs, which if prolonged, could have a material negative impact on operators’ demand for regulated cannabis facilities,
including our existing tenants.
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The assets we acquire may be subject to impairment charges.
We periodically evaluate the real estate investments we acquire and other assets for impairment indicators. The judgment
regarding the existence of impairment indicators is based upon factors such as market conditions, tenant performance and
legal structure. For example, the termination of a lease by a tenant may lead to an impairment charge. If we determine that an
impairment has occurred, we would be required to make an adjustment to the net carrying value of the asset which could have
an adverse effect on our results of operations in the period in which the impairment charge is recorded.
We face significant risks associated with the development and redevelopment of properties that we acquire.
In many instances, we engage in development or redevelopment of properties that we acquire. Development and
redevelopment activities entail risks that could adversely impact our financial condition and results of operations, including:
●
construction costs, which may exceed our or our tenant’s original estimates due to increases in materials, labor or
other costs, which could make the project less profitable for our tenant, require us or our tenant to commit additional
funds to complete the project and adversely impact our tenant’s business and prospects as a result;
●
permitting or construction delays, which may result in increased project costs, as well as deferred revenue and
delayed commencement of operations by our tenant;
●
unavailability of raw materials when needed, which may result in project delays, stoppages or interruptions, which
could make the project less profitable;
●
claims for warranty, product liability and construction defects after a property has been built;
●
health and safety incidents and site accidents;
●
poor performance or nonperformance by, or disputes with, any of our contractors, subcontractors or other third
parties on whom we rely;
●
a contractor, subcontractor or other third party on whom we rely files for bankruptcy or commits fraud before
completing a project that we have funded in part or in full;
●
unforeseen engineering, environmental or geological problems, which may result in delays or increased costs;
●
changes in local zoning, permitting and other requirements which may impact the permitted use or scope of a
project;
●
labor stoppages, slowdowns or interruptions;
●
a default on an existing lease of a property under development or redevelopment by the tenant, exposing us to
potential vacancy for a property that is not ready for its intended use;
●
liabilities, expenses or project delays, stoppages or interruptions as a result of challenges by third parties in legal
proceedings; and
●
weather-related and geological interference, including hurricanes, landslides, earthquakes, floods, drought, wildfires
and other events, which may result in delays or increased costs.
The realization of any of the risks above or other delays in development and redevelopment activities at a property may
also materially adversely impact our tenant’s ability to commence, continue or expand its operations, which may
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result in that tenant defaulting on its rent obligations to us. As of December 31, 2024, we had properties consisting of an
aggregate of 666,000 rentable square feet under development or redevelopment, and we had committed to fund improvements
at our properties in the future totaling up to $38.3 million.
For one of our properties located in San Bernardino, California, as of December 31, 2024, we are evaluating alternative
non-cannabis uses for the property, due in part to changes in the zoning of the property that no longer allow for regulated
cannabis cultivation and processing.
In November 2022, Green Peak defaulted on its obligations to pay rent at one of our properties in Michigan, which was
under redevelopment as a regulated cannabis cultivation and processing facility, and we subsequently regained possession of
that property in March 2023.
In February 2023, Parallel also defaulted on its obligations to pay rent at one of our properties in Texas, which was under
development, and we regained possession of that property in March 2023.
Ongoing inflation for construction and labor costs, labor shortages and global supply chain issues also continue to
adversely impact costs and timing for completion of our development and redevelopment projects, which are resulting in cost
overruns and delays in commencing operations on certain projects.
We are currently subject to securities lawsuits and we may be subject to similar or other litigation in the future, which may
divert management’s attention and have a material adverse effect on our business, financial condition and results of
operations.
Purported securities class action lawsuits have been filed against us and certain of our executive officers alleging that the
Company made false or misleading statements regarding its business. Derivative lawsuits also have been filed against us and
certain of our officers and directors asserting putative derivative claims for breach of fiduciary duty, unjust enrichment, abuse
of control, gross mismanagement, and waste of corporate assets against our directors and certain of our officers. See Note 11
“Commitments and Contingencies” for a full description of these actions.
We will continue to incur legal fees in connection with these pending cases, including expenses for the reimbursement of
legal fees of our officers and directors under indemnification obligations. The expense of continuing to defend such litigation
may be significant. We intend to defend these lawsuits vigorously, but there can be no assurance that we will be successful in
any defense. If any of the lawsuits are adversely decided, we may be liable for significant damages directly or under our
indemnification obligations, which could adversely affect our business, results of operations and cash flows. Further, the
amount of time that will be required to resolve these lawsuits is unpredictable and these actions may divert management's
attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and
cash flows.
We cannot predict the outcome of these lawsuits and we may be subject to other similar securities litigation in the future.
Monitoring and defending against legal actions, whether or not meritorious, is time-consuming for our management and
detracts from our ability to fully focus our internal resources on our business activities. In addition, we may incur substantial
legal fees and costs in connection with litigation. Although we have insurance, coverage could be denied or prove to be
insufficient. We are not currently able to estimate the possible cost to us from the currently pending lawsuits, and we cannot be
certain how long it may take to resolve these matters or the possible amount of any damages that we may be required to pay.
We have not established any reserves for any potential liability relating to these or future lawsuits. It is possible that we could,
in the future, incur judgments or enter into settlements of claims for monetary damages. A decision adverse to our interests on
these actions could result in the payment of substantial damages and could have a material adverse effect on our business,
results of operations and financial condition. In addition, the uncertainty of the currently pending lawsuits could lead to
volatility in our stock price. The ultimate outcome of litigation could have a material adverse effect on our business and the
trading price for our securities.
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Inflation may adversely affect our business and our tenants’ financial condition and results of operations.
Increased inflation could have a more pronounced negative impact on any variable rate debt we incur in the future and on
our results of operations. We also enter into leases that generally provide for fixed increases in rent. During times when
inflation is greater than increases in rent as provided for in our leases, rent increases may not keep up with the rate of inflation.
Likewise, even though net leases reduce our exposure to rising property expenses due to inflation, substantial inflationary
pressures and increased costs may have an adverse impact on our tenants if increases in their operating expenses exceed
increases in their revenues, which may adversely affect our tenants’ ability to pay rent. Substantial inflation in the cost of
construction materials and labor may also adversely impact our and our tenants’ ability to complete building projects on
budget and on time, which may also materially adversely impact our tenants’ ability to commence operations of facilities and
consequently our tenants’ ability to pay rent.
Competition for the acquisition of properties suitable for the retail sale, cultivation or production of regulated cannabis
and alternative financing sources for licensed operators may impede our ability to make acquisitions or increase the cost of
these acquisitions, which could adversely affect our operating results and financial condition.
We compete for the acquisition of properties suitable for the retail sale, cultivation or production of regulated cannabis
with other entities engaged in retail, agricultural and real estate investment activities, including corporate agriculture
companies, cultivators and producers of cannabis, private equity investors, and other real estate investors (including public
and private REITs). These competitors may prevent us from acquiring desirable properties, may cause an increase in the price
we must pay for properties or may result in us having to lease our properties on less favorable terms than we expect. Our
competitors may have greater financial and operational resources than we do and may be willing to pay more for certain assets
or may be willing to accept more risk than we believe can be prudently managed. In particular, larger companies may enjoy
significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating
efficiencies. Our competitors may also adopt transaction structures similar to ours, which would decrease our competitive
advantage in offering flexible transaction terms. In addition, due to a number of factors, including but not limited to potential
greater clarity of the laws and regulations governing cannabis by state and federal governments, the number of entities and the
amount of funds competing for suitable investment properties may increase, resulting in increased demand and increased
prices paid for these properties. If we pay higher prices for properties or enter into leases for such properties on less favorable
terms than we expect, our profitability and ability to generate cash flow and make distributions to our stockholders may
decrease.
We also compete as a provider of capital to regulated cannabis operators with alternative financing sources to these
companies, including both equity and debt financing alternatives. For example, many larger, publicly traded multi-state
cannabis operators are able to raise significant capital through public equity offerings, in addition to access to significant debt
financing options. Furthermore, changes in federal regulations pertaining to cannabis could also lead to increased access to
U.S. capital markets for our competitors and for regulated cannabis operators (including but not limited to access to the
Nasdaq Stock Market and/or the New York Stock Exchange).
Increased competition for properties as a result of greater clarity of the federal regulatory environment may also preclude
us from acquiring those properties that would generate attractive returns to us. If any of the proposed bills in Congress
focused on the regulated cannabis industry became law, there could be further increased competition for the acquisition of
properties that can be leased to licensed cannabis operators, consolidation of cannabis cultivation facilities for more cost
efficient, larger scale production and manufacturing may occur (including consolidation that may occur as a result of
authorization of interstate commerce in cannabis), and such operators would have greater access to alternative financing
sources with lower costs of capital. These factors may reduce the number of operators that wish to enter into lease transactions
with us or renew leases with us, or may result in us having to enter into leases on less favorable terms with tenants, each of
which may significantly adversely impact our profitability and ability to generate cash flow and make distributions to our
stockholders.
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Our growth will depend upon future acquisitions of regulated cannabis facilities, and we may be unable to consummate
acquisitions on advantageous terms.
Our growth strategy is focused on primarily the acquisition of specialized industrial real estate assets on favorable terms
as opportunities arise. Our ability to acquire these real estate assets on favorable terms is subject to the following risks:
●
competition from other potential acquirers or increased availability of alternative debt and equity financing sources
for tenants may significantly increase the purchase price of a desired property and/or negatively impact the lease
terms we are able to secure with our tenants;
●
we may not successfully purchase and lease our properties to meet our expectations;
●
we may be unable to obtain the necessary equity or debt financing to consummate an acquisition on satisfactory
terms or at all;
●
agreements for the acquisition of properties are typically subject to closing conditions, including satisfactory
completion of due diligence investigations, and we may spend significant time and money and divert management
attention on potential acquisitions that we do not consummate; and
●
we may acquire properties without any recourse, or with only limited recourse, for liabilities, whether known or
unknown, against the former owners of the properties.
Our failure to consummate acquisitions on advantageous terms without substantial expense or delay would impede our
growth and negatively affect our results of operations and our ability to generate cash flow and make distributions to our
stockholders.
There may only be a limited number of regulated cannabis facilities operated by suitable tenants available for us to
acquire, which could adversely affect the return on our common stock.
We target regulated cannabis facilities for acquisition and leasing to licensed operators under triple-net lease agreements.
In light of the current regulatory landscape regarding regulated cannabis, including but not limited to, the rigorous state
licensing processes, limits on the number of licenses granted in certain states and in counties within such states, zoning
regulations related to regulated cannabis facilities, the inability of potential tenants to open bank accounts necessary to pay
rent and other expenses and the ever-changing federal and state regulatory landscape, we may have only a limited number of
regulated cannabis facilities available to purchase that are operated by licensees that we believe would be suitable tenants.
These tenants may also have increased access to alternative equity and debt financing sources over time, which may limit our
ability to negotiate leasing arrangements that meet our investment criteria. Our inability to locate suitable investment
properties and tenants would have a material adverse effect on our ability to generate cash flow and make distributions to our
stockholders.
Our and our tenants’ businesses may be materially and adversely affected by the impact of global pandemics.
We cannot predict the extent to which global pandemics may impact our business and operating results and those of our
tenants, but their impact may include the following:
●
a complete or partial closure of, or other operational issues at, one or more of our properties resulting from
government or tenant actions;
●
the temporary inability of consumers and patients to purchase our tenant’s cannabis products due to a number of
factors, including but limited to illness, dispensary closures or limitations on operations (including but not limited to
shortened operating hours, social distancing requirements and mandated “curbside only” pickup), quarantine,
financial hardship, and “stay at home” orders, could severely impact our tenants’ businesses,
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financial condition and liquidity and may cause one or more of our tenants to be unable to meet their obligations to
us in full, or at all, or to otherwise seek modifications of such obligations;
●
difficulty accessing equity and debt capital on attractive terms, or at all, and a severe disruption and instability in the
global financial markets or deteriorations in credit and financing conditions may affect our access to capital
necessary to fund business operations and our tenants’ ability to fund their business operations and meet their
obligations to us;
●
workforce disruptions for our tenants, as a result of infections, quarantines, stay at home orders or other factors,
could result in a material reduction in our tenants’ cannabis cultivation, manufacturing, distribution and/or sales
capacity;
●
because of the federal regulatory uncertainty relating to the regulated cannabis industry, our tenants may not be
eligible for financial relief available to other businesses, including federal assistance programs;
●
restrictions on public events for the regulated cannabis industry limit the opportunity for our tenants to market and
sell their products and promote their brands;
●
delays in construction at our properties may adversely impact our tenants’ ability to commence operations and
generate revenues from projects, including but not limited to delays caused by:
o
construction moratoriums by local, state or federal government authorities;
o
delays by applicable governmental authorities in providing the necessary authorizations to continue construction
or commence operations;
o
reductions in construction team sizes to effectuate social distancing and other requirements;
o
infection by one or more members of a construction team necessitating a partial or full shutdown of
construction; and
o
manufacturing and supply chain disruptions for materials sourced from other geographies which may be
experiencing shutdowns and/or restrictions on transportation of such materials;
●
a general decline in business activity in the regulated cannabis industry would adversely affect our ability to grow
our portfolio of regulated cannabis properties; and
●
the potential negative impact on the health of our personnel, particularly if a significant number of them are
impacted, would result in a deterioration in our ability to ensure business continuity during a disruption.
The extent to which pandemics impact our operations and those of our tenants will depend on future developments, which
are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the
actions taken to contain the outbreak or mitigate its impact, and the extent of the direct and indirect economic effects of the
pandemic and containment measures, among others.
Our tenants may be unable to renew or otherwise maintain their licenses or other requisite authorizations for their
cannabis operations, which may result in such tenants not being able to operate their businesses and defaulting on their
lease payments to us.
Most states where we own properties issue licenses for cannabis operations for a limited period. We rely on our tenants to
renew or otherwise maintain the requisite state and local cannabis licenses and other authorizations on a continuous basis. If
one or more of our tenants are unable to renew or otherwise maintain its licenses or other state and
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local authorizations necessary to continue its cannabis operations, such tenants may default on their lease payments to us.
Any such noncompliance by our tenants of state and local laws, rules and regulations may also subject us, as the owner of
such properties, to potential penalties, fines or other liabilities.
Any lease payment defaults by a tenant or additional liability on us could adversely affect our cash flows and cause us to
reduce the amount of distributions to stockholders. In the event of a default by a tenant, we may also experience delays in
enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing our property as
operators of cannabis cultivation and production facilities are generally subject to extensive state licensing requirements,
including required state and local authorizations for a new tenant to take over operations at a facility.
In July 2022, Kings Garden, a prior tenant of ours at six properties that we own in southern California, defaulted on its
obligations to pay rent. As previously disclosed, for two of our properties (one located in San Bernardino, California and one
located in Palm Springs, California), we continue to evaluate alternative non-cannabis uses for the properties, due in part to
changes in the zoning of the properties that no longer allow for regulated cannabis cultivation and processing. In September
2023, we regained possession of the remaining four properties that Kings Garden previously occupied.
In November 2022, a subsidiary of Parallel defaulted on its obligations to pay rent at one of our properties in
Pennsylvania, and we regained possession of the property in October 2023. The Pennsylvania regulated cannabis program
issued a limited number of operator licenses, and as a result, we may encounter longer delays and other challenges in finding a
suitable tenant, versus in states with more licensed operators.
In February 2023, Parallel also defaulted on its obligations to pay rent at one of our properties in Texas, and we regained
possession of that property in March 2023. The Texas regulated cannabis program is a restricted medical cannabis program
with a limited number of operator licenses, and as a result, we may encounter longer delays and other challenges in
development and finding a suitable tenant, versus in states with more licensed operators and a more open regulated cannabis
program.
We acquired our properties, and expect to acquire other properties, “as-is,” which increases the risk of an investment that
requires us to remedy defects or costs without recourse to the prior owner.
We acquired our properties, and expect to acquire other real estate properties, “as is” with only limited representations
and warranties from the property seller regarding matters affecting the condition, use and ownership of the property. There
may also be environmental conditions associated with properties we acquire of which we are unaware despite our diligence
efforts or that we have identified during diligence, including with respect to historical heavy industrial uses of the properties.
In particular, cannabis facilities may present environmental concerns of which we are not currently aware. If environmental
contamination exists on properties we acquire or develops after acquisition, we could become subject to liability for the
contamination. As a result, if defects in the property (including any building on the property) or other matters adversely
affecting the property are discovered, including but not limited to environmental matters, we may not be able to pursue a claim
for any or all damages against the property seller. Such a situation could harm our business, financial condition, liquidity and
results of operations.
Our properties are, and are expected to continue to be, geographically concentrated in states that permit licensed cannabis
operations, and we will be subject to social, political and economic risks of doing business in these states and any other
state in which we may own property.
As of February 21, 2025, we owned properties in 19 states, and we expect that the properties that we acquire will be
geographically concentrated in these states and other states that have established cannabis programs. See “Geographic
Concentration” under Item 1, “Business” for a table of properties owned by us and organized by state as of
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December 31, 2024. Circumstances and developments related to operations in these markets that could negatively affect our
business, financial condition, liquidity and results of operations include, but are not limited to, the following factors:
●
the state regulated cannabis market fails to develop and grow in ways that we or our tenants projected;
●
the responsibility of complying with multiple and, in some respects, conflicting state and federal laws in the United
States, including with respect to cultivation and distribution of cannabis, licensing, banking and insurance;
●
access to capital may be more restricted, or unavailable on favorable terms or at all in certain locations;
●
difficulties and costs of staffing and managing operations;
●
unexpected changes in regulatory requirements and other laws;
●
the impact of national, regional or state specific business cycles and economic instability; and
●
potentially adverse tax consequences.
Some of our tenants could be susceptible to bankruptcy, which would affect our ability to generate rents from them and
therefore negatively affect our results of operations.
In addition to the risk of tenants being unable to make regular rent payments, certain of our tenants may depend on debt,
which could make them especially susceptible to bankruptcy in the event that their cash flows are insufficient to satisfy their
debt. Because cannabis remains illegal under federal law, there is no assurance that federal bankruptcy courts will provide
relief for parties who engage in cannabis-related businesses. A number of recent bankruptcy court rulings have denied
bankruptcy relief for certain cannabis businesses on the basis that businesses cannot violate federal law and then claim the
benefits of federal bankruptcy for such activity and on the basis that courts cannot ask a bankruptcy trustee to take possession
of, and distribute cannabis assets, as such action would violate the CSA. Any inability of our tenants to seek bankruptcy
protection may impact their ability to secure financing for their operations and prevent our tenants from utilizing the benefits
of reorganization of their businesses under bankruptcy protection to operate in a financially sustainable way, thereby reducing
the probability that such a tenant would be able to honor its lease obligations with us.
Generally, under bankruptcy law, a tenant who is the subject of bankruptcy proceedings may continue (“assume”) or give
up (“reject”) any unexpired lease of non-residential real property. If a bankrupt tenant decides to give up (reject) a lease, any
claim for breach of the lease is treated as a general unsecured claim in the tenant’s bankruptcy case, subject to certain
exceptions for collateral and guarantees. In the event one of our tenants is permitted to seek bankruptcy protection in the U.S.,
our general unsecured claim would likely be capped at the amount the tenant owed us for unpaid rent prior to the bankruptcy
unrelated to the termination, plus the greater of one year of lease payments or 15% of the lease payments payable under the
remaining term of the lease, but in no case more than three years of lease payments. In addition to the cap on our damages for
breach of the lease, even if our claim is timely submitted to the bankruptcy court, there is no guaranty that the tenant’s
bankruptcy estate would have sufficient funds to satisfy the claims of general unsecured creditors. Finally, a bankruptcy court
could re-characterize a net lease transaction as a disguised secured lending transaction. If that were to occur, we would not be
treated as the owner of the property, but might have additional rights as a secured creditor. This would mean our claim in
bankruptcy court could be limited to the amount we paid for the property, which could adversely impact our financial
condition. Any bankruptcy, if allowed, of one of our tenants would result in a loss of lease payments to us, as well as an
increase in our costs to carry the property.
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Our tenants may be subject to Section 280E of the Code because of the nature of their business activities, which could have
an adverse impact on their financial condition due to a disallowance of certain tax deductions.
Section 280E of the Code provides that, with respect to any taxpayer, no deduction or credit is allowed for expenses
incurred during a taxable year “in carrying on any trade or business if such trade or business (or the activities which comprise
such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the CSA)
which is prohibited by federal law or the law of any state in which such trade or business is conducted.” Because cannabis is a
Schedule I controlled substance under the CSA, Section 280E by its terms applies to the purchase and sale of cannabis
products. Our tenants are engaged in the cultivation, processing and sale of cannabis and cannabis-related products, and
therefore may be subject to Section 280E. Application of the provisions of Section 280E to our tenants would result in the
disallowance of certain tax deductions, including for depreciation or interest expense, which could have an adverse impact on
their respective financial condition and ability to make lease payments to us. Any lease payment defaults by a tenant could
adversely affect our results of operations and cash flows, and cause us to reduce the amount of distributions to our
stockholders.
We have acquired and may continue to acquire cannabis retail stores and dispensaries and enter into leases with licensed
operators for those properties, which present additional risks and challenges in comparison to properties for the cultivation
and production of cannabis.
We have acquired and may continue to acquire cannabis retail stores and dispensaries and enter into leases with licensed
operators for those locations. Cannabis retail stores and dispensaries entail risks that could adversely impact our financial
condition and results of operations, and that are in addition to risks associated with regulated cannabis cultivation and
processing facilities, including but not limited to:
●
the impact of the continued evolution of the retail distribution model for cannabis and customer preferences,
including the impact of e-commerce and home delivery on demand for cannabis retail space;
●
negative perceptions by customers of the safety, convenience and attractiveness of cannabis dispensaries;
●
the handling of significant cash transactions and cannabis inventory at the property, which may increase security
risks associated with dispensary operations;
●
local real estate conditions (such as an oversupply of, or a reduction in demand for, cannabis retail space);
●
our and our tenants’ ability to procure and maintain appropriate levels of property and casualty insurance; and
●
risks associated with data breaches through cyberattacks, cyber intrusions or otherwise that expose customer
personal information at dispensaries, which may result in liability and reputational damage to our tenants and our
company.
The realization of any of the risks above, among others, with respect to one or more of our properties or tenants could
have a material adverse impact on our business.
We are exposed to the potential impacts of future climate change, which may result in unanticipated losses that could affect
our business and financial condition.
We are exposed to potential physical risks from possible future changes in climate. Our properties may be exposed to
catastrophic weather events, such as severe storms, hurricanes, fires, floods or droughts, in addition to changes in temperature
and air quality. If the frequency of extreme weather events increases, our exposure to these events could increase. We may also
be exposed to regulatory risks related to climate change, including regulations seeking to limit greenhouse gas emissions and
reduce water usage. We may also be adversely impacted by potential impacts to the supply chain or stricter energy efficiency
standards or greenhouse gas regulations for commercial real estate. We cannot give any assurance that other such conditions
do not exist or may not arise in the future. The potential impacts of future
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climate change on our properties could adversely affect our ability to lease or sell such properties or to borrow using such
properties as collateral.
Liability for uninsured losses could adversely affect our financial condition.
While the terms of our leases with our tenants generally require property and casualty insurance, losses from disaster-type
occurrences, such as earthquakes, hurricanes, floods and weather-related disasters, and other types of insurance, such as
landlord’s rental loss insurance, may be either uninsurable or not insurable on economically viable terms, due in part to our
properties’ locations, construction types and concentration on the regulated cannabis industry. Should an uninsured loss occur,
we could lose our capital investment or anticipated profits and cash flows from one or more properties.
If our properties’ access to adequate water and power supplies is interrupted, it could harm our ability to lease the
properties for cannabis cultivation and production, thereby adversely affecting our ability to generate returns on our
properties.
In order to lease the properties that we acquire, these properties require access to sufficient water and power to make them
suitable for the cultivation and production of cannabis. Although we expect to acquire properties with sufficient access to
water, should the need arise for additional wells from which to obtain water, we would be required to obtain permits prior to
drilling such wells. Permits for drilling water wells are required by state and county regulations, and such permits may be
difficult to obtain due to the limited supply of water in areas where we acquire properties. Similarly, our properties may be
subject to governmental regulations relating to the quality and disposition of rainwater runoff or other water to be used for
irrigation. In such case, we could incur costs necessary in order to retain this water. If we are unable to obtain or maintain
sufficient water supply for our properties, our ability to lease them for the cultivation and production of cannabis would be
seriously impaired, which would have a material adverse impact on the value of our assets and our results of operations.
Historically, states that have legalized cannabis cultivation have typically required that such cultivation take place
indoors. Indoor cultivation of cannabis requires significant power for growing lights and ventilation and air conditioning to
remove the hot air generated by the growing lights. While outdoor cultivation is gaining acceptance in many states with
favorable climates for such growth, we expect that most of our properties will continue to utilize indoor cultivation methods.
Any extended interruption of the power supply to our properties, particularly those using indoor cultivation methods, would
likely harm our tenants’ crops and processing capabilities, which could result in their inability to make lease payments to us
for our properties. Any lease payment defaults by a tenant could adversely affect our cash flows and cause us to reduce the
amount of distributions to stockholders.
Due to our involvement in the regulated cannabis industry, we may have a difficult time obtaining the various insurance
policies that are desired to operate our business, which may expose us to additional risks and financial liabilities.
Insurance that is otherwise readily available, such as workers’ compensation, general liability and directors’ and officers’
insurance, is more difficult for us to find and more expensive, because we lease our properties to companies in the regulated
cannabis industry. There are no guarantees that we will be able to find such insurance in the future, or that the cost will be
affordable to us. If we are forced to go without such insurance or with less insurance than we would prefer, it may prevent us
from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial
liabilities.
Construction loans involve an increased risk of loss and other risks that are different from owning and leasing properties.
In June 2021, we executed a construction loan agreement with a developer, pursuant to which we agreed to make
available up to $18.5 million for the development of a regulated cannabis cultivation and processing facility in California. In
February 2023, we amended our construction loan agreement to provide up to an additional $4.5 million for the development
as a result of costs incurred by the developer that were in excess of the original budget, making our
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total potential investment in the project $23.0 million. We may invest in other such loans in the future. Construction loans
involve an increased risk of loss and other risks that are different from owning and leasing properties, including the following
risks:
●
If we fail to fund our entire commitment on a construction loan or if a borrower otherwise fails to complete the
construction of a project, there could be adverse consequences associated with the loan, including, but not limited to:
a loss of the value of the property securing the loan, especially if the borrower is unable to raise funds to complete it
from other sources; a borrower’s claim against us for failure to perform under the loan documents; increased costs to
the borrower that the borrower is unable to pay; a bankruptcy or receivership filing by the borrower; and
abandonment by the borrower of the collateral for the loan;
●
We are subject to the risk that a borrower may make business decisions with which we disagree and the management
of such company may take risks or otherwise act in ways that do not serve our interests;
●
A borrower may not be able to realize the value anticipated from the project and otherwise not have the resources to
repay the amount owed under the construction loan at maturity;
●
We may incur significant costs and assume significant liabilities in foreclosing on any property subject to a
construction loan, in addition to costs and risks associated with completing construction of the property if
construction was not completed; and
●
If we foreclose on the property and take ownership, we may incur a significant loss on disposing of the property or,
in the alternative, we may not be able to lease the property at all or on terms reasonably acceptable to us if we
determine to continue to own the property.
If any one of these risks were to materialize with respect to one or more construction loans, our financial condition, results
of operations, cash flow, and our ability to make distributions to our stockholders could be materially and adversely affected.
We may purchase properties subject to ground leases or enter into other transactions involving ground leases that expose
us to the loss of such properties upon breach or termination of the ground leases.
A ground lease agreement permits a tenant to develop and/or operate a land parcel (property) during the lease period, after
which the land parcel and all improvements revert back to the property owner. Under a ground lease, property improvements
are owned by the property owner unless an exception is created and all relevant taxes incurred during the lease period are paid
for by the tenant. Ground leases typically have a long duration generally ranging from 50 to 99 years with additional extension
options. As a lessee under a ground lease, we would be exposed to the possibility of losing the property upon termination, or
an earlier breach by us, of the ground lease, which could have a material adverse effect on our business, financial condition
and results of operations, our ability to make distributions to our stockholders and the trading price of our common stock.
Risks Related to Regulation
Cannabis remains illegal under federal law, and therefore, strict enforcement of federal laws regarding cannabis would
likely result in our inability and the inability of our tenants to execute our respective business plans.
Cannabis is a Schedule I controlled substance under the CSA. Even in those jurisdictions in which cannabis has been
legalized at the state level, the possession, distribution, cultivation, manufacture and use of cannabis all remain violations of
federal law that are punishable by imprisonment, substantial fines and forfeiture. Moreover, individuals and entities may
violate federal law if they intentionally aid and abet another in violating these federal controlled substance laws, or conspire
with another to violate them. The U.S. Supreme Court has ruled in United States v. Oakland Cannabis Buyers’
Coop. and Gonzales v. Raich that it is the federal government that has the right to regulate and criminalize the sale, possession
and use of cannabis, even for medical purposes. We would likely be unable to execute our business plan if the federal
government were to strictly enforce federal law regarding cannabis.
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In January 2018, the DOJ rescinded certain memoranda, including the so-called “Cole Memo” issued on August 29, 2013
under the Obama Administration, which had characterized enforcement of federal cannabis prohibitions under the CSA to
prosecute those complying with state regulatory systems allowing the use, manufacture and distribution of medical cannabis
as an inefficient use of federal investigative and prosecutorial resources when state regulatory and enforcement efforts are
effective with respect to enumerated federal enforcement priorities under the CSA. In rescinding the Cole Memo, DOJ
instructed its prosecutors to enforce the laws enacted by Congress and to follow well-established principles that govern all
federal prosecutions when deciding whether to pursue prosecutions related to cannabis activities. As a result, federal
prosecutors could, and still can, use their prosecutorial discretion to decide to prosecute actors compliant with their state laws.
Although there have not been any identified prosecutions of state law compliant cannabis entities, there can be no assurance
that the federal government will not enforce federal laws against the regulated cannabis industry generally, including our
tenants and us.
Pamela Bondi was confirmed by the United States Senate as Attorney General of the United States on February 4, 2025.
During her tenure as Attorney General in the State of Florida, Bondi routinely opposed the softening of anti-cannabis laws,
including opposition to ballot initiatives to broaden access to medical cannabis, but she also generally faithfully enforced state
cannabis laws to maintain a well-regulated medical cannabis market. Bondi has not provided a clear policy directive for the
United States as it pertains to state-level cannabis-related activities, and there can be no assurances that DOJ or other law
enforcement authorities will not seek to vigorously enforce current U.S. federal laws. It is generally expected that Bondi will
closely follow the Trump Administration’s enforcement priorities.
Congress previously enacted an omnibus spending bill that includes the Rohrabacher-Blumenauer Amendment
prohibiting the DOJ (which includes the DEA) from using funds appropriated by that bill to prevent states from implementing
their medical-use cannabis laws. This provision will expire on March 8, 2024. On December 20, 2024, Congress passed a
continuing resolution to extend government funding, extending the application of the Rohrabacher-Blumenauer Amendment
until March 14, 2025. There can be no assurance that Congress will approve inclusion of a similar prohibition in future
appropriations bills to prevent DOJ from using congressionally appropriated funds to enforce federal cannabis laws against
regulated medical cannabis actors operating in compliance with state and local law. In USA vs. McIntosh, the U.S. Court of
Appeals for the Ninth Circuit held that this provision prohibits the DOJ from spending funds from relevant appropriations acts
to prosecute individuals who engage in conduct permitted by state medical-use cannabis laws and who strictly comply with
such laws. However, the Ninth Circuit’s opinion, which only applies to the states of Alaska, Arizona, California, Hawaii, and
Idaho, also held that persons who do not strictly comply with all state laws and regulations regarding the distribution,
possession and cultivation of medical-use cannabis have engaged in conduct that is unauthorized, and in such instances the
DOJ may prosecute those individuals. Furthermore, while we target the acquisition of medical-use cannabis facilities, our
leases do not prohibit cannabis cultivation for adult-use that is permissible under the state and local laws where our facilities
are located. Consequently, certain of our tenants currently (and additional tenants may in the future) cultivate adult-use
cannabis in our medical-use cannabis facilities, as permitted by such state and local laws now or in the future, which may in
turn subject the tenant, us and our properties to greater and/or different federal legal and other risks as compared to facilities
where cannabis is cultivated exclusively for medical use, including not providing protection under the Congressional spending
bill provision described above.
Additionally, financial transactions involving proceeds generated by cannabis-related conduct can form the basis for
prosecution under the federal money laundering statutes, unlicensed money transmitter statutes and the Bank Secrecy Act. The
penalties for violation of these laws include imprisonment, substantial fines and forfeiture. Prior to the DOJ’s rescission of the
Cole Memo, supplemental guidance from the DOJ issued in the 2014 Cole Memorandum directed federal prosecutors to
consider the federal enforcement priorities enumerated in the Cole Memo when determining whether to charge institutions or
individuals with any of the financial crimes described above based upon cannabis-related activity. This supplemental guidance
was followed by the February 14, 2014 FinCEN Memorandum outlining the pathways for financial institutions to provide
services to state-sanctioned cannabis businesses consistent with Bank Secrecy Act obligations and in alignment with federal
enforcement priorities. Under these guidelines, financial institutions must submit a SAR in connection with all cannabis-
related banking activities by any client of such financial institution, in accordance with federal money laundering laws. These
cannabis-related SARs are divided into three categories - cannabis limited, cannabis priority, and cannabis terminated - based
on the financial institution’s belief that the business in question follows state law, is operating outside of compliance with state
law, or where the banking
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relationship has been terminated, respectively. The FinCEN Memorandum states that in some circumstances, it is permissible
for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money
laundering laws. Although the Cole Memo has been rescinded, the FinCEN Memorandum technically remains intact;
however, it is unclear whether the current administration will continue to follow the FinCEN Memorandum. The DOJ
continues to have the right and power to prosecute crimes committed by banks and financial institutions, such as money
laundering and violations of the Bank Secrecy Act, that occur in any state including states that have in some form legalized the
sale of cannabis. Further, the conduct of the DOJ’s enforcement priorities could change for any number of reasons. A change
in the DOJ’s priorities could result in the DOJ’s prosecuting banks and financial institutions for crimes that were not
previously prosecuted.
Federal prosecutors have significant discretion and no assurance can be given that the federal prosecutor in each judicial
district where we purchase a property will not choose to strictly enforce the federal laws governing cannabis operations. Any
change in the federal government’s enforcement posture with respect to state-licensed cannabis operations, including the
enforcement postures of individual federal prosecutors in judicial districts where we purchase properties, would result in our
inability to execute our business plan, and we would likely suffer significant losses with respect to our investment in cannabis
facilities in the United States, which would adversely affect the trading price of our securities. Furthermore, following any
such change in the federal government’s enforcement position, we could be subject to criminal prosecution, which could lead
to imprisonment and/or the imposition of penalties, fines, or forfeiture.
Certain of our tenants engage in operations for the adult-use cannabis industry in addition to or in lieu of operations for
the medical-use cannabis industry, and such tenants, we and our properties may be subject to additional risks associated
with such adult-use cannabis operations.
Our existing leases at our properties do not, and we expect that leases that we enter into with future tenants at other
properties we acquire will not, prohibit cannabis operations for adult-use that is permissible under state and local laws where
our facilities are located and certain of our tenants are currently engaged in operations for the adult-use cannabis industry,
which may subject our tenants, us and our properties to different and greater risks, including greater prosecution risk for
aiding and abetting violation of the CSA and federal laws governing money laundering. For example, the prohibition in the
current omnibus spending bill that prohibits the DOJ from using funds appropriated by Congress to prevent states from
implementing their medical-use cannabis laws does not extend to adult-use cannabis laws. In addition, while we may purchase
properties in states that only permit medical-use cannabis at the time of acquisition, such states may in the future authorize by
state legislation or popular vote the legalization of adult-use cannabis, thus permitting our tenants to engage in adult-use
cannabis operations at our properties. For example, a number of states permit licensed adult-use cannabis operations, and our
leases with tenants in those states allow for adult-use cannabis operations to be conducted at the properties in compliance with
state and local laws.
Our ability to grow our business depends on state laws pertaining to the cannabis industry.
Continued development of the cannabis industry depends upon continued legislative authorization of cannabis at the state
level. The status quo of, or progress in, the regulated cannabis industry is not assured and any number of factors could slow or
halt further progress in this area. While there may be ample public support for legislative action permitting the cannabis
operations, numerous factors impact the legislative process. For example, many states that voted to legalize medical and/or
adult-use cannabis have seen significant delays in the drafting and implementation of industry regulations and issuance of
licenses. In addition, burdensome regulation at the state level could slow or stop further development of the cannabis industry,
such as limiting the medical conditions for which medical cannabis can be recommended by physicians for treatment, not
strictly enforcing regulations for non-licensed cannabis operators, restricting the form in which medical cannabis can be
consumed, imposing significant registration requirements on physicians and patients or imposing significant taxes on the
growth, processing and/or retail sales of cannabis, which could have the impact of dampening growth of the cannabis industry
and making it difficult for cannabis businesses, including our tenants, to operate profitably in those states. Any one of these
factors could slow or halt additional legislative authorization of cannabis, which could harm our business prospects.
For example, we believe that California’s taxation of regulated cannabis at local and state governmental levels and
ineffective enforcement policy with respect to illicit cannabis sales have significantly limited the growth and profitability
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of operators in that state. According to Global Go Analytics, the illicit market for cannabis remains a much larger portion of
overall sales in the state, and state and local authorities have assessed significant taxes on regulated cannabis products, both of
which have had the impact of significantly limiting the growth and profitability for operators in the state’s regulated cannabis
market. This also extends beyond California, with reports coming from states like Oregon, Massachusetts, and New York that
buyers are turning to the illicit cannabis market to avoid state sales taxes. These states report difficulties in enforcement as
well, allowing the illicit market to thrive, and limiting the growth and profitability for operators in the regulated markets of
those states.
Recently, many states have also experienced significant declines in unit pricing for regulated cannabis products, with that
decline more pronounced in certain states than in others. As a result, certain regulated cannabis operators have consolidated
operations or shuttered certain operations to reduce costs, which if prolonged, could have a material negative impact on
operators’ demand for regulated cannabis facilities, including our existing tenants.
New laws that are adverse to the business of our tenants may be enacted, and current favorable national, state or local laws
or enforcement guidelines relating to cannabis operations may be modified or eliminated in the future.
We have acquired and are targeting for acquisition properties that are owned by state-licensed cannabis operators.
Relevant state or local laws may be amended or repealed, or new laws may be enacted in the future to eliminate existing laws
permitting cannabis operations. If our tenants were forced to close their operations, we would need to replace those tenants
with tenants who are not engaged in the cannabis industry, who most likely pay significantly lower rents. Moreover, any
changes in state or local laws that reduce or eliminate the ability to conduct cannabis operations would likely result in a high
vacancy rate for the kinds of properties that we seek to acquire, which would depress our lease rates and property values. In
addition, we would realize an economic loss on any and all improvements made to properties that were specific to the
cannabis industry.
For example, in connection with the Centers for Disease Control and Prevention identifying cases of vaping-related lung
injuries, certain state and local governments had instituted temporary bans. In addition to litigation and reputational risks
surrounding vaping-related lung injuries, bans or heightened regulations could have a material adverse impact on our tenants’
operations in those states and localities where such a ban or other restrictive regulation has been implemented.
FDA regulation of cannabis and the possible registration of facilities where cannabis is grown could negatively affect the
cannabis industry, which would directly affect our financial condition.
Should the federal government legalize cannabis, it is possible that the FDA would seek to regulate it under the Food,
Drug and Cosmetics Act of 1938 or under the Public Health Service Act. Additionally, the FDA may issue rules, regulations,
or guidance including certified good manufacturing practices, related to the growth, cultivation, harvesting and processing of
medical cannabis. If regulated by the FDA as a drug, clinical trials may be needed to verify efficacy and safety. It is also
possible that the FDA would require that facilities where cannabis is grown register with the FDA and comply with certain
federally prescribed regulations. In the event that some or all of these regulations or enforcement actions are imposed, we do
not know what the impact this would have on the cannabis industry, including what costs, requirements and possible
prohibitions may be enforced. If we or our tenants are unable to comply with the regulations or registration as prescribed by
the FDA, we and or our tenants may be unable to continue to operate their and our business in its current form or at all.
We and our tenants may have difficulty accessing the service of banks and other financial institutions, which may make it
difficult to contract for real estate needs.
Financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under
the federal money laundering statutes, unlicensed money transmitter statute and the Bank Secrecy Act. Previous guidance
issued by FinCEN clarified how financial institutions can provide services to cannabis-related businesses consistent with their
obligations under the Bank Secrecy Act. However, this guidance does not provide any safe harbors or legal defenses from
examination or regulatory or criminal enforcement actions by the DOJ, FinCEN or other federal regulators. Further,
prosecution of financial institutions of offenses under the Bank Secrecy Act based on transactions
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involving cannabis proceeds does not require an underlying cannabis-related conviction under federal or state law. Thus, most
banks and other financial institutions in the United States do not appear to be comfortable providing banking services to
cannabis-related businesses, or relying on this guidance, which can be amended or revoked at any time by the executive
branch. In addition to the foregoing, banks may refuse to process debit card payments and credit card companies generally
refuse to process credit card payments for cannabis-related businesses. Prior to the DOJ’s announcement in January 2018 of
the rescission of the Cole Memo and related memoranda, supplemental guidance from the DOJ directed federal prosecutors to
consider the federal enforcement priorities enumerated in the Cole Memo when determining whether to charge institutions or
individuals with any of the financial crimes described above based upon cannabis-related activity. It remains unclear what
impact the rescission of the Cole Memo will have, but federal prosecutors may increase enforcement activities against
institutions or individuals that are conducting financial transactions related to cannabis activities. The increased uncertainty
surrounding financial transactions related to cannabis activities may also result in financial institutions discontinuing services
to the cannabis industry.
Consequently, those businesses involved in the regulated cannabis industry continue to encounter difficulty establishing
banking relationships, which may increase over time. Our inability to maintain our current bank accounts would make it
difficult for us to operate our business, increase our operating costs, and pose additional operational, logistical and security
challenges and could result in our inability to implement our business plan.
The terms of our leases require that our tenants make rental payments via check or wire transfer. Only a small percentage
of financial institutions in the United States currently provide banking services to licensed cannabis operators. The inability of
our current and potential tenants to open accounts and continue using the services of banks will limit their ability to enter into
triple-net lease arrangements with us or may result in their default under our lease agreements, either of which could
materially harm our business and the trading price of our securities.
In addition, for our tenants that are publicly traded companies, securities clearing firms may refuse to accept deposits of
securities of those tenants, which may negatively impact the trading and valuations of such tenants and have a material
adverse impact on our tenants’ ability to finance their operations and growth through the capital markets.
In addition, federal money laundering statutes and Bank Secrecy Act regulations discourage financial institutions from
working with any organization that sells a controlled substance, regardless of whether the state it resides in permits cannabis
sales. While the United States House of Representatives has passed the SAFE Banking Act, which would permit commercial
banks to offer services to cannabis companies that are in compliance with state law, it remains under consideration by the
Senate, and if Congress fails to pass the SAFE Banking Act, the Company’s inability, or limitations on the Company’s ability,
to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make
it difficult for the Company to operate and conduct its business as planned or to operate efficiently.
Federal and state banking regulators closed two U.S. banks in March 2023, and another U.S. bank in May 2023, with
which we have no banking, financing or other business relationships, precipitating financial industry and capital markets
turmoil centered on concerns about the stability and solvency of other banks and financial institutions and the attendant risk
they may be closed and/or forced by governmental agencies into receivership or sale. The failure of other banks and financial
institutions, if it occurs, could have a material adverse effect on our or our tenants’ liquidity or consolidated financial
statements if we or our tenants have placed cash and cash equivalent deposits at such banks or financial institutions or have
lending relationships with those banks.
Owners of properties located in close proximity to our properties may assert claims against us regarding the use of the
property as a regulated cannabis cultivation, processing or dispensing facility, which if successful, could materially and
adversely affect our business.
Owners of properties located in close proximity to our properties may assert claims against us regarding the use of our
properties for regulated cannabis cultivation, processing or dispensing, including assertions that the use of the property
constitutes a nuisance that diminishes the market value of such owner’s nearby property. Such property owners may also
attempt to assert such a claim in federal court as a civil matter under the Racketeer Influenced and Corrupt Organizations Act.
If a property owner were to assert such a claim against us, we may be required to devote significant
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resources and costs to defending ourselves against such a claim, and if a property owner were to be successful on such a
claim, our tenants may be unable to continue to operate their business in its current form at the property, which could
materially adversely impact the tenant’s business and the value of our property, our business and financial results and the
trading price of our securities.
Laws and regulations affecting the regulated cannabis industry are constantly changing, which could materially adversely
affect our operations, and we cannot predict the impact that future regulations may have on us.
Local, state and federal cannabis laws and regulations are broad in scope and subject to evolving interpretations, which
could require us to incur substantial costs associated with compliance or alter our business plan. In addition, violations of
these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our
operations. It is also possible that regulations may be enacted in the future that will be directly applicable to our business. We
cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect
additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our
business.
In August 2023, HHS recommended to the DEA that cannabis be reclassified from a Schedule I drug to a Schedule III
drug under the CSA. HHS based this recommendation on an FDA review of cannabis’ classification pursuant to President
Biden’s executive order in October 2022. On May 16, 2024, the DEA issued a Notice of Proposed Rulemaking, which
proposed to schedule cannabis as a Schedule III substance under the CSA. During the 60-day comment period that followed
publication of the notice in the Federal Register, the majority of commenters favored either the proposed rescheduling or the
complete removal of cannabis as a scheduled substance under the CSA.
The prospects for this reclassification effort under the Trump administration remain unclear. A DEA administrative law
judge canceled the rulemaking hearing on this issue that was set to begin on January 21, 2025, following a series of challenges
by various parties, including parties seeking to remove the DEA from the proposed rulemaking process. Since that
postponement, President Trump has appointed Derek Maltz to lead the DEA. Neither Trump nor Maltz has released any
official policy directive related to rescheduling. No further hearings have been scheduled beyond a status update slated for
April, 2025.
The impact of such decisions or rules, if any are promulgated, on existing state-regulated cannabis programs remains
unclear, including but not limited to FDA and other federal regulatory agency involvement, the impact of such a decision on
potential federal legislative reform such as proposals to de-schedule cannabis and provide greater access to capital markets for
state-regulated cannabis operators, and the potential entry into the cannabis markets of large, well-capitalized companies as a
result of any re-scheduling.
Assets leased to cannabis businesses may be forfeited to the federal government.
Any assets used in conjunction with the violation of federal law are potentially subject to federal forfeiture, even in states
where cannabis is legal. In July 2017, the DOJ issued a new policy directive regarding asset forfeiture, referred to as the
“equitable sharing program.” Under this new policy directive, federal authorities may adopt state and local forfeiture cases and
prosecute them at the federal level, allowing for state and local agencies to keep up to 80% of any forfeiture revenue. This
policy directive represents a reversal of the DOJ’s policy under the Obama administration, and allows for forfeitures to
proceed that are not in accord with the limitations imposed by state-specific forfeiture laws. This new policy directive may
lead to increased use of asset forfeitures by local, state and federal enforcement agencies. If the federal government decides to
initiate forfeiture proceedings against cannabis businesses, such as the cannabis facilities that we have acquired and intend to
acquire, our investment in those properties may be lost.
We may have difficulty accessing bankruptcy courts.
As discussed above, cannabis is illegal under federal law. Therefore, there is a compelling argument that the federal
bankruptcy courts cannot provide relief for parties who engage in the cannabis or cannabis related businesses. Recent
bankruptcy rulings have denied bankruptcies for dispensaries upon the justification that businesses cannot violate federal law
and then claim the benefits of federal bankruptcy for the same activity and upon the justification that courts cannot
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ask a bankruptcy trustee to take possession of, and distribute cannabis assets as such action would violate the CSA. Therefore,
we may not be able to seek the protection of the bankruptcy courts and this could materially affect our business or our ability
to obtain credit.
The properties that we acquire are subject to extensive regulations, which may result in significant costs and materially
and adversely affect our business, financial condition, liquidity and results of operations.
Our properties are and other properties that we expect to acquire will be subject to various laws and regulatory
requirements. For example, local property regulations, including restrictive covenants of record, may restrict the use of
properties we acquire and may require us to obtain approval from local authorities with respect to the properties that we
expect to acquire, including prior to acquiring a property or when developing or undertaking renovations. Among other things,
these restrictions may relate to cultivation, processing or dispensing of cannabis, the use of water and the discharge of waste
water, fire and safety, seismic conditions, asbestos-cleanup or hazardous material abatement requirements. Our failure to
obtain such regulatory approvals could have a material adverse effect on our business, financial condition, liquidity and results
of operations. Furthermore, we cannot assure you that the regulatory requirements and statutory prohibitions relating to
properties used in cannabis operations will not materially and adversely affect us or the timing or cost of any future
acquisitions, developments or renovations, or that additional regulations will not be adopted that would increase such delays
or result in additional prohibition or costs.
Compliance with environmental laws could materially increase our operating expenses.
There may be environmental conditions associated with properties we acquire of which we are unaware. If environmental
contamination exists on properties we acquire, we could become subject to liability for the contamination. The presence of
hazardous substances on a property may materially and adversely affect our ability to sell the property and we may incur
substantial remediation costs. In addition, although we may require in our leases that tenants operate in compliance with all
applicable laws and indemnify us against any environmental liabilities arising from a tenant’s activities on the property, we
could nonetheless be subject to liability by virtue of our ownership interest and we cannot be sure that our tenants would
satisfy their indemnification obligations to us. Such environmental liability exposure associated with properties we acquire
could harm our business, financial condition, liquidity and results of operations.
Risks Related to Financing Our Business
Our growth depends on external sources of capital, which may not be available on favorable terms or at all. In addition,
banks, financial institutions, and other capital market participants may be reluctant to enter into lending and other
financing transactions with us because we acquire properties used in the cultivation and production of cannabis. If one or
more of these sources of funding is unavailable to us, it could have a material adverse effect on our business, financial
condition, liquidity and results of operations.
We expect to acquire additional real estate assets, which we intend to finance primarily through newly issued equity or
debt. We may not be in a position to take advantage of attractive investment opportunities for growth if we are unable, due to
global or regional economic uncertainty, changes in the state or federal regulatory environment relating to the cannabis
industry, restrictions that potential investors may have to own our equity or debt due to our tenant’s operations in the regulated
cannabis industry, changes in market conditions for the regulated cannabis industry, our own operating or financial
performance or otherwise, to access capital markets on a timely basis and on favorable terms or at all. In addition, U.S. federal
income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to
the deduction for dividends paid and excluding net capital gain and that it pay U.S. federal income tax at regular corporate
rates to the extent that it annually distributes less than 100% of its taxable income. Because we intend to grow our business,
this limitation may require us to raise additional equity or incur debt at a time when it may be disadvantageous to do so.
Our access to capital will depend upon a number of factors over which we have little or no control, including general
market conditions, restrictions imposed on potential investors and other capital markets participants due to our tenants’
operations in the regulated cannabis industry, and the market’s perception of our current and potential future earnings. If
general economic instability or downturn leads to an inability to borrow at attractive rates or at all, our
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ability to obtain capital to finance the purchase of real estate assets could be negatively impacted. In addition, banks and other
financial institutions may be reluctant to enter into lending transactions with us, particularly secured lending, because we
intend to acquire properties used in the cultivation, production or dispensing of cannabis. If this source of funding is
unavailable to us, our growth may be limited and our levered return on the properties we purchase may be lower.
If we are unable to obtain capital on terms and conditions that we find acceptable, we likely will have to reduce the
number of properties we can purchase. In addition, our ability to refinance all or any debt we may incur in the future, on
acceptable terms or at all, is subject to all of the above factors, and will also be affected by our future financial position, results
of operations and cash flows, which additional factors are also subject to significant uncertainties, and therefore we may be
unable to refinance any debt we may incur in the future, as it matures, on acceptable terms or at all. All of these events would
have a material adverse effect on our business, financial condition, liquidity and results of operations.
In addition, securities clearing firms may refuse to accept deposits of our securities, which may negatively impact the
trading of our securities and have a material adverse impact on our ability to obtain capital.
In recent years, general financial conditions have deteriorated significantly, which has also significantly reduced our
access to capital. If sustained, this would have a material adverse effect on our business, financial condition and results of
operations, including our ability to continue to make acquisitions of new properties and fund draws for future improvements at
existing properties.
Our Notes due 2026 and any future indebtedness reduce our cash available for distribution and may expose us to the risk
of default.
As of December 31, 2024, we had outstanding $300.0 million aggregate principal amount of our Notes due 2026.
Payments of principal and interest on our Notes due 2026 and borrowings that we may incur in the future, including pursuant
to the Revolving Credit Facility, may leave us with insufficient cash resources to operate our properties or to pay the
distributions currently contemplated or necessary to satisfy the requirements for REIT qualification. Our level of debt and the
limitations imposed on us by these debt agreements could have significant material and adverse consequences, including the
following:
●
our cash flow may be insufficient to meet our required principal and interest payments;
●
we may be unable to borrow additional funds as needed or on favorable terms, or at all;
●
we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the
terms of our original indebtedness;
●
to the extent we borrow debt that bears interest at variable rates, increases in interest rates could materially increase
our interest expense;
●
we may be forced to dispose of one or more of the properties that we expect to acquire, possibly on disadvantageous
terms;
●
we may default on our obligations or violate restrictive covenants, in which case the lenders may accelerate these
debt obligations; and
●
our default under any loan with cross default provisions could result in a default on other indebtedness.
If any one of these events were to occur, our financial condition, results of operations, cash flow, and our ability to make
distributions to our stockholders could be materially and adversely affected.
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A downgrade in our investment grade credit rating could materially adversely affect our business and financial condition.
There can be no assurance that we will be able to maintain our current credit rating. Any downgrade in terms of rating or
outlook by the rating agency could have a material adverse impact on our cost and availability of capital, which could in turn
have a material adverse impact on our financial condition, results of operations and liquidity and a material adverse effect on
the market price of our common stock.
The terms governing our Notes due 2026 and the Revolving Credit Facility include restrictive covenants relating to our
operations, which could limit our ability to respond to changing market conditions and our ability to make distributions to
our stockholders.
The indenture governing the Notes due 2026 and the Loan Agreement governing the Revolving Credit Facility each
contains financial and operating covenants that, among other things, restrict our ability to take specific actions, even if we
believe them to be in our best interest, including restrictions on our ability to (1) consummate a merger, consolidation or sale
of all or substantially all of our assets and (2) incur additional secured and unsecured indebtedness.
The covenants relating to our Notes due 2026 and Revolving Credit Facility may adversely affect our flexibility and our
ability to achieve our operating plans. Our ability to comply with these covenants and other provisions relating to our
indenture governing the Notes due 2026 and the Loan Agreement governing the Revolving Credit Facility may be affected by
changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory
developments or other events adversely impacting us. The breach of any of these covenants could result in a default under our
indebtedness, which could cause those and other obligations to become due and payable. If any of our indebtedness is
accelerated, we may not be able to repay it, pursue our business plan or make distributions to our stockholders.
Risks Related to Our Organization and Structure
Our senior management team manages our portfolio subject to very broad investment guidelines.
Our senior management team has broad discretion over our investments, and our stockholders will have no opportunity to
evaluate the terms of transactions or other economic or financial data concerning our investments that are not described in
periodic filings with the SEC. We rely on the senior management team’s ability to execute acquisitions and dispositions of
properties, subject to the oversight and approval of our board of directors. Our senior management team is authorized to
pursue acquisitions and dispositions of real estate investments in accordance with very broad investment guidelines, subject to
approval of our board of directors.
Our board of directors may change our investment objectives and strategies without stockholder consent.
Our board of directors determines our major policies, including with regard to financing, growth, debt capitalization,
REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the
stockholders. Under our charter and Maryland General Corporation Law (the “MGCL”), our stockholders generally have a
right to vote only on the following matters:
●
the election or removal of directors;
●
the amendment of our charter, except that our board of directors may amend our charter without stockholder
approval to:
o
change our name;
o
change the name or other designation or the par value of any class or series of stock and the aggregate par
value of our stock;
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o
increase or decrease the aggregate number of shares of stock that we have the authority to issue;
o
increase or decrease the number of our shares of any class or series of stock that we have the authority to
issue; and
o
effect certain reverse stock splits;
●
our liquidation and dissolution; and
●
our being a party to a merger, consolidation, sale or other disposition of all or substantially all of our assets or
statutory share exchange.
All other matters are subject to the discretion of our board of directors.
Certain provisions of Maryland law could inhibit changes in control.
Under the MGCL, “business combinations” (including a merger, consolidation, statutory share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and an
“interested stockholder” or an affiliate of an interested stockholder are prohibited for five years after the most recent date on
which the interested stockholder becomes an interested stockholder. An interested stockholder is defined as: (a) any person
who beneficially owns 10% or more of the voting power of the then-outstanding voting stock of the corporation; or (b) an
affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then-outstanding stock of the corporation.
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by
which the person otherwise would have become an interested stockholder. A Maryland corporation’s board of directors may
provide that its approval is subject to compliance with any terms and conditions determined by the board of directors prior to
the time that the interested stockholder becomes an interested stockholder.
Thereafter, any such business combination must generally be recommended by the board of directors of such corporation
and approved by the affirmative vote of at least:
●
80% of the votes entitled to be cast by holders of outstanding voting stock of the corporation; and
●
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation, other than shares held by the
interested stockholder with whom (or with whose affiliate) the business combination is to be effected, or held by an
affiliate or associate of the interested stockholder unless, among other conditions, the corporation’s common
stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the interested stockholder for its shares.
A Maryland corporation’s board of directors may provide that its approval is subject to compliance with any terms and
conditions determined by it. These provisions of the MGCL do not apply, however, to business combinations that are
approved or exempted by a Maryland corporation’s board of directors prior to the time that the interested stockholder becomes
an interested stockholder.
The “control share” provisions of the MGCL provide that, subject to certain exceptions, a holder of “control shares” of a
Maryland corporation (defined as shares which, if aggregated with all other shares of stock owned by the acquirer or in respect
of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy),
entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control
share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control
shares”) has no voting rights with respect to such shares except to the extent approved by our stockholders by the affirmative
vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding
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votes entitled to be cast by the acquirer of control shares, our officers and our personnel who are also our directors. Our
bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of
shares of our stock. Our bylaws contain a provision exempting from the control share acquisition statute any and all
acquisitions by any person of shares of our stock. There can be no assurance that such provision will not be amended or
eliminated at any time in the future by our board of directors.
The “unsolicited takeover” provisions of Title 3, Subtitle 8 of the MGCL, or Subtitle 8, permit our board of directors,
without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain
takeover defenses, some of which (for example, a classified board) we do not yet have. Our charter provides that vacancies on
our board may be filled only by the remaining directors and for the remainder of the full term of the directorship in which the
vacancy occurred. Through provisions in our charter and bylaws unrelated to Subtitle 8, we already (i) require the affirmative
vote of stockholders entitled to cast not less than two-thirds of all of the votes entitled to be cast generally in the election of
directors for the removal of any director from the board, only with cause, (ii) vest in the board of directors the exclusive power
to fix the number of directorships and (iii) require, unless called by our chairman of the board, our chief executive officer or
our board of directors, the written request of stockholders entitled to cast not less than a majority of all votes entitled to be cast
at such a meeting to call a special meeting of our stockholders.
These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying,
deferring or preventing a change in control of us under the circumstances that otherwise could provide the holders of shares of
common stock with the opportunity to realize a premium over the then current market price.
Our authorized but unissued shares of common and preferred stock may prevent a change in our control.
Our charter permits our board of directors to authorize us to issue additional shares of our authorized but unissued
common or preferred stock. In addition, our board of directors may, without stockholder approval, amend our charter to
increase the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have the
authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the terms of the
classified or reclassified shares. As a result, our board of directors may establish a class or series of shares of common or
preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for shares
of our common stock or otherwise be in the best interest of our stockholders.
Severance agreements with our executive officers could be costly and prevent a change in our control.
The severance agreements that we entered into with our executive officers provide that, if their employment with us
terminates under certain circumstances (including upon a change in our control), we may be required to pay them significant
amounts of severance compensation, including accelerated vesting of equity awards, thereby making it costly to terminate
their employment. Furthermore, these provisions could delay or prevent a transaction or a change in our control that might
involve a premium paid for our common stock or otherwise be in the best interests of our stockholders.
Because of our holding company structure, we depend on our Operating Partnership and its subsidiaries for cash flow and
we will be structurally subordinated in right of payment to the obligations of such operating subsidiary and its subsidiaries.
We are a holding company with no business operations of our own. Our only significant asset is and will be the general
and limited partnership interests in our Operating Partnership. We conduct, and intend to continue to conduct, all of our
business operations through our Operating Partnership. Accordingly, our only source of cash to pay our obligations is
distributions from our Operating Partnership and its subsidiaries of their net earnings and cash flows. We cannot assure our
stockholders that our Operating Partnership or its subsidiaries will be able to, or be permitted to, make distributions to us that
will enable us to make distributions to our stockholders from cash flows from operations. Each of our Operating Partnership’s
subsidiaries is or will be a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit
our ability to obtain cash from such entities. In addition, because we are a holding company, your claims as stockholders will
be structurally subordinated to all existing and future liabilities and
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obligations of our Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or
reorganization, our assets and those of our Operating Partnership and its subsidiaries will be able to satisfy your claims as
stockholders only after all of our and our Operating Partnership’s and its subsidiaries’ liabilities and obligations have been
paid in full. Furthermore, U.S. bankruptcy courts have generally refused to grant bankruptcy protections to cannabis
businesses.
Our Operating Partnership may issue additional limited partnership interests to third parties without the consent of our
stockholders, which would reduce our ownership percentage in our Operating Partnership and would have a dilutive effect
on the amount of distributions made to us by our Operating Partnership and, therefore, the amount of distributions we can
make to our stockholders.
We are the sole general partner of our Operating Partnership and own, directly or through subsidiaries, 100% of the
outstanding partnership interests in our Operating Partnership. We may, in connection with our acquisition of properties or
otherwise, cause our Operating Partnership to issue additional limited partnership interests to third parties. Such issuances
would reduce our ownership percentage in our Operating Partnership and affect the amount of distributions made to us by our
Operating Partnership and, therefore, the amount of distributions we can make to our stockholders. Because our stockholders
will not directly own any interest in our Operating Partnership, our stockholders will not have any voting rights with respect to
any such issuances or other partnership level activities of our Operating Partnership.
If we issue limited partnership interests in our Operating Partnership in exchange for property, the value placed on such
partnership interests may not accurately reflect their market value, which may dilute your interest in us.
If we issue limited partnership interests in our Operating Partnership in exchange for property, the per unit value
attributable to such interests will be determined based on negotiations with the property seller and, therefore, may not reflect
the fair market value of such limited partnership interests if a public market for such limited partnership interests existed. If
the value of such limited partnership interests is greater than the value of the related property, your interest in us may be
diluted.
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit
your recourse in the event of actions not in your best interests.
We have entered into indemnification agreements with each of our executive directors and officers that provide for
indemnification to the maximum extent permitted by Maryland law. Maryland law permits us to include in our charter a
provision eliminating the liability of our directors and officers and our stockholders for money damages except for liability
resulting from:
●
actual receipt of an improper benefit or profit in money, property or services; or
●
active and deliberate dishonesty that was established by a final judgment and was material to the cause of action.
Our charter authorizes us to obligate ourselves and our bylaws obligate us, to the fullest extent permitted by Maryland law
in effect from time to time, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to
indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to:
●
any present or former director or officer who is made or threatened to be made a party to or witness in the proceeding
by reason of his or her service in that capacity; or
●
any individual who, while a director or officer of our company and at our request, serves or has served as a director,
officer, partner, manager, member or trustee of another corporation, REIT, partnership, limited liability company,
joint venture, trust, employee benefit plan or any other enterprise and who is made or threatened to be made a party
to or witness in the proceeding by reason of his or her service in that capacity.
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Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our
stockholders to effect changes to our management.
Our charter provides that, subject to the rights of holders of any series of preferred stock, a director may be removed only
with cause upon the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast generally
in the election of directors. Vacancies may be filled only by a vote of the majority of the remaining directors in office, even if
less than a quorum. These requirements make it more difficult to change our management by removing and replacing directors
and may prevent a change in control of our company that is in the best interests of our stockholders.
Ownership limitations may restrict change in control or business combination opportunities in which our stockholders
might receive a premium for their shares.
In order for us to qualify as a REIT under the Code, shares of our stock must be owned by 100 or more persons during at
least 335 days of a taxable year of 12 months (other than the first year for which an election to be a REIT has been made) or
during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of our
stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year (other than the first year for which an election to be a REIT has been made). In order for
us to qualify as a REIT under the Code, the relevant sections of our charter provide that, subject to certain exceptions, no
person or entity may own, or be deemed to own, by virtue of the applicable constructive ownership provisions of the Code,
more than 9.8% (in value or number of shares, whichever is more restrictive) of the aggregate of our outstanding shares of
stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of our outstanding common stock or any
class or series of our outstanding preferred stock, including our 9.00% Series A Cumulative Redeemable Preferred Stock (the
“Series A Preferred Stock”). These ownership limits and other restrictions could have the effect of discouraging a takeover or
other transaction in which holders of our common stock might receive a premium for their shares over the then prevailing
market price or which holders might believe to be otherwise in their best interests.
We plan to continue to operate our business so that we are not required to register as an investment company under the
Investment Company Act.
We engage primarily in the business of investing in real estate and we have not and do not intend to register as an
investment company under the Investment Company Act. If our primary business were to change in a manner that would
require us register as an investment company under the Investment Company Act, we would have to comply with substantial
regulation under the Investment Company Act which could restrict the manner in which we operate and finance our business
and could materially and adversely affect our business operations and results.
Risks Related to Our Securities
The market prices and trading volumes of our common stock and Series A Preferred Stock have been and may continue to
be volatile.
The market prices for our common stock and Series A Preferred Stock have been, and may continue to be, volatile. In
addition, the trading volume in our common stock and Series A Preferred Stock has fluctuated and may continue to fluctuate,
resulting in significant price variations.
Some of the factors that could negatively affect the share price or result in fluctuations in the price or trading volume of
our common stock and preferred stock include:
●
our actual or projected operating results, financial condition, cash flows and liquidity or changes in business strategy
or prospects;
●
changes in government policies, regulations or laws;
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●
the performance of our current properties and additional properties that we acquire;
●
our ability to make acquisitions on preferable terms or at all;
●
equity issuances by us, including issuances by us of shares of common stock under our ATM Program, or share
resales by our stockholders, or the perception that such issuances or resales may occur;
●
actual or anticipated accounting problems;
●
publication of research reports about us, the real estate industry or the cannabis industry;
●
changes in market valuations of similar companies;
●
adverse market reaction to any increased indebtedness we may incur in the future;
●
interest rate changes;
●
additions to or departures of our senior management team;
●
speculation in the press or investment community or negative press in general;
●
our failure to meet, or the lowering of, our earnings estimates or those of any securities analysts;
●
failure to maintain our qualification as a REIT;
●
refusal of securities clearing firms to accept deposits of our securities;
●
a delisting of our common stock or preferred stock from the New York Stock Exchange (“NYSE”);
●
the realization of any of the other risk factors presented in this report;
●
actions by institutional stockholders;
●
price and volume fluctuations in the stock market generally; and
●
market and economic conditions generally, including the current state of the credit and capital markets and the
market and economic conditions.
Market factors unrelated to our performance could also negatively impact the market price of our common stock and
preferred stock. One of the factors that investors may consider in deciding whether to buy or sell our common stock or
Series A Preferred Stock is our distribution rate as a percentage of our stock price relative to market interest rates. If market
interest rates increase, prospective investors may demand a higher distribution rate or seek alternative investments paying
higher dividends or interest. As a result, interest rate fluctuations and conditions in capital markets can affect the market value
of our common stock or Series A Preferred Stock.
Common stock and preferred stock eligible for future sale may have material and adverse effects on our share price.
Subject to applicable law, our board of directors, without stockholder approval, may authorize us to issue additional
shares of our common stock or to raise capital through the issuance of preferred stock (including equity or debt securities
convertible into preferred stock), options, warrants and other rights, on terms and for consideration as our board of directors in
its sole discretion may determine. Any such issuance could result in dilution of the equity of our
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stockholders. Sales of substantial amounts of shares of our common stock in the public market, or the perception that such
sales might occur, could adversely affect the market price of our common stock.
Our charter also authorizes our board of directors, without stockholder approval, to designate and issue one or more
classes or series of preferred stock (including equity or debt securities convertible into preferred stock) and to set or change
the voting, conversion or other rights, preferences, restrictions, limitations as to dividends or other distributions and
qualifications or terms or conditions of redemption of each class of shares so issued. If any preferred stock is publicly offered,
the terms and conditions of such preferred stock (including any equity or debt securities convertible into preferred stock) will
be set forth in a registration statement registering the issuance of such preferred stock or equity or debt securities convertible
into preferred stock. Because our board of directors has the power to establish the preferences and rights of each class or series
of preferred stock, it may afford the holders of any series or class of preferred stock preferences, powers, and rights senior to
the rights of holders of common stock or other preferred stock. If we ever create and issue additional preferred stock or equity
or debt securities convertible into preferred stock with a distribution preference over common stock or preferred stock,
payment of any distribution preferences of new outstanding preferred stock would reduce the amount of funds available for
the payment of distributions on the common stock and junior preferred stock. Further, holders of preferred stock are normally
entitled to receive a preference payment if we liquidate, dissolve, or wind up before any payment is made to the common
stockholders, likely reducing the amount common stockholders would otherwise receive upon such an occurrence. In addition,
under certain circumstances, the issuance of additional preferred stock may delay, prevent, render more difficult or tend to
discourage a merger, tender offer, or proxy contest, the assumption of control by a holder of a large block of our securities, or
the removal of incumbent management.
Furthermore, we intend to file an automatic shelf registration statement, which may permit us, from time to time, to offer
and sell common stock, preferred stock, warrants and other securities to the extent necessary or advisable to meet our liquidity
needs.
Additionally, from time to time we also may issue shares of our common stock or operating partnership units of our
Operating Partnership in connection with property acquisitions. We may grant additional demand or piggyback registration
rights in connection with these issuances. Sales of substantial amounts of our common stock or operating partnership units of
our Operating Partnership, or the perception that these sales could occur, may adversely affect the prevailing market price of
our common stock or may adversely affect the terms upon which we may be able to obtain additional capital through the sale
of equity securities.
As of December 31, 2024, 28,331,833 shares of our common stock were issued and outstanding, and we had reserved an
additional 457,654 shares of common stock for future issuance under our 2016 Omnibus Incentive Plan (the “2016 Plan”). In
addition, as of December 31, 2024, we had $490.0 million in shares of common stock and/or Series A Preferred Stock
available for future issuance under the ATM Program. The existence of operating partnership units, shares of Series A
Preferred Stock, shares of our common stock reserved for issuance under our 2016 Plan and shares available for future
issuance under the ATM Program may adversely affect the terms upon which we may be able to obtain additional capital
through the sale of equity securities.
We cannot assure you of our ability to make distributions in the future. We may be unable to pay or maintain cash
dividends, and may borrow money, sell assets or use offering proceeds to make distributions to our stockholders, if we are
unable to make distributions from cash flows from operations.
U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income,
determined without regard to the deduction for dividends paid and excluding net capital gain (which does not equal net
income as calculated in accordance with U.S. generally accepted accounting principles (“GAAP”)), and that it pay U.S.
federal income tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We
may not continue our current level of distributions to stockholders. Our board of directors will determine future distributions
based on a number of factors, including cash available for distribution, economic conditions, operating results, our financial
condition, especially in relation to our anticipated future capital needs, then current expansion plans, the distribution
requirements for REITs, and other factors our board deems relevant. In
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addition, we may borrow money, sell assets or use offering proceeds to make distributions to our stockholders, if we are
unable to make distributions from cash flows from operations.
Our charter permits us to pay distributions from any source and, as a result, the amount of distributions paid at any time
may not reflect the performance of our properties or as cash flow from operations.
Our organizational documents permit us to make distributions from any source. To the extent that our cash available for
distribution is insufficient to cover our distributions, we expect to use our cash on hand, the proceeds from the issuance of
securities in the future, the proceeds from borrowings or other sources to pay distributions. It is possible that any distributions
declared will be paid from our cash on hand or future issuances of shares of our common stock or preferred stock, which
would constitute a return of capital to our stockholders. If we fund distributions from borrowings, sales of properties, future
issuances of securities or cash on hand, we will have fewer funds available for the acquisition of additional properties
resulting in potentially fewer investments, less diversification of our portfolio and a reduced overall return to our stockholders.
In addition, the value of our shares of common stock and preferred stock may be diluted because funds that would otherwise
be available to make investments would be diverted to fund distributions.
The market price of our common stock and Series A Preferred Stock could be materially and adversely affected by our level
of cash distributions.
The market value of our common stock and Series A Preferred Stock is based primarily upon the market’s perception of
our growth potential and our current and potential future cash distributions, whether from operations, sales or re-financings,
and is secondarily based upon the real estate market value of our underlying assets. For that reason, our stock may trade at
prices that are higher or lower than our net asset value per share. To the extent we retain operating cash flow for investment
purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets,
may not correspondingly increase the market price of our stock. Our failure to meet the market’s expectations with regard to
future earnings and cash distributions likely would materially and adversely affect the market price of our common stock and
Series A Preferred Stock.
We may enter into forward sale transactions that subject us to certain risks.
We may enter into forward sale agreements, including under our ATM Program, that subject us to certain risks. The future
issuance of any shares of common stock upon settlement of any forward sale agreement will result in dilution to our earnings
per share, return on equity, and dividends per share. The purchase of common stock in connection with the unwinding of the
forward purchaser’s hedge position could cause our stock price to increase (or prevent a decrease) over such time, thereby
increasing the amount of cash we would owe (or decreasing the amount of cash owed to us) upon a cash settlement. In
addition, pursuant to each forward sale agreement, the relevant forward purchaser will have the right to accelerate the
settlement of the forward sale agreement in connection with certain specified events. In such cases, we could be required to
settle that particular forward sale agreement and issue common stock irrespective of our capital needs.
Under Section 1032 of the Code, generally, no gains and losses are recognized by a corporation in dealing in its own
shares, including pursuant to a “securities futures contract” as defined in the Code. However, because it is not clear whether a
forward sale agreement qualifies as a “securities futures contract,” the U.S. federal income tax treatment of any cash
settlement payment is uncertain. In the event that we recognize a significant gain from a forward sale agreement, we may not
be able to satisfy the gross income requirements applicable to REITs under the Code, may not be able to rely upon certain
relief provisions and could lose our REIT status under the Code. Even if relief provisions apply, we would be subject to a tax
based on the amount of non-qualifying income.
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Risks Related to Our Taxation as a REIT
Our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and
local taxes, which would reduce the amount of cash available for distribution to our stockholders and have significant
adverse consequences on the market price of our common stock and existing preferred stock.
We have made an election to be taxed as a REIT under Sections 856 through 860 of the Code commencing with our
taxable year ended December 31, 2017. We believe that we have been organized and operated in such a manner as to qualify
for taxation as a REIT under the Code for such taxable year and all subsequent taxable years to date, and intend to continue to
operate in such a manner in the future. We have not requested and do not intend to request a ruling from the Internal Revenue
Service (the “Service”) that we qualify as a REIT, and the statements in this report are not binding on the Service or any court.
Qualification as a REIT involves the application of highly technical and complex Code provisions and regulations
promulgated by the U.S. Treasury Department thereunder (“Treasury Regulations”) for which there are limited judicial and
administrative interpretations. Accordingly, we cannot provide assurance that we will qualify or remain qualified as a REIT.
To qualify as a REIT, we must meet, on an ongoing basis, various tests regarding the nature and diversification of our
assets and our income, the ownership of our outstanding stock, and the amount of our distributions to stockholders. Our ability
to satisfy these asset tests depends upon the characterization and fair market values of our assets, some of which are not
susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the
REIT income and quarterly asset requirements also depends upon our ability to manage successfully the composition of our
income and assets on an ongoing basis. Moreover, new legislation, court decisions or administrative guidance, in each case
possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT. Thus, while we intend to
operate in a manner to qualify as a REIT, in view of the highly complex nature of the rules governing REITs, the ongoing
importance of factual determinations, and the possibility of future changes in our circumstances, we cannot provide assurance
that we will so qualify for any particular year. These considerations also might restrict the types of income we can realize, or
assets that we can acquire in the future.
If we fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we would
be required to pay U.S. federal income tax, including any applicable alternative minimum tax (for taxable years beginning
before December 31, 2017), on our taxable income at regular corporate rates and possibly increased state and local taxes. We
will not be able to deduct distributions to our stockholders in any year in which we fail to qualify, nor will we be required to
make distributions to our stockholders. In such a case, we might need to borrow money, sell assets, or reduce or even cease
making distributions in order to pay our taxes. Our payment of income tax would reduce significantly the amount of cash
available for distribution to our stockholders. If we fail to qualify as a REIT, all distributions to stockholders, to the extent of
current and accumulated earnings and profits, will be taxable to the stockholders as dividend income (which may be subject to
tax at preferential rates) and corporate distributions may be eligible for the dividends received deduction if they satisfy the
relevant provisions of the Code. Furthermore, if we fail to qualify as a REIT, we no longer would be required to distribute
substantially all of our net taxable income to our stockholders. In addition, unless we were eligible for certain statutory relief
provisions, we could not re-elect to qualify as a REIT until the fifth calendar year following the year in which we failed to
qualify. We might not be entitled to the statutory relief described in this paragraph in all circumstances.
The REIT distribution requirements could adversely affect our ability to execute our business plan, require us to borrow
funds during unfavorable market conditions or subject us to tax, which would reduce the cash available for distribution to
our stockholders.
To qualify as a REIT, we must distribute to our stockholders, on an annual basis, at least 90% of our REIT taxable
income, determined without regard to the deduction for dividends paid and excluding net capital gain. In addition, we will be
subject to U.S. federal income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable
income (including net capital gain) and will be subject to a 4% nondeductible excise tax on the amount by which our
distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. We intend to
distribute our net income to our stockholders in a manner intended to satisfy the REIT 90% distribution requirement and to
avoid U.S. federal income tax and the 4% nondeductible excise tax. However, we can
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provide no assurances that we will have sufficient cash or other liquid assets to meet these requirements. Difficulties in
meeting the distribution requirements might arise due to competing demands for available funds or timing differences between
tax reporting and cash receipts. In addition, if the Service were to disallow certain of our deductions, such as employee
salaries, depreciation or interest expense, by alleging that we, through our rental agreements with our state-licensed medical
cannabis tenants, are primarily or vicariously liable for “trafficking” a Schedule I substance (cannabis) under Section 280E of
the Code or otherwise, we would be unable to meet the distribution requirements and would fail to qualify as a REIT.
Likewise, if any governmental entity were to impose fines on us for our business involvement in state-licensed cannabis, such
fines would not be deductible and the inability to deduct such fines could also cause us to be unable to satisfy the distribution
requirement.
We may also generate less cash flow than taxable income in a particular year. In such event, we may be required to use
cash reserves, incur debt or liquidate assets at rates or times that we regard as unfavorable or, to the extent possible, make a
taxable distribution of our stock in order to satisfy the REIT 90% distribution requirement and to avoid U.S. federal income
tax and the 4% nondeductible excise tax in that year. Under certain circumstances, we may be able to rectify a failure to meet
the distribution requirement for a year by paying “deficiency dividends” to stockholders in a later year, which may be included
in our deduction for dividends paid for the earlier year. Thus, we may be able to avoid being taxed on amounts distributed as
deficiency dividends; however, we will be required to pay penalties and interest based upon the amount of any deduction
taken for deficiency dividends. If we do not have sufficient cash to distribute, we may incur U.S. federal income tax, U.S.
federal excise tax and/or our REIT status may be jeopardized.
If we are deemed to be subject to Section 280E of the Code because of the business activities of our tenants, the resulting
disallowance of tax deductions could cause us to incur U.S. federal income tax and jeopardize our REIT status.
Section 280E of the Code provides that, with respect to any taxpayer, no deduction or credit is allowed for expenses
incurred during a taxable year “in carrying on any trade or business if such trade or business (or the activities which comprise
such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the CSA)
which is prohibited by federal law or the law of any State in which such trade or business is conducted.” Because cannabis is a
Schedule I controlled substance under the CSA, Section 280E by its terms applies to the purchase and sale of cannabis
products. Although we will not be engaged in the purchase, sale, growth, cultivation, harvesting, or processing of cannabis
products, we will lease our properties to tenants who will engage in such activities, and therefore our tenants will likely be
subject to Section 280E. If the Service were to take the position that, through our rental agreements with our state-licensed
cannabis tenants, we are primarily or vicariously liable under federal law for “trafficking” a Schedule 1 substance (cannabis)
under section 280E of the Code or for any other violations of the CSA, the Service may seek to apply the provisions of
Section 280E to our company and disallow certain tax deductions, including for employee salaries, depreciation or interest
expense. If such tax deductions are disallowed, we would be unable to meet the distribution requirements applicable to REITs
under the Code, which could cause us to incur U.S. federal income tax and fail to qualify as a REIT. Because we are not
engaged in the purchase and/or sale of a controlled substance, we do not believe that we will be subject to the disallowance
provisions of Section 280E, and neither we nor our tax advisors are aware of any tax court cases or guidance from the Service
in which a taxpayer not engaged in the purchase or sale of a controlled substance was disallowed deductions under
Section 280E. However, there is no assurance that the Service will not take such a position either currently or in the future.
Complying with REIT requirements may cause us to forego otherwise attractive business opportunities or liquidate
otherwise attractive investments.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually. In addition, we must ensure
that, at the end of each calendar quarter, at least 75% of the value of our total assets consists of cash, cash items, government
securities and qualified REIT real estate assets, including certain mortgage loans, certain kinds of mortgage-backed securities
and certain securities issued by other REITs. The remainder of our investment in securities (other than government securities,
securities of corporations that are treated as taxable REIT subsidiaries (“TRSs”), and qualified REIT real estate assets)
generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total
value of the outstanding securities of any one issuer.
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In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real
estate assets) can consist of the securities of any one issuer, no more than 20% of the value of our total securities can be
represented by securities of one or more TRSs, and the aggregate value of debt instruments issued by public REITs held by us
that are not otherwise secured by real property may not exceed 25% of the value of our total assets. If we fail to comply with
these asset requirements at the end of any calendar quarter, we generally must correct the failure within 30 days after the end
of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering
adverse tax consequences.
To meet these tests, we may be required to take or forgo taking actions that we would otherwise consider advantageous.
For instance, in order to satisfy the gross income or asset tests applicable to REITs under the Code, we may be required to
forego investments that we otherwise would make. Furthermore, we may be required to liquidate from our portfolio otherwise
attractive investments. In addition, we may be required to make distributions to stockholders at disadvantageous times or
when we do not have funds readily available for distribution. These actions could have the effect of reducing our income and
amounts available for distribution to our stockholders. Thus, compliance with the REIT requirements may hinder our
investment performance.
The tax on prohibited transactions could limit our ability to engage in certain transactions or subject us to a 100% penalty
tax.
We are subject to a 100% tax on any income from a prohibited transaction. “Prohibited transactions” generally include
sales or other dispositions of property (other than property treated as foreclosure property under the Code) that is held as
inventory or primarily for sale to customers in the ordinary course of a trade or business by a REIT, either directly or
indirectly through certain pass-through subsidiaries. Although we do not intend to hold a significant amount of assets as
inventory or primarily for sale to customers in the ordinary course of our business, the characterization of an asset sale as a
prohibited transaction depends on the particular facts and circumstances. The Code provides a safe harbor that, if met, allows a
REIT to avoid being treated as engaged in a prohibited transaction. It is likely that we may sell certain properties that have not
met all of the requirements of such safe harbor if we believe the transaction would not be a prohibited transaction based on a
facts and circumstances analysis. If the Service were to successfully argue that such a sale was in fact a prohibited transaction,
we would be subject to a 100% penalty tax with respect to such sale.
The ability of our board of directors to revoke our REIT election without stockholder approval may cause adverse
consequences to our stockholders.
Our charter provides that the board of directors may revoke or otherwise terminate our REIT election, without the
approval of our stockholders, if the board of directors determines that it is no longer in our best interest to attempt to, or
continue to, qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our
net taxable income and we generally would no longer be required to distribute any of our net taxable income to our
stockholders, which may have adverse consequences on our total return to our stockholders.
Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations, which
could adversely affect the value of our common stock.
The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are
individuals, trusts and estates is 20%. Dividends (other than capital gain dividends) payable by REITs, however, generally are
not eligible for the reduced rates. Although the reduced U.S. federal income tax rate applicable to dividend income from
regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable
rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive
investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay
dividends, which could adversely affect the value of the shares of our common stock.
Non-corporate stockholders, including individuals, generally may deduct 20% of dividends from a REIT, other than
capital gain dividends and dividends treated as qualified dividend income, for taxable years beginning after December 31,
2017 and before January 1, 2026. If we fail to qualify as a REIT, such stockholders may not claim this deduction with respect
to dividends paid by us.
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Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax
liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we
enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to
be made to acquire or carry real estate assets, if properly identified under applicable Treasury Regulations, does not constitute
“gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging
transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of both of the
gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement
those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs would be subject to tax
on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In
addition, losses in a TRS generally will not provide any tax benefit, except for being carried forward against future taxable
income of such TRS, provided, however, losses in a TRS arising in taxable years beginning after December 31, 2017 may only
be deducted against 80% of future taxable income in the TRS.
Re-characterization of sale-leaseback transactions may cause us to lose our REIT status.
We purchase many properties and lease them back to the sellers of such properties. While we will use our best efforts to
structure any such sale-leaseback transaction so that the lease will be characterized as a “true lease,” thereby allowing us to be
treated as the owner of the property for federal income tax purposes, the Service could challenge such characterization. In the
event that any sale-leaseback transaction is challenged and re-characterized as a financing transaction or loan for federal
income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-
leaseback transaction were so re-characterized, we might fail to satisfy the REIT qualification “asset tests” or the “income
tests” and, consequently, lose our REIT status effective with the year of re-characterization. Alternatively, the amount of our
REIT taxable income could be recalculated which might also cause us to fail to meet the distribution requirement for a
taxable year.
Non-U.S. stockholders will generally be subject to withholding tax with respect to our ordinary dividends.
Non-U.S. stockholders generally will be subject to U.S. federal withholding tax on ordinary dividends received from us at
a 30% rate, subject to reduction under an applicable treaty or a statutory exemption under the Code.
Legislative, regulatory or administrative changes could adversely affect us or our stockholders.
At any time, the U.S. federal income tax laws or Treasury Regulations governing REITs or the administrative
interpretations of those laws or regulations may be changed, possibly with retroactive effect, and may adversely affect us and
our stockholders. We cannot predict if or when any new U.S. federal income tax law, regulation or administrative
interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will
be adopted, promulgated or become effective or whether any such law, regulation or interpretation may take effect
retroactively.
It remains unclear what impact the rescission of the Cole Memo may have on our ability to qualify as a REIT. If
rescission of the Cole Memo is followed by strict enforcement of federal prohibitions regarding cannabis, the Service could
seek to apply the provisions of Section 280E of the Code to our company. Section 280E of the Code provides that, with
respect to any taxpayer, no deduction or credit is allowed for expenses incurred during a taxable year “in carrying on any trade
or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in
controlled substances (within the meaning of Schedule I and II of the CSA) which is prohibited by federal law or the law of
any State in which such trade or business is conducted.” Because cannabis is a Schedule I controlled substance under the
CSA, Section 280E of the Code by its terms applies to the purchase and sale of cannabis products. If the Service were to take
the position that, through our rental agreements with our state-licensed cannabis tenants, we are primarily or vicariously liable
under federal law for “trafficking” a Schedule I substance (cannabis) under Section 280E of the Code or for any other
violations of the CSA, the Service may apply the provisions of Section 280E of the Code to our company and disallow certain
tax deductions, including for employee salaries, depreciation or interest expense. If
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such tax deductions are disallowed, we would be unable to meet the distribution requirements applicable to REITs under the
Code, which could cause us to incur U.S. federal income tax and fail to qualify as a REIT.
In addition, tax legislation originally introduced as the Tax Cuts and Jobs Act and signed into law in December 2017 (the
“TCJA”) makes numerous changes to the tax rules that do not affect the REIT qualification rules directly, but may otherwise
affect us or our stockholders. Among the changes made by the TCJA are permanently reducing the generally applicable
corporate tax rate, generally reducing the tax rate applicable to individuals and other non-corporate taxpayers for tax years
beginning after December 31, 2017 and before January 1, 2026, eliminating or modifying certain previously allowed
deductions (including substantially limiting interest deductibility and, for individuals, the deduction for non-business state and
local taxes), and, for taxable years beginning after December 31, 2017 and before January 1, 2026, providing for preferential
rates of taxation through a deduction of up to 20% (subject to certain limitations) on most ordinary REIT dividends and
certain trade or business income of non-corporate taxpayers. The TCJA also imposes new limitations on the deduction of net
operating losses, which may result in us having to make additional taxable distributions to our stockholders in order to comply
with REIT distribution requirements or avoid taxes on retained income and gains. The effect of the significant changes made
by the TCJA is highly uncertain, and administrative guidance will be required in order to fully evaluate the effect of many
provisions. The effect of any technical corrections with respect to the TCJA could have an adverse effect on us or our
stockholders.
Any repurchase of our Notes due 2026 at a discount may result in cancellation of debt income.
Any repurchase of our outstanding Notes due 2026 at a discount may result in us recognizing cancellation of debt
(“COD”) income for U.S. federal income tax purposes generally in an amount equal to the discount. COD income must
generally be included in our REIT taxable income. While a REIT’s COD income is not taken into account in determining
whether a REIT satisfies the tax requirements mandating that certain percentages of a REIT’s gross income be from specified
sources and the tax rules also provide an exception from the distribution requirement for a REIT’s “excess noncash income”
(including COD income), the amount of excess noncash income is determined by a formula and may be significantly less than
the amount of the REIT’s actual noncash income (including COD income). Moreover, even when a REIT’s distribution
requirement is reduced by the exclusion of excess noncash income, the REIT is taxable at regular corporate income tax rates
on its undistributed REIT taxable income and there may be other tax implications that could adversely affect our operations or
financial condition.
General Risk Factors
We are dependent on our key personnel for our success.
We depend upon the efforts, experience, diligence, skill and network of business contacts of our senior management team,
and our success will depend on their continued service. The departure of any of our executive officers or key personnel could
have a material adverse effect on our business. If any of our key personnel were to cease their employment, our operating
results could suffer. Further, we do not intend to maintain key person life insurance that would provide us with proceeds in the
event of death or disability of any of our key personnel.
We believe our future success depends upon our senior management team’s ability to hire and retain highly skilled
managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure you that we
will be successful in attracting and retaining such skilled personnel. If we lose or are unable to obtain the services of key
personnel, our ability to implement our investment strategies could be delayed or hindered, and the value of our common
stock may decline.
Furthermore, we may retain independent contractors to provide various services for us, including administrative services,
transfer agent services and professional services. Such contractors have no fiduciary duty to us and may not perform as
expected or desired.
The occurrence of cyber incidents or cyberattacks could disrupt our operations, result in the loss of confidential
information and/or damage our business relationships and reputation.
We rely on technology to run our business, and as such we are subject to risk from cyber incidents, including cyberattacks
attempting to gain unauthorized access to our systems to disrupt operations, corrupt data or steal
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confidential information, and other electronic security breaches. While we have implemented measures to help mitigate these
threats, such measures cannot guarantee that we will be successful in preventing a cyber incident. The occurrence of a cyber
incident or cyberattack could disrupt our operations, compromise the confidential information of our employees or tenants,
and/or damage our business relationships and reputation.
Contingent or unknown liabilities could materially and adversely affect our business, financial condition, liquidity and
results of operations.
We acquired our properties and may in the future acquire properties, subject to liabilities and without any recourse, or
with only limited recourse, with respect to unknown liabilities. As a result, if a claim were asserted against us based on
ownership of any of these properties, we may have to pay substantial amounts to defend or settle the claim. If the magnitude
of such unknown liabilities is high, individually or in the aggregate, our business, financial condition, liquidity and results of
operations would be materially and adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 1C. CYBERSECURITY
Risk Management and Strategy
Our corporate information technology, communication networks, enterprise applications, accounting and financial
reporting platforms, and related systems are necessary for the operation of our business. We use these systems, among others,
to manage our tenant and vendor relationships, for internal communications, for accounting and record-keeping functions, and
for many other key aspects of our business. Our business operations rely on the secure collection, storage, transmission, and
other processing of proprietary, confidential, and sensitive data.
We have implemented and maintain various information security processes designed to identify, assess and manage
material risks from cybersecurity threats to our critical computer networks, third-party hosted services, communications
systems, hardware and software, and our critical data, including confidential information that is proprietary, strategic or
competitive in nature, and tenant data (“Information Systems and Data”).
We rely on a multidisciplinary team, as described further below, to identify, assess, and manage cybersecurity threats and
risks. We identify and assess risks from cybersecurity threats by monitoring and evaluating our threat environment and our
risk profile using various methods including, for example, using manual and automated tools, analyzing reports of threats and
threat actors, conducting scans of the threat environment, evaluating our industry’s risk profile, and conducting threat and
vulnerability assessments.
Depending on the environment, we implement and maintain various technical, physical, and organizational measures,
processes, standards, and/or policies designed to manage and mitigate material risks from cybersecurity threats to our
Information Systems and Data, including risk assessments, incident detection and response, vulnerability management,
disaster recovery and business continuity plans, internal controls within our accounting and financial reporting functions,
encryption of data, network security controls, access controls, physical security, systems monitoring, employee training, and
penetration testing.
To operate our business, we utilize certain third-party service providers to perform a variety of functions. We seek to
engage reliable, reputable service providers that maintain cybersecurity programs. Depending on the nature of the services
provided, the sensitivity and quantity of information processed, and the identity of the service provider, our vendor
management process may include reviewing the cybersecurity practices of such provider, conducting security assessments,
and conducting periodic reassessments during their engagement.
We are not aware of any risks from cybersecurity threats, including as a result of any cybersecurity incidents, which have
materially affected or are reasonably likely to materially affect us, including our business strategy, results of
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operations, or financial condition. Refer to “Item 1A. Risk factors” in this annual report on Form 10-K, including “The
occurrence of cyber incidents or cyberattacks could disrupt our operations, result in the loss of confidential information and/or
damage our business relationships and reputation,” for additional discussion about cybersecurity-related risks.
Governance
Our board of directors holds oversight responsibility over our strategy and risk management, including material risks
related to cybersecurity threats. This oversight is executed directly by the Board of Directors and through its committees. The
audit committee of the board of directors oversees the management of systemic risks, including cybersecurity, in accordance
with its charter. The audit committee engages in regular discussions with management regarding our significant financial risk
exposures and the measures implemented to monitor and control these risks, including those that may result from material
cybersecurity threats.
Our management, represented by our Chief Operating Officer, Catherine Hastings, leads our cybersecurity risk
assessment and management processes and oversees their implementation and maintenance. Ms. Hastings is an experienced
risk management professional, having previously served as our Chief Financial Officer and Treasurer from 2017 until March
2023, and as Vice President, internal audit of BioMed Realty Trust, Inc. (formerly NYSE: BMR) until December 2016, having
joined BioMed Realty in 2009. Ms. Hastings currently oversees key functions for our development, asset management, human
resources and information technology functions, including cybersecurity risk oversight and the development and enhancement
of internal controls designed to prevent, detect, address, and mitigate the risk of cyber incidents. Since 2016, we have retained
a third-party information technology specialist to develop and maintain our information technology infrastructure and
network, who has extensive experience in the development of business processes, system infrastructure design and
cybersecurity for large-scale, institutional real estate companies.
Management is responsible for helping to integrate cybersecurity risk considerations into our overall risk management
strategy, and communicating key priorities to relevant personnel. Management is responsible for approving cybersecurity
processes, reviewing cybersecurity assessments and other cybersecurity-related matters, and responding to cybersecurity
incidents, including reporting to the audit committee for certain cybersecurity incidents. Our management team also evaluates
the potential impact of cybersecurity incidents to determine materiality. This evaluation considers factors such as the nature
and scope of the incident, and its effects on operations, assets, or reputation. The audit committee holds quarterly meetings
and receives periodic reports from management, including our Chief Operating Officer and third-party information technology
expert, concerning our significant cybersecurity threats and risks and the processes we have implemented to address them.
ITEM 2. PROPERTIES
Information pertaining to our properties can be found under Item 1 and Schedule III.
ITEM 3. LEGAL PROCEEDINGS
For a description of our legal proceedings, see Note 11 “Commitments and Contingencies — Litigation” to our
consolidated financial statements, which is hereby incorporated by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NYSE under the symbol “IIPR.” As of February 14, 2025, there were 32 holders of
record of our common shares. This number excludes our common shares owned by stockholders holding under nominee
security position listings.
We have elected to be treated as a REIT for U.S. federal income tax purposes. U.S. federal income tax law generally
requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction
for dividends paid and excluding net capital gain (which does not equal net income as calculated in accordance with GAAP),
and that it pay U.S. federal income tax at regular corporate rates to the extent that it annually distributes less than 100% of its
taxable income.
To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income tax, we intend to
make quarterly distributions of all or substantially all of our taxable income to holders of our common stock out of assets
legally available therefor. However, we cannot assure you that distributions will be made or sustained. Any distributions we
make will be at the direction of our board of directors and will depend upon a number of factors, including our actual results
of operations, economic conditions, maintenance of REIT qualification and the applicable provisions of the MGCL and such
other factors as our board may determine in its sole discretion.
Our organizational documents permit us to make distributions from any source. If our cash available for distribution is
insufficient to cover our distributions, we expect to use the proceeds from the issuance of securities, the proceeds from
borrowings or other sources to pay distributions. During our initial years of operation, we expect that a portion of our
distributions declared may be paid from offering proceeds, which would constitute a return of capital to our stockholders.
We anticipate that our distributions generally will be taxable as ordinary income to our stockholders, although a portion of
the distributions may be designated by us as qualified dividend income or capital gain or may constitute a return of capital. We
will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and
their characterization as ordinary income, return of capital, qualified dividend income or capital gain.
Information about our equity compensation plans and other related stockholder matters is incorporated by reference in
Item 12 of Part III of this Annual Report on Form 10-K.
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Stock Performance Graph
The following graph shows a comparison from January 1, 2020 to December 31, 2024 of cumulative total stockholder
return, calculated on a dividends reinvested basis, for Innovative Industrial Properties, Inc., the S&P 500 Stock Index, or the
S&P 500, and the MSCI US REIT Index, which includes all tax-qualified equity REITs listed in the United States. Note that
historic stock price performance is not necessarily indicative of future stock price performance. The stock performance graph
should not be deemed filed or incorporated by reference into any other filing made by us under the Securities Act or the
Exchange Act, except to the extent that we specifically incorporate the stock performance graph by reference in another filing.
Source: SNL Financial
Recent Sales of Unregistered Securities
During the year ended December 31, 2024, we issued 28,408 shares of our common stock upon exchange by holders of
$4.3 million of outstanding principal amount of our Exchangeable Senior Notes. Such shares of our common stock were
issued in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended.
For information regarding our Exchangeable Senior Notes, see Note 7 “Debt” in the notes to our consolidated financial
statements.
ITEM 6. [RESERVED]
Not applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this report. We make statements in this section that are forward-looking statements within the meaning
of the federal securities laws. For a complete discussion of forward-looking statements, see the section above entitled
“Cautionary Statement Regarding Forward-Looking Statements.” Certain risk factors may cause our actual results,
performance or achievements to differ materially from those expressed or implied by the following discussion. For a
discussion of such risk factors, see Item 1A, “Risk Factors.”
Overview
We are an internally-managed REIT focused on the acquisition, ownership and management of specialized industrial
properties in the United States. Our properties are leased to experienced, state-licensed operators for their regulated cannabis
facilities. We have leased and expect to continue to lease our properties on a triple-net lease basis, where the tenant is
generally responsible for all aspects of and costs related to the property and its operation during the lease term, including
structural repairs, maintenance, real estate taxes and insurance.
We were incorporated in Maryland on June 15, 2016. We conduct our business through a traditional umbrella partnership
real estate investment trust, or UPREIT structure, in which our properties are owned by our Operating Partnership, directly or
through subsidiaries. We are the sole general partner of our Operating Partnership and own, directly or through subsidiaries,
100% of the limited partnership interests in our Operating Partnership. As of December 31, 2024, we had 22 full-time
employees.
As of December 31, 2024, we owned 109 properties comprising 9.0 million square feet (including 666,000 rentable
square feet under development/redevelopment) in 19 states. As of December 31, 2024, we had invested $2.4 billion in the
aggregate (consisting of purchase price and funding of draws for improvements submitted by tenants, if any, but excluding
transaction costs) and had committed an additional $38.3 million to fund draws to certain tenants and vendors for
improvements at our properties. Of the $38.3 million committed to fund draws to certain tenants and vendors for
improvements at our properties, $11.4 million was incurred but not funded as of December 31, 2024.
Of these properties, we include 106 properties in our operating portfolio, which were 98.3% leased as of December 31,
2024, with a weighted-average remaining lease term of 13.7 years.
We do not include in our operating portfolio the following properties (all of which were under
development/redevelopment as of December 31, 2024, and together are expected to comprise 491,000 rentable square feet
upon completion of development/redevelopment):
●
63795 19th Avenue in Palm Springs, California (pre-leased);
●
Inland Center Drive in San Bernardino, California; and
●
Leah Avenue in San Marcos, Texas.
Factors Impacting Our Operating Results
Our results of operations are affected by a number of factors and depend on the rental revenue we receive from the
properties that we acquire, the timing of lease expirations, general market conditions, the regulatory environment in the
cannabis industry, and the competitive environment for real estate assets that support the regulated cannabis industry.
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Rental Revenues
We receive income primarily from rental revenue generated by the properties that we acquire. The amount of rental
revenue depends upon a number of factors, including:
●
our ability to enter into leases with increasing or market value rents for the properties that we acquire; and
●
rent collection, which primarily relates to each of our current and future tenant’s financial condition and ability to
make rent payments to us on time.
The properties that we acquire consist of primarily real estate assets that support the regulated cannabis industry. Most
states where we own properties issue licenses for cannabis operations for a limited period. If one or more of our tenants are
unable to renew or otherwise maintain their licenses or other state and local authorizations necessary to continue its cannabis
operations, such tenants may default on their lease payments to us. Current unfavorable market dynamics in the regulated
cannabis industry have adversely affected our ability to re-lease properties upon tenant defaults at the rental rates we currently
receive and, in some cases, for prolonged periods. See the section entitled “Business – Tenant Concentration” for a discussion
of our recent tenant defaults. Furthermore, changes in federal law and current favorable state or local laws in the cannabis
industry may impair our ability to renew or re-lease properties and the ability of our tenants to fulfill their lease obligations
and could materially and adversely affect our ability to maintain or increase rental rates for our properties.
Conditions in Our Markets
Positive or negative changes in regulatory, economic or other conditions, drought, and natural disasters in the markets
where we acquire properties may affect our overall financial performance.
Our tenants primarily operate in the regulated cannabis industry. Market dynamics and the regulatory regime in the states
where they operate create challenges that impact our tenants’ businesses and may decrease future demand for regulated
cannabis cultivation and production facilities. These challenges include federal, state and local taxation burdens; ineffective
enforcement policies with respect to the illicit cannabis market; declines in unit pricing for regulated cannabis products;
limited access to capital; and inflation and supply chain constraints. The resulting adverse impact on the Company’s and our
tenants’ financial condition, results of operations, and cash flows depends on the extent and duration of these challenges in the
regulated cannabis markets where we own properties, which are further described below.
Market Dynamics in Regulated Cannabis State Programs
States vary significantly in their market dynamics, driven by many factors, including, but not limited to, regulatory
frameworks, enforcement policies with respect to illicit, unlicensed cannabis operations, taxation and licensing structures.
Ineffective enforcement policies with respect to illicit cannabis sales in a particular state may significantly limit the growth
and profitability of operators in that state’s regulated cannabis market.
Unit Pricing for Regulated Cannabis Products
Many states have experienced declines in unit pricing for regulated cannabis products, with that decline more pronounced
in certain states than in others, which compresses operating margins for operators. As a result, certain regulated cannabis
operators have consolidated operations or shuttered certain operations to reduce costs, which could have a negative impact on
operators’ demand for regulated cannabis facilities, including our existing tenants.
Inflation and Supply Chain Constraints
The U.S. economy has experienced a sustained increase in inflation rates in recent years, which we believe is negatively
impacting our tenants. This inflation has impacted costs for labor and production inputs for regulated cannabis operators, in
addition to increasing costs of construction for development and redevelopment projects. Labor
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shortages and global supply chain issues also continue to adversely impact costs and timing for completion of these
development and redevelopment projects, which are resulting in cost overruns and delays in commencing operations on
certain of our tenants’ projects.
Capital Availability for Tenants
Recently, financial markets have been volatile, reflecting heightened geopolitical risks and material tightening of financial
conditions since the U.S. Federal Reserve began increasing interest rates in spring of 2022 and continued uncertainty
regarding monetary policy.
Driven in part by overall macroeconomic conditions, since 2021 capital availability has declined for regulated cannabis
operators. According to Viridian Capital Advisors (“Viridian”), worldwide cannabis capital raises in 2024 increased slightly
over 2023, with less than $2.3 billion in total capital raises, versus over $1.9 billion in 2023, $4.3 billion in 2022 and over
$12.0 billion in 2021. Also, according to Viridian, mergers and acquisitions activity in the North American regulated cannabis
industry declined in 2024 to $1.2 billion, down from $1.8 billion in 2023.
Capital raising activities by U.S. REITs continued to increase in 2024 with $85 billion of capital raised compared to $62
billion in 2023. According to the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”), U.S. REIT 2024
capital raising was higher than 2022 and 2023, but remained lower than 2019-2021 levels.
Significant Tenants and Concentrations of Risk
As of December 31, 2024, we owned 109 properties located in 19 states. Many of our tenants are tenants at multiple
properties. We seek to manage our portfolio-level risk through geographic diversification and by minimizing dependence on
any single property or tenant. At December 31, 2024, our largest property was located in New York and accounted for 5.5% of
our net real estate held for investment. No other properties accounted for more than 5% of our net real estate held for
investment at December 31, 2024. See Note 2 “Summary of Significant Accounting Policies and Procedures” in the notes to
the consolidated financial statements for further information regarding the tenants in our portfolio that represented the largest
percentage of our total rental revenues for the year ended December 31, 2024.
Competitive Environment
We face competition from a diverse mix of market participants, including but not limited to, other companies with similar
business models, independent investors, hedge funds, lenders and other real estate investors, as well as potential tenants
(cannabis operators themselves), all of whom may compete with us in our efforts to acquire real estate zoned for regulated
cannabis operations. Competition from others may diminish our opportunities to acquire a desired property on favorable terms
or at all. In addition, this competition may put pressure on us to reduce the rental rates below those that we expect to charge
for the properties that we acquire, which would adversely affect our financial results.
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Operating Expenses
Our operating expenses include general and administrative expenses, including personnel costs, stock-based
compensation, and legal, accounting and other expenses related to corporate governance, public reporting and compliance
with the various provisions of U.S. securities laws. Our operating expenses also include costs that we incur for properties,
including taxes, insurance, maintenance, security, utilities and other property-specific costs. We generally expect to structure
our leases so that the tenant is responsible for real estate taxes, maintenance, insurance, and structural repairs with respect to
the premises throughout the lease term. Increases or decreases in such operating expenses will impact our overall financial
performance.
Our Qualification as a REIT
We have been organized and operate our business so as to qualify, to be taxed as a REIT for U.S. federal income tax
purposes. Shares of our common stock and Series A Preferred Stock are subject to restrictions on ownership and transfer that
are intended, among other purposes, to assist us in qualifying and maintaining our qualification as a REIT. In order for us to
qualify as a REIT under the Code, the relevant sections of our charter provide that, subject to certain exceptions, no person or
entity may own, or be deemed to own, by virtue of the applicable constructive ownership provisions of the Code, more than
9.8% (in value or number of shares, whichever is more restrictive) of the aggregate of our outstanding shares of stock or
Series A Preferred Stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of our outstanding
common stock or any class or series of our outstanding preferred stock.
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Results of Operations
Investments
See Note 6 “Investments in Real Estate” in the notes to the consolidated financial statements for information regarding
our investments in real estate and property portfolio activity during the year ended December 31, 2024. In March 2023, we
sold the portfolio of four properties in California previously leased to affiliates of Vertical for $16.2 million (excluding
transaction costs) with a secured loan for $16.1 million with the buyer of the properties. The transaction did not qualify for
recognition as a completed sale since not all of the criteria were met. Accordingly, we have not derecognized the assets
transferred. All consideration received, as well as any future payments, from the buyer is recognized as a deposit liability and
is included in other liabilities on our consolidated balance sheet until such time the criteria for recognition as a sale have been
met. In addition, as we have not met all of the held-for-sale criteria, land and building and improvements with gross carrying
values of $3.4 million and $13.9 million, respectively, and accumulated depreciation of $2.0 million as of December 31, 2024,
remain on the consolidated balance sheets, and the buildings and improvements continue to be depreciated. During the year
ended December 31, 2024, we received cash interest payments of $1.1 million, which has been recorded as a liability as of
December 31, 2024.
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of
Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on
February 27, 2024, for a comparison of the years ended December 31, 2023 and December 31, 2022.
Comparison of the Years Ended December 31, 2024 and 2023 (in thousands)
Years Ended December 31,
2024
2023
Change
Revenues:
Rental (including tenant reimbursements)
$ 306,936
$ 307,349
$
(413)
Other
1,581
2,157
(576)
Total revenues
308,517
309,506
(989)
Expenses:
Property expenses
28,472
24,893
3,579
General and administrative expense
37,444
42,832
(5,388)
Depreciation and amortization expense
70,807
67,194
3,613
Total expenses
136,723
134,919
1,804
Gain (loss) on sale of real estate
(3,449)
—
(3,449)
Income from operations
168,345
174,587
(6,242)
Interest income
10,988
8,446
2,542
Interest expense
(17,672)
(17,467)
(205)
Gain (loss) on exchange of Exchangeable Senior Notes
—
22
(22)
Net income
161,661
165,588
(3,927)
Preferred stock dividends
(1,804)
(1,352)
(452)
Net income attributable to common stockholders
$ 159,857
$ 164,236
$
(4,379)
Revenues
Rental Revenues. Rental revenues for the year ended December 31, 2024 were $306.9 million, compared to $307.4
million for the year ended December 31, 2023, reflecting a decrease of $0.4 million or less than 1%. This decrease in rental
revenues was primarily related to certain properties we took back possession of or sold since 2023, lease amendments that
adjusted and deferred rent for certain properties, partial payment of rent by certain tenants and two leases that were classified
as sale-type leases starting in January 2024 where rental revenue collected is recognized as a deposit liability and is included
in other liabilities in our consolidated balance sheet as of December 31, 2024. The decrease was partially offset by the $3.9
million disposition-contingent lease termination fee that was received in
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connection with the sale of our property in Los Angeles, California, amendments to leases for additional improvement
allowances at existing properties that resulted in adjustments to rent, revenue from the two properties we acquired in 2024 and
contractual rent escalations on our other existing properties.
For the year ended December 31, 2024, we applied $7.7 million of security deposits for payment of contractual rent on
properties leased to six tenants. For the year ended December 31, 2023, we applied $8.7 million of security deposits for
payment of contractual rent on properties leased to five tenants.
Rental revenues for the year ended December 31, 2024 were negatively impacted by non-collection of rent from
properties in our operating portfolio totaling $5.5 million.
While we have re-leased several properties that we regained possession of, the rent commencement on certain of these
properties is contingent on the tenants obtaining the requisite approvals to operate. We have also granted temporary rent
abatements in certain instances as tenants transition into the properties and commence operations. As a result, we do not
expect to recognize rental revenue from those properties until such events have occurred.
Other Revenues. Other revenues for the years ended December 31, 2024 and 2023 consist of interest revenue related to
leases for property acquisitions that did not satisfy the requirements for sale-leaseback accounting. The decrease in other
revenues for the year ended December 31, 2024 was primarily due to non-collection of $0.6 million in rent from one property,
partially offset by the application of $0.2 million of security deposits.
Expenses
Property Expenses. Property expenses for the year ended December 31, 2024 increased by $3.6 million, or 14%, to $28.5
million, compared to $24.9 million for the year ended December 31, 2023. The increase was primarily due to additional
investment in existing properties, which resulted in higher property tax that we paid for our properties, as well as higher
property expenses related to properties that we have regained possession of but not yet leased. Property expenses related to
leased properties are generally reimbursable to us by the tenants under the terms of the leases.
General and Administrative Expense. General and administrative expense for the year ended December 31, 2024
decreased by $5.4 million, or 13%, to $37.4 million, compared to $42.8 million for the year ended December 31, 2023. The
decrease in general and administrative expense was primarily due to lower tenant litigation-related expense incurred, which
decreased by $1.8 million compared to 2023, and lower compensation to employees compared to the prior year. The lower
compensation was primarily due to the expiration of the performance share units (“PSUs”) granted in 2021 on December 31,
2023 (which were forfeited in their entirety as they failed to meet the threshold for any payout as of that date) resulting in a
decrease of $4.0 million in PSU related stock-based compensation, which was partially offset by an increase to non-PSU
related stock-based compensation for employees and directors.
Compensation expense for the year ended December 31, 2024 and 2023 included $17.3 million and $19.6 million,
respectively, of non-cash stock-based compensation.
Depreciation and Amortization Expense. Depreciation and amortization expense for the year ended December 31, 2024
increased by $3.6 million, or 5%, to $70.8 million, compared to $67.2 million for the year ended December 31, 2023. The
increase in depreciation and amortization expense was primarily related to depreciation on the two properties we acquired in
2024 and the placement into service of construction and improvements at certain of our properties.
Loss on Sale of Real Estate. Amount relates to the sale of one property in Los Angeles, California (see Note 6
“Investments in Real Estate” to our consolidated financial statements included in this report for more information).
Interest Income. Interest income for the year ended December 31, 2024 increased by $2.6 million, or 30%, to $11.0
million, compared to $8.4 million for the year ended December 31, 2023. The increase in interest income was primarily due to
an additional $3.3 million of interest received on our construction loan, which was partially offset by a $0.7 million decrease
to interest earned on our interest-bearing cash and cash equivalents and short-term investments.
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Interest Expense. Interest expense primarily consists of interest on our Notes due 2026. The increase to interest expense
was due to a $0.3 million increase of non-cash interest expense related to the Revolving Credit Facility, which was partially
offset by a decrease in interest expense on our Exchangeable Senior Notes as a result of their maturity in February 2024.
Cash Flows
The following summary discussion of our cash flows is based on the consolidated statements of cash flows in Item 8,
“Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in our cash
flows for the periods presented below (in thousands):
Year Ended December 31,
2024
2023
Change
Net cash provided by (used in) operating activities
$ 258,446 $ 255,543
$
2,903
Net cash provided by (used in) investing activities
(55,996)
(6,788)
(49,208)
Net cash provided by (used in) financing activities
(197,904)
(195,628)
(2,276)
Ending cash, cash equivalents and restricted cash
146,245
141,699
4,546
Operating Activities
Cash flows provided by operating activities for the years ended December 31, 2024 and 2023 were $258.4 million and
$255.5 million, respectively. Cash flows provided by operating activities were generally from contractual rent and tenant
reimbursements from our properties, partially offset by our general and administrative expense, interest expense, property
expenses in excess of tenant reimbursements and property expenses at properties that were not leased. The increase in cash
flows provided by operating activities from 2023 to 2024 was primarily due to the $3.9 million disposition-contingent lease
termination fee that was received concurrently with the sale of our property in Los Angeles, California.
Investing Activities
Cash flows used in investing activities for the year ended December 31, 2024 included $82.6 million of purchases of
investments in real estate, funding of draws for improvements and construction, and funding of construction loan and other
investments in the aggregate, partially offset by $9.1 million in proceeds related to the sale of our Los Angeles, California
property and $17.5 million of net maturities of short-term investments.
Cash flows used in investing activities for the year ended December 31, 2023 included $189.0 million of purchases of
investments in real estate, funding of draws for improvements and construction, and funding of construction loan and other
investments in the aggregate, partially offset by $182.2 million of net maturities of short-term investments.
The year-over-year decrease in purchases of investments in real estate, funding of draws for improvements and
construction, and funding of construction loan and other investments was due to smaller acquisitions and lower development
activities as certain projects were completed during 2024.
Financing Activities
Cash flows used in financing activities for the year ended December 31, 2024 were $197.9 million, primarily related to
dividend payments of $213.5 million to common and preferred stockholders, principal payment on the Exchangeable Senior
Notes of $4.4 million, and $1.4 million related to the net share settlement of equity awards to pay the required withholding
taxes upon vesting of restricted stock for certain employees and payment of deferred financing costs, partially offset by $11.8
million in net proceeds from the issuance of our common stock and $9.6 million in net proceeds from the issuance of our
Series A Preferred Stock pursuant to our ATM program.
Cash flows used in financing activities for the year ended December 31, 2023 were $195.6 million, primarily related to
dividend payments of $204.1 million to common and preferred stockholders and $1.1 million related to the net share
settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees
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and payment of deferred financing costs, partially offset by $9.6 million in net proceeds from the issuance of our common
stock.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements. We expect to use significant cash to acquire
additional properties, develop and redevelop existing properties, pay dividends to our stockholders, fund our operations,
service our Notes due 2026 and meet other general business needs.
Sources and Uses of Cash
We derive substantially all of our revenues from the leasing of our properties and collecting rental income, which includes
operating expense reimbursements, based on contractual arrangements with our tenants. This source of revenue represents our
primary source of liquidity to fund our dividends, Notes due 2026 interest payments, repayments of borrowings and interest
payments under our Revolving Credit Facility, general and administrative expenses, property development and redevelopment
activities, property operating expenses and other expenses incurred related to managing our existing portfolio and investing in
additional properties. Because substantially all of our leases are triple net, our tenants are generally responsible for the
maintenance, insurance and property taxes associated with the properties they lease from us. If a tenant defaults on one of our
leases or the lease term expires with no tenant renewal, we would incur property costs not paid by the tenant during the time it
takes to re-lease or sell the property.
In July 2022, Kings Garden defaulted on its obligations to pay rent at all of the properties that Kings Garden leases from
us. In September 2023, we regained possession of the four remaining properties that Kings Garden had occupied, where Kings
Garden paid stipulated rent during its period of occupancy until September 20, 2023. In November 2022, Parallel defaulted on
its obligations to pay rent at one of our properties in Pennsylvania, and we regained possession of that property in October
2023. Also in November 2022, Green Peak defaulted on its obligations to pay rent at one of our properties in Michigan.
During 2023, a receiver was appointed over substantially all of Green Peak’s assets, and we regained possession of one
property that was under redevelopment as a regulated cannabis cultivation and processing facility and three retail properties in
Michigan. In February 2024, we regained possession of the remaining regulated cannabis cultivation and processing facility
that was leased to Green Peak. In February 2023, Parallel also defaulted on its obligations to pay rent at one of our properties
in Texas, and we regained possession of that property in March 2023.
In May 2024, Temescal Wellness defaulted on its obligations to pay rent at one of our properties in Massachusetts and we
regained possession of that property in September 2024.
In December 2024, PharmaCann defaulted on its obligations to pay rent for the month of December under six of its
eleven leases for properties located in Illinois, Massachusetts, Michigan, New York, Ohio and Pennsylvania. December rent,
including base rent, property management fees and estimated tax and insurance payments, totaled $4.3 million for these six
properties. In January 2025, we entered into lease amendments with PharmaCann with respect to nine of its leases for
properties located in New York, Illinois, Pennsylvania, Ohio, and Colorado. Those amendments reduced cumulative total base
rent from $2.8 million per month to $2.6 million per month, with cash rent payments commencing February 1, 2025, and
provided for pro-rata replenishment of security deposits over thirty-six months commencing February 1, 2027. We also
entered into amendments with PharmaCann with respect to two of its leases for cultivation properties in Michigan and
Massachusetts. Those amendments provide that monthly base rent of $1.3 million for these two properties will be abated in
full effective February 1, 2025 and, if the properties have not been transitioned to new tenant(s) by August 1, 2025, we will
regain full control over the properties. We applied security deposits held by us pursuant to all of the PharmaCann leases for the
payment in full of all defaulted rent for December 2024 and January 2025 and certain penalties. If PharmaCann is not able to
refinance its existing senior secured credit facility maturing June 30, 2025, all modifications to our leases with PharmaCann
described above will immediately be null and void and the leases will revert to the terms in effect as of January 1, 2025.
We directly pay for all property insurance and most property taxes, which are typically reimbursed to us by our tenants.
Some tenants have elected to pay property taxes directly. From time to time, we incur non-reimbursed property-level operating
costs when properties become vacant and are being re-marketed or re-positioned. These costs vary
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quarterly based on vacancy levels and underperforming properties. Additionally, for properties that are not leased and are
under development or redevelopment, we may invest significant capital to prepare them for their intended use and re-leasing.
For the year ended December 31, 2024, property expenses included $4.1 million in non-reimbursed costs related to vacant
properties or non-payment.
To the extent additional resources are needed, we expect to fund our investment activity generally through equity or debt
issuances either in the public or private markets along with draws on our Revolving Credit Facility. Where possible, we also
may issue limited partnership interests in our Operating Partnership to acquire properties from existing owners seeking a tax-
deferred transaction.
In May 2021, we received an investment grade rating from a ratings agency. We sought to obtain an investment grade
rating to facilitate access to the investment grade unsecured debt market as part of our overall strategy to maximize our
financial flexibility and manage our overall cost of capital. On May 25, 2021, our Operating Partnership issued $300.0 million
aggregate principal amount of Notes due 2026. The Notes due 2026 are the Operating Partnership’s general unsecured
obligations, and rank equally in right of payment with all of the Operating Partnership’s existing and future senior unsecured
indebtedness, including the Exchangeable Senior Notes which matured in February 2024. The terms of the Notes due 2026 are
governed by an indenture, which requires compliance with various financial covenants including limits on the amount of total
leverage and secured debt maintained by the Operating Partnership and which require the Operating Partnership to maintain
minimum levels of debt service coverage. Management believes that it was in compliance with those covenants as of
December 31, 2024. In addition, the terms of the indenture provide that if the debt rating on the Notes due 2026 is
downgraded or withdrawn entirely, interest on the Notes due 2026 will increase to a range of 6.0% to 6.5% based on such debt
rating. We, or our affiliates, may at any time and from time to time, purchase our Notes due 2026 for cash through open
market purchases, privately negotiated transactions, a tender offer or otherwise. Such purchases, if any, will be upon such
terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements,
contractual restrictions and other factors.
In February 2024, we issued 28,408 shares of our common stock and paid $4.3 million in cash upon exchange by holders
of $4.3 million principal amount of Exchangeable Senior Notes and paid off the remaining $0.1 million principal amount, in
accordance with terms of the indenture for the Exchangeable Senior Notes.
In May 2024, we terminated the previously existing “at-the-market” offering program (the “Prior ATM Program”) and
entered into new equity distribution agreements with four sales agents, pursuant to which we may offer and sell from time to
time through an “at-the-market” offering program (the “ATM Program”), including on a forward basis, shares of our common
stock and 9.00% Series A Cumulative Redeemable Preferred Stock, $0.001 par value per share (the “Series A Preferred
Stock”), up to an aggregate offering price of $500.0 million. During the year ended December 31, 2024, we sold 123,224
shares of our common stock pursuant to the Prior ATM Program for net proceeds of $11.8 million. During the year ended
December 31, 2024, we sold 402,673 shares of our Series A Preferred Stock pursuant to the ATM Program for net proceeds of
$9.6 million.
We intend to file an automatic shelf registration statement, which may permit us, from time to time, to offer and sell
common stock, preferred stock, warrants, debt securities of our Operating Partnership and other securities to the extent
necessary or advisable to meet our liquidity needs.
On October 23, 2023, our Operating Partnership entered into a loan and security agreement (the “Loan Agreement”) with
a federally regulated commercial bank, as lender and as agent for lenders that become party thereto from time to time. The
Loan Agreement matures on October 23, 2026, and was most recently amended in November 2024 to increase aggregate
commitments for secured revolving loans to $87.5 million (the “Revolving Credit Facility”). The Loan Agreement also allows
the Operating Partnership, subject to the satisfaction of certain conditions, to request additional revolving incremental loan
commitments up to a specified amount. The Loan Agreement is subject to certain liquidity and operating covenants and
includes customary representations and warranties, affirmative and negative covenants and events of default. There were no
amounts outstanding under the Loan Agreement as of December 31, 2024. See Note 7 “Debt” to our consolidated financial
statements included in this report for more information.
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In May 2024, we sold a property in Los Angeles, California for $9.1 million (excluding closing costs), received a
disposition-contingent lease termination fee from the tenant concurrently with the closing of $3.9 million and received tenant
reimbursement of our closing and other costs related to the sale of the property.
We expect to meet our short-term and long-term liquidity needs through cash and short-term investments on hand, cash
flows from operations and cash flows from sources discussed above. We believe that our liquidity and sources of capital are
adequate to satisfy our cash requirements. We cannot, however, be certain that these sources of funds will be available at a
time and upon terms acceptable to the Company in sufficient amounts to meet our liquidity needs. Our investment guidelines
also provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible assets at
the time of any new borrowing, subject to our board of directors’ discretion.
In recent years, financial markets have been volatile in general, which has also significantly reduced our access to capital.
If sustained, this could have a material adverse effect on our business, financial condition and results of operations, including
our ability to continue to make acquisitions of new properties and fund investments for improvements at existing properties.
Dividends
The Company is required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to
qualify and maintain its qualification as a REIT. As a result of this distribution requirement, our Operating Partnership cannot
rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are
not REITs can. During 2024, we declared cash dividends on our common stock totaling $7.52 per share, and cash dividends
on our Series A Preferred Stock totaling $2.25 per share. Our ability to continue to pay dividends is dependent upon our ability
to continue to generate cash flows, service any debt obligations we have, including our Notes due 2026, and make accretive
new investments.
Year Ended December 31,
2024
2023
2022
Ordinary income distributions
$ 7.440000 $ 7.700000
$ 6.929636
Long-term capital gain distributions(1)
—
—
0.100364
Total
$ 7.440000
$ 7.700000
$ 7.030000
(1)
Unrecaptured Section 1250 Gain of $0.058864 represents additional characterization of and is part of long-term capital gain distributions for the
year ended December 31, 2022.
The common stock distribution with a record date of December 31, 2024 was a split-year distribution, with $0.83
allocable to 2024 for federal income tax purposes and $1.07 allocable to 2025 for federal income tax purposes. The common
stock distribution with a record date of December 29, 2023 was a split-year distribution, with $0.83 allocable to 2023 for
federal income tax purposes and $0.99 allocable to 2024 for federal income tax purposes. The common stock distribution with
a record date of December 30, 2022 was a split-year distribution, with $0.33 allocable to 2022 for federal income tax purposes
and $1.47 allocable to 2023 for federal income tax purposes.
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Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2024 (in thousands):
Payments Due
by Year
Notes due 2026
Interest
Office Rent
Total
2025
$
—
$
16,500
$
526
$
17,026
2026
300,000
6,646
543
307,189
2027
—
—
45
45
2028
—
—
—
—
2029
—
—
—
—
Thereafter
—
—
—
—
Total
$
300,000
$
23,146
$
1,114
$
324,260
As of December 31, 2024, we had (1) $37.1 million outstanding in commitments related to improvement allowances,
which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the
applicable lease; (2) $1.2 million outstanding in commitments related to contract with vendors for improvements at our
properties; and (3) $0.2 million outstanding in commitments to fund a construction loan. The commitments discussed in this
paragraph are excluded from the table of contractual obligations above, as improvement allowances generally may be
requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease, there is
no explicit time frame for incurring the obligations related to our contracts with vendors, and construction loan funding
generally may be requested by the borrower from time to time, subject to satisfaction of certain conditions.
There were no amounts outstanding under the Revolving Credit Facility as of December 31, 2024. See Note 7 “Debt” to
our consolidated financial statements included in this report for more information.
Non-GAAP Financial Information and Other Metrics
In addition to the required GAAP presentations, we use certain non-GAAP performance measures as we believe these
measures improve the understanding of our operational results. We continually evaluate the usefulness, relevance, limitations,
and calculation of our reported non-GAAP performance measures to determine how best to provide relevant information to
the public and thus such reported measures could change.
Funds from Operations, Normalized Funds from Operations and Adjusted Funds from Operations
Funds from operations (“FFO”) and FFO per share are operating performance measures adopted by NAREIT. NAREIT
defines FFO as the most commonly accepted and reported non-GAAP measure of a REIT’s operating performance equal to
net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, depreciation and
amortization and impairment related to real estate properties, and after adjustments for unconsolidated partnerships and joint
ventures. The Company also excludes the disposition-contingent lease termination fee relating to the sale of our property in
Los Angeles, California.
Management believes that net income, as defined by GAAP, is the most appropriate earnings measurement. However,
management believes FFO and FFO per share to be supplemental measures of a REIT’s performance because they provide an
understanding of the operating performance of our properties without giving effect to certain significant non-cash items,
primarily depreciation expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the
value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen
with market conditions. We believe that by excluding the effect of depreciation, FFO and FFO per share can facilitate
comparisons of operating performance between periods. We report FFO and FFO per share because these measures are
observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate
REITs and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and
publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per
share.
We compute normalized funds from operations (“Normalized FFO”) by adjusting FFO, as defined by NAREIT, to
exclude certain GAAP income and expense amounts that we believe are infrequent and unusual in nature and/or not
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related to our core real estate operations. Exclusion of these items from similar FFO-type metrics is common within the equity
REIT industry, and management believes that presentation of Normalized FFO and Normalized FFO per share provides
investors with a metric to assist in their evaluation of our operating performance across multiple periods and in comparison to
the operating performance of other companies, because it removes the effect of unusual items that are not expected to impact
our operating performance on an ongoing basis. Normalized FFO is used by management in evaluating the performance of our
core business operations. Items included in calculating FFO that may be excluded in calculating Normalized FFO include
certain transaction-related gains, losses, income or expense or other non-core amounts as they occur.
Management believes that adjusted funds from operations (“AFFO”) and AFFO per share are also appropriate
supplemental measures of a REIT’s operating performance. We calculate AFFO by adjusting Normalized FFO for certain cash
and non-cash items.
Other than for the three months ended December 31, 2024, September 30, 2024 and June 30, 2024, FFO (diluted),
Normalized FFO, AFFO and FFO, Normalized FFO and AFFO per diluted share include the dilutive impact of the assumed
full exchange of the Exchangeable Senior Notes for shares of common stock.
For the three months ended September 30 and June 30, 2024, 25,352 shares and 20,713 shares, respectively, issuable upon
vesting of the PSUs were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as of the
respective periods. No shares were issuable upon vesting of the PSUs for all other periods presented, as the performance
thresholds for vesting of the PSUs were not met as measured as of the end of those respective periods.
Our computation of FFO, Normalized FFO and AFFO may differ from the methodology for calculating FFO, Normalized
FFO and AFFO utilized by other equity REITs and, accordingly, may not be comparable to such REITs. Further, FFO,
Normalized FFO and AFFO do not represent cash flow available for management’s discretionary use. FFO, Normalized FFO
and AFFO should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of
our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of
our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make
distributions. FFO, Normalized FFO and AFFO should be considered only as supplements to net income computed in
accordance with GAAP as measures of operations.
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The table below is a reconciliation of net income attributable to common stockholders to FFO, Normalized FFO and
AFFO for the years ended December 31, 2024, 2023 and 2022 (in thousands, except share and per share amounts):
Years Ended December 31,
2024
2023
2022
Net income attributable to common stockholders
$
159,857 $
164,236 $
153,034
Real estate depreciation and amortization
70,807
67,194
61,303
Loss (gain) on sale of real estate
—
—
(3,601)
Disposition-contingent lease termination fee, net of loss on sale of real estate(1)
(451)
—
—
FFO attributable to common stockholders (basic)
230,213
231,430
210,736
Cash and non-cash interest expense on Exchangeable Senior Notes
28
219
546
FFO attributable to common stockholders (diluted)
230,241
231,649
211,282
Financing expense
—
—
367
Litigation-related expense
788
2,480
3,010
Loss (gain) on exchange of Exchangeable Senior Notes
—
(22)
125
Normalized FFO attributable to common stockholders (diluted)
231,029
234,107
214,784
Interest income on seller-financed note(2)
1,104
1,342
—
Deferred lease payments received on sales-type leases(3)
4,938
—
—
Stock-based compensation
17,317
19,581
17,507
Non-cash interest expense
1,664
1,375
1,255
Above-market lease amortization
92
92
91
AFFO attributable to common stockholders (diluted)
$
256,144
$
256,497
$
233,637
FFO per common share – diluted
$
8.07
$
8.20
$
7.64
Normalized FFO per common share – diluted
$
8.10
$
8.29
$
7.76
AFFO per common share – diluted
$
8.98
$
9.08
$
8.45
Weighted average common shares outstanding – basic
28,226,402
27,977,807
27,345,047
Restricted stock and RSUs
294,780
196,821
116,046
Dilutive effect of Exchangeable Senior Notes
9,468
81,169
202,076
Weighted average common shares outstanding – diluted
28,530,650
28,255,797
27,663,169
(1)
Amount reflects the $3.9 million disposition-contingent lease termination fee received concurrently with the sale of our property
in Los Angeles, California, net of the loss on sale of real estate of $3.4 million (see Note 6 “Investments in Real Estate” to our
consolidated financial statements included in this report for more information).
(2)
Amount reflects the non-refundable interest paid on the seller-financed note issued to us by the buyer in connection with our
disposition of a portfolio of four properties in southern California previously leased to affiliates of Vertical, which is recognized
as a deposit liability and is included in other liabilities in our consolidated balance sheet as of December 31, 2024 and 2023, as
the transaction did not qualify for recognition as a completed sale.
(3)
Amount reflects the non-refundable lease payments received on two sales-type leases which are recognized as a deposit liability
starting on January 1, 2024, and is included in other liabilities in our consolidated balance sheets as of December 31, 2024, as
the transaction did not qualify for recognition as a completed sale (see Note 2 “Lease Accounting” to our consolidated financial
statements included in this report for more information). Prior to the lease modifications on January 1, 2024, which extended the
initial lease terms, the leases were classified as operating leases and the lease payments received were recognized as rental
revenue and therefore, included in net income attributable to common stockholder.
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The tables below are reconciliations of quarterly net income attributable to common stockholders to FFO, Normalized
FFO and AFFO for the years ended December 31, 2024 and 2023 (in thousands, except share and per share amounts):
Three Months Ended(1)
December 31, 2024 September 30, 2024 June 30, 2024 March 31, 2024
Net income attributable to common stockholders
$
39,461 $
39,651
$
41,655 $
39,090
Real estate depreciation and amortization
18,240
17,944
17,473
17,150
Disposition-contingent lease termination fee, net of loss on sale of real
estate(2)
—
—
(451)
—
FFO attributable to common stockholders (basic)
57,701
57,595
58,677
56,240
Cash and non-cash interest expense on Exchangeable Senior Notes
—
—
—
28
FFO attributable to common stockholders (diluted)
57,701
57,595
58,677
56,268
Litigation-related expense
268
210
164
146
Normalized FFO attributable to common stockholders (diluted)
57,969
57,805
58,841
56,414
Interest income on seller-financed note(3)
30
268
403
403
Deferred lease payments received on sales-type leases(4)
568
1,452
1,462
1,456
Stock-based compensation
4,315
4,316
4,371
4,315
Non-cash interest expense
456
419
401
388
Above-market lease amortization
23
23
23
23
AFFO attributable to common stockholders (diluted)
$
63,361
$
64,283
$
65,501
$
62,999
FFO per common share – diluted
$
2.02
$
2.02
2.06
1.98
Normalized FFO per common share – diluted
$
2.03
$
2.02
2.06
1.98
AFFO per common share – diluted
$
2.22
$
2.25
2.29
2.21
Weighted-average common shares outstanding – basic
28,254,565
28,254,565
28,250,843
28,145,017
Restricted stock and RSUs
299,770
299,770
300,582
278,890
PSUs
—
25,352
20,713
—
Dilutive effect of Exchangeable Senior Notes
—
—
—
38,079
Weighted-average common shares outstanding – diluted
28,554,335
28,579,687
28,572,138
28,461,986
Three Months Ended(1)
December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023
Net income attributable to common stockholders
$
41,295 $
41,256
$
40,931 $
40,754
Real estate depreciation and amortization
17,098
16,678
16,704
16,714
FFO attributable to common stockholders (basic)
58,393
57,934
57,635
57,468
Cash and non-cash interest expense on Exchangeable Senior Notes
50
50
50
69
FFO attributable to common stockholders (diluted)
58,443
57,984
57,685
57,537
Litigation-related expense
152
1,112
670
546
Loss (gain) on exchange of Exchangeable Senior Notes
—
—
—
(22)
Normalized FFO attributable to common stockholders (diluted)
58,595
59,096
58,355
58,061
Interest income on seller-financed note(3)
403
402
403
134
Stock-based compensation
4,934
4,934
4,884
4,829
Non-cash interest expense
383
335
331
326
Above-market lease amortization
23
23
23
23
AFFO attributable to common stockholders (diluted)
$
64,338
$
64,790
$
63,996
$
63,373
FFO per common share – diluted
$
2.07
2.05
2.04
2.04
Normalized FFO per common share – diluted
$
2.07
2.09
2.07
2.06
AFFO per common share – diluted
$
2.28
2.29
2.26
2.25
Weighted-average common shares outstanding – basic
27,996,393
27,983,004
27,981,517
27,949,747
Restricted stock and RSUs
206,667
206,919
201,462
171,741
Dilutive effect of Exchangeable Senior Notes
76,774
75,682
74,260
102,210
Weighted-average common shares outstanding – diluted
28,279,834
28,265,605
28,257,239
28,223,698
(1)
The sum of quarterly financial data may vary from annual data due to rounding and differences in the dilutive effect of potentially
issuable shares of each reporting period.
(2)
Amount reflects the $3.9 million disposition-contingent lease termination fee received concurrently with the sale of our property in Los
Angeles, California, net of the loss on sale of real estate of $3.4 million (see Note 6 “Investments in Real Estate” to our consolidated
financial statements included in this report for more information)
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(3)
Amount reflects the non-refundable interest paid on the seller-financed note issued to us by the buyer in connection with our
disposition of a portfolio of four properties in southern California previously leased to affiliates of Vertical, which is recognized as a
deposit liability and is included in other liabilities in our consolidated balance sheets as of December 31, 2024 and 2023, as the
transaction did not qualify for recognition as a completed sale.
(4)
Amount reflects the non-refundable lease payments received on two sales-type leases which are recognized as a deposit liability
starting on January 1, 2024, and is included in other liabilities in our consolidated balance sheets as of December 31, 2024, as the
transaction did not qualify for recognition as a completed sale (see Note 2 “Lease Accounting” to our consolidated financial statements
included in this report for more information). Prior to the lease modifications on January 1, 2024, which extended the initial lease
terms, the leases were classified as operating leases and the lease payments received were recognized as rental revenue and therefore,
included in net income attributable to common stockholders.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with GAAP, which require us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ materially from those estimates and assumptions.
We continually evaluate the estimates and assumptions we use to prepare our consolidated financial statements. Our
critical accounting estimates are defined as accounting estimates or assumptions made in accordance with GAAP, which
involve a significant level of estimation uncertainty or subjectivity and have had or are reasonably likely to have a material
impact on our financial condition or results of operations. The following critical accounting estimates discussion reflects what
we believe are the most significant estimates and assumptions used in the preparation of our consolidated financial statements.
This discussion of our critical accounting estimates is intended to supplement the description of our accounting policies in the
footnotes to our consolidated financial statements and to provide additional insight into the information used by management
when evaluating significant estimates and assumptions. For further discussion of our significant accounting policies, see Note
2 “Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements” to our consolidated
financial statements included in this report.
Lease Accounting
We account for our leases under Accounting Standards Codification 842, Leases, which requires significant estimates and
judgments by management in its application. Upon lease inception or lease modification, we assess the lease classification of
both the land and building components of the property. The determination of lease classification requires the calculation of the
rate implicit in the lease, which is driven by significant estimates relating to the unguaranteed residual value of the assets at
the end of the non-cancelable lease term. A decrease of 5% in the estimated unguaranteed residual value of our properties
would result in a change to the lease classification of one lease that was modified during the year ended December 31, 2024.
Acquisition of Rental Property, Depreciation and Impairment
All of our acquisitions of rental properties to date were accounted for as asset acquisitions and not business combinations
because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets
(i.e., land, buildings, and related intangible assets). The accounting model for asset acquisitions requires that the acquisition
consideration (including acquisition costs) be allocated to the individual assets acquired and liabilities assumed on a relative
fair value basis.
We exercise judgment to determine key assumptions used in each valuation technique (cost, income, and sales
approaches). For example, we are required to use judgment and make a number of assumptions, including those related to
projected growth in rental rates and operating expenses, anticipated trends and market/economic conditions. The use of
different assumptions can affect the amount of consideration allocated to the acquired depreciable/amortizable asset, which in
turn can impact our net income due to the recognition of the related depreciation/amortization expense in our consolidated
statements of operations.
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We depreciate buildings and improvements where we are considered the owner for accounting purposes based on our
evaluation of the estimated useful life of each specific asset, not to exceed 40 years. Determining whether expenditures meet
the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment.
The determination of whether we are or the tenant is the owner of improvements for accounting purposes is subject to
significant judgment. In making that determination, we consider numerous factors and perform a detailed evaluation of each
individual lease. No one factor is determinative in reaching a conclusion. The factors we evaluate include but are not limited
to the following:
●
whether the lease agreement requires landlord approval of how the improvement allowance is spent prior to
installation of the improvements;
●
whether the lease agreement requires the tenant to provide evidence to the landlord supporting the cost and what
the improvement allowance was spent on prior to payment by the landlord for such improvements;
●
whether the improvements are unique to the tenant or reusable by other tenants;
●
whether the tenant is permitted to alter or remove the improvements without the consent of the landlord or
without compensating the landlord for any lost utility or diminution in fair value; and
●
whether the ownership of the improvements remains with the landlord or remains with the tenant at the end of
the lease term.
When we conclude that we are the owner of improvements for accounting purposes using the factors discussed above, we
record the cost to construct the improvements as our capital asset.
We evaluate our real estate assets for potential impairment whenever events or changes in circumstances indicate that the
carrying amount of a given asset may not be recoverable. We evaluate our real estate assets for impairment on a property-by-
property basis. Indicators we use to determine whether an impairment evaluation is necessary include:
●
deterioration in rental rates for a specific property;
●
deterioration of a given rental submarket;
●
significant change in strategy or use of a specific property or any other event that could result in a decreased
holding period, including classifying a property as held for sale, or significant development delay;
●
evidence of material physical damage to the property; and
●
default by a significant tenant when any of the other indicators above are present.
When we evaluate for potential impairment our real estate assets to be held and used, we first evaluate whether there are
any indicators of impairment. If any impairment indicators are present for a specific real estate asset, we then perform an
undiscounted cash flow analysis and compare the net carrying amount of the real estate asset to the real estate asset’s
estimated undiscounted future cash flow over the anticipated holding period. If the estimated undiscounted future cash flow is
less than the net carrying amount of the real estate asset, we perform an impairment loss calculation to determine if the fair
value of the real estate asset is less than the net carrying value of the real estate asset. Our impairment loss calculation
compares the net carrying amount of the real estate asset to the real estate asset’s estimated fair value, which may be based on
estimated discounted future cash flow calculations or third-party valuations or appraisals. We recognize an impairment loss if
the amount of the asset’s net carrying amount exceeds the asset’s estimated fair value. If we recognize an impairment loss, the
estimated fair value of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis would be
depreciated (amortized) over the remaining useful life of that asset. If a real estate asset is designated as real estate held-for-
sale, it is carried at the lower of the net carrying value or estimated fair value less costs to sell, and depreciation ceases.
Our undiscounted cash flow and fair value calculations contain uncertainties because they require management to make
assumptions and to apply judgment to estimate future cash flow and property fair values, including determining our estimated
holding period. We are also required to make a number of assumptions relating to future economic and market events and
prospective operating trends.
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For each property where such an indicator occurred, we completed an impairment evaluation. After completing this
process, we determined that for each of the operating properties evaluated, undiscounted cash flows over the holding period
were in excess of carrying value and, therefore, we did not record any impairment losses for these properties for the years
ended December 31, 2024, 2023 and 2022. Significant adverse changes in the critical accounting estimates and judgements
used in the impairment evaluation would need to occur for the undiscounted cash flows over the holding period to be less than
the carrying value for each operating property evaluated as of December 31, 2024.
Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain periods, the
U.S. credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our
access to and cost of capital. We continually monitor the commercial real estate and U.S. credit markets carefully and, if
required, will make decisions to adjust our business strategy accordingly.
Interest Rate Risk
As of December 31, 2024, we had $300.0 million principal amount of Notes due 2026 outstanding at a fixed interest rate
of 5.50%, and therefore, if interest rates decline, our required payments may exceed those based on current market rates. It is
possible that a property we acquire in the future would be subject to a mortgage, which we may assume. In recent years, the
commercial real estate market generally has experienced significant disruptions from, among other things, significant
increases in interest rates and changing tenant preferences for space. Our Revolving Credit Facility bears interest at a variable
rate based on the greater of the prime rate and an applicable margin and a stipulated interest rate; therefore, if interest rates
increase, our required payments on any amounts outstanding on our Revolving Credit Facility may also increase. As of
December 31, 2024, we had no outstanding borrowings on our Revolving Credit Facility.
Impact of Inflation
The U.S. economy has experienced a sustained increase in inflation rates in recent years. We enter into leases that
generally provide for fixed increases in rent. During times when inflation is greater than the fixed increases in rent, as
provided for in the leases, rent increases may not keep up with the rate of inflation. See also the discussion under Item 1A,
“Risk Factors,” under the caption “Inflation may adversely affect our business and our tenants’ financial condition and results
of operations.”
Seasonality
Our business has not been, and we do not expect our business in the future to be, subject to material seasonal fluctuations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our Notes due 2026 bear interest at a fixed rate of 5.50% per annum until maturity and is the only debt we have
outstanding. Our Revolving Credit Facility bears interest at a variable rate based on the greater of the prime rate and an
applicable margin and a stipulated interest rate; therefore, if interest rates increase, our required payments on any amounts
outstanding on our Revolving Credit Facility may also increase.
Our investments in short-term money market funds, certificates of deposit and short-term investments in obligations of
the U.S. government with an original maturity at the time of purchase of greater than 90 days are less sensitive to market
fluctuations than a portfolio of long-term securities. Accordingly, we believe that a significant change in interest rates would
not have a material effect on the consolidated financial statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference to our Financial Statements beginning on page F-1 of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange
Act, designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) and 15d-15(b) promulgated under the Exchange Act, our management has evaluated, under
supervision of the audit committee of the board of directors and with the participation of our principal executive and principal
financial officers, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act) as of December 31, 2024. Based on that evaluation, our principal executive and financial officers concluded that our
disclosure controls and procedures were effective as of December 31, 2024 (the end of the period covered by this Annual Report).
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Exchange Act Rules 13a-15(f) and 15d-15(f), designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Under the supervision and with the participation of our management, including our principal executive and principal financial
officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in
the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, our principal executive officer and principal financial officer concluded that our internal
controls over financial reporting, as of December 31, 2024, were effective. BDO USA, P.C. has issued an attestation report on the
effectiveness of the Company’s internal control over financial reporting, which appears in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There have been no changes in our system of internal control over financial reporting during the quarter ended December 31,
2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Our system of internal control over financial reporting was designed to provide reasonable assurance regarding the preparation
and fair presentation of published financial statements in accordance with accounting principles generally accepted in the United
States. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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81
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Innovative Industrial Properties, Inc.
Park City, Utah
Opinion on Internal Control over Financial Reporting
We have audited Innovative Industrial Properties, Inc.’s (the “Company’s”) internal control over financial reporting as of
December 31, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2024, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2024 and 2023, the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2024,
and the related notes and financial statement schedule, and our report dated February 21, 2025 expressed an unqualified
opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A,
“Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, P.C.
San Diego, California
February 21, 2025
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82
ITEM 9B. OTHER INFORMATION
(b) Rule 10b5-1 Trading Plans
During the three months ended December 31, 2024, no director or officer of the Company adopted or terminated a “Rule
10b5-1 trading arrangement,” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation
S-K.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSEPCTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning our directors, executive officers and corporate governance required by Item 10 will be
included in the Proxy Statement to be filed relating to our 2025 Annual Meeting of Stockholders and is incorporated herein by
reference. Pursuant to instruction G(3) to Form 10-K, information concerning audit committee financial expert disclosure set
forth under the heading “Information Regarding the Board — Committees of the Board — Audit Committee” will be included
in the Proxy Statement to be filed relating to Innovative Industrial Properties, Inc.’s 2025 Annual Meeting of Stockholders and
is incorporated herein by reference.
Pursuant to instruction G(3) to Form 10-K, information concerning compliance with Section 16(a) of the Exchange Act
concerning our directors and executive officers set forth under the heading entitled “General Section 16(a) Beneficial
Ownership Reporting Compliance” will be included in the Proxy Statement to be filed relating to Innovative Industrial
Properties, Inc.’s 2025 Annual Meeting of Stockholders and is incorporated herein by reference.
Information About our Executive Officers and Directors
Our executive officers as of February 21, 2025, along with their positions and offices held with the Company, are as
follows:
Name
Position
Alan Gold
Executive Chairman and Director
Paul Smithers
President, Chief Executive Officer and Director
David Smith
Chief Financial Officer and Treasurer
In addition to Messrs. Gold and Smithers, our directors as of February 21, 2025, and their principal occupations or current
employment are as follows:
Name
Position
Gary Kreitzer
Retired Executive Vice President and General Counsel; Co-Founder of three publicly traded REITs
Mary Curran
Retired Executive Vice President and Corporate Banking Chief Risk Officer MUFG Union Bank,
N.A., Member of the Board of Directors of Banc of California, Inc. and Hunter Industries, Inc.
Scott Shoemaker
Practicing orthopedic surgeon for Kaiser Permanente
David Stecher
Managing Director at CapAcquity LLC
Table of Contents
83
Code of Ethics and Code of Conduct
We have adopted a written Code of Business Conduct and Ethics that applies to our directors, officers and employees,
including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons
performing similar functions. Our Code of Business Conduct and Ethics is posted on our website
(www.innovativeindustrialproperties.com). We do not incorporate the information on our website into this Annual Report on
Form 10-K and you should not consider any such information that can be accessed through our website as part of this Annual
Report. We intend to disclose any amendments to certain provisions of our Code of Business Conduct and Ethics, or any
waivers of those provisions, as required by the listing rules of the New York Stock Exchange, the rules and regulations of the
SEC and applicable law on our website promptly following the date of such amendment or waiver.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning our executive compensation required by Item 11 will be included in the Proxy Statement to
be filed relating to our 2025 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information concerning the security ownership of certain beneficial owners and management, our equity
compensation plans and related stockholder matters required by Item 12 will be included in the Proxy Statement to be filed
relating to our 2025 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information concerning certain relationships and related transactions and director independence required by Item 13
will be included in the Proxy Statement to be filed relating to our 2025 Annual Meeting of Stockholders and is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information concerning our principal accountant fees and services required by Item 14 will be included in the Proxy
Statement to be filed relating to our 2025 Annual Meeting of Stockholders and is incorporated herein by reference.
Table of Contents
84
PART IV
ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULE
(a)(1) and (2) Financial Statements and Schedule:
Please refer to the Index to Consolidated Financial Statements included under Part II, Item 8, Financial Statements and
Supplementary Data.
(3) Exhibits
Exhibit
Number
Description of Exhibit
3.1
Second Articles of Amendment and Restatement of Innovative Industrial Properties, Inc. (including Articles
Supplementary Classifying Innovative Industrial Properties, Inc.’s 9.00% Series A Cumulative Redeemable
Preferred Stock).(1)
3.2
Articles Supplementary to the Second Articles of Amendment and Restatement of Innovative Industrial
Properties, Inc. (including Articles Supplementary Classifying Innovative Industrial Properties, Inc.’s 9.00%
Series A Cumulative Redeemable Preferred Stock).(2)
3.3
Third Amended and Restated Bylaws of Innovative Industrial Properties, Inc.(3)
4.1
Form of Certificate for Common Stock.(4)
4.2
Indenture, dated as of February 21, 2019, among IIP Operating Partnership, LP, as issuer, Innovative
Industrial Properties, Inc. and the subsidiaries of IIP Operating Partnership, LP, as guarantors, Argent
Institutional Trust Company, as trustee (as successor-in-interest to GLAS Trust Company LLC), and
Securities Transfer Corporation, as registrar (as successor-in-interest to GLAS Trust Company LLC),
including the Form of Note representing IIP Operating Partnership, LP’s 3.75% Exchangeable Senior
Notes due 2024.(5)
4.3
Indenture, dated as of May 25, 2021, among Innovative Industrial Properties, Inc., IIP Operating Partnership,
LP, the Subsidiary Guarantors set forth on the signature page thereto, Argent Institutional Trust Company, as
trustee (as successor-in-interest to GLAS Trust Company LLC), and Securities Transfer Corporation, as
registrar (as successor-in-interest to GLAS Trust Company LLC), including the form of 5.50% Senior Note
due 2026.(6)
4.4*
Innovative Industrial Properties, Inc. Description of Securities Registered Pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended.
10.1
Agreement of Limited Partnership of IIP Operating Partnership, LP.(8)
10.2+
2016 Omnibus Incentive Plan.(8)
10.3+
Form of Restricted Stock Award Agreement for Officers.(9)
10.4+
Form of Restricted Stock Award Agreement for Directors.(9)
10.5+
Form of Restricted Stock Unit Award Agreement.(10)
10.6+
Form of 2021 Performance Share Unit Award Agreement.(11)
10.6+
Form of 2022 Performance Share Unit Award Agreement.(12)
10.7+
Form of Indemnification Agreement between Innovative Industrial Properties, Inc. and each of its Directors
and Officers.(4)
10.8+
Severance and Change of Control Agreement dated as of January 18, 2017 among Innovative Industrial
Properties, Inc., IIP Operating Partnership, LP and Alan Gold.(13)
10.9+
Severance and Change of Control Agreement dated as of January 18, 2017 among Innovative Industrial
Properties, Inc., IIP Operating Partnership, LP and Paul Smithers.(13)
10.10+
Severance and Change of Control Agreement dated as of January 18, 2017 among Innovative Industrial
Properties, Inc., IIP Operating Partnership, LP and Brian Wolfe.(13)
10.11+
Severance and Change of Control Agreement dated as of June 7, 2017 among Innovative Industrial
Properties, Inc., IIP Operating Partnership, LP and Catherine Hastings.(14)
10.12+
Severance and Change of Control Agreement dated as of March 29, 2023 among Innovative Industrial
Properties, Inc., IIP Operating Partnership, LP and David Smith.(15)
10.13+
Director Compensation Policy.(11)
10.14+
Innovative Industrial Properties, Inc. Nonqualified Deferred Compensation Plan.(16)
Table of Contents
85
10.15
Registration Rights Agreement, dated as of May 25, 2021, among Innovative Industrial Properties, Inc., IIP
Operating Partnership, LP, the Subsidiary Guarantors set forth on the signature page thereto and BTIG, LLC,
as representative of the initial purchasers.(6)
19.1*
Innovative Industrial Properties, Inc. Insider Trading Compliance Program.
21.1*
List of Subsidiaries of Innovative Industrial Properties, Inc.
23.1*
Consent of Independent Registered Public Accounting Firm.
31.1*
Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
97.1
Innovative Industrial Properties, Inc. Compensation Recovery Policy.(17)
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
104*
Cover Page Interactive Date File (formatted as Inline XBRL and contained in Exhibit 101).
*
Filed herewith.
+
Indicates management contract or compensatory plan.
(1)
Incorporated by reference to Innovative Industrial Properties, Inc.’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2020.
(2)
Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on May 24, 2024.
(3)
Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on December 8, 2022.
(4)
Incorporated by reference to Innovative Industrial Properties, Inc.’s Registration Statement on Form S-11, as amended (File No. 333-214148), filed with
the SEC on November 17, 2016.
(5)
Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on February 21, 2019.
(6)
Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on May 25, 2021.
(7)
Incorporated by reference to Innovative Industrial Properties, Inc.’s Registration Statement on Form S-11, as amended (File No. 333-214148), filed with
the SEC on October 17, 2016.
(8)
Incorporated by reference to Innovative Industrial Properties, Inc.’s Registration Statement on Form S-8 (File No. 333-214919), filed with the SEC on
December 6, 2016.
(9)
Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 6, 2020.
(10) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 15, 2021.
(11) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 12, 2022.
(12) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 24, 2017.
(13) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on June 8, 2017.
(14) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on March 30, 2023.
(15) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on November 18, 2019.
(16) Incorporated by reference to Innovative Industrial Properties, Inc.’s Quarterly Report on Form 10-Q filed with the SEC on August 3, 2023.
(17) Incorporated by reference to Innovative Industrial Properties, Inc.’s Annual Report on Form 10-K filed with the SEC on February 27, 2024.
ITEM 16. FORM 10-K SUMMARY
None.
Table of Contents
86
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, hereunto duly authorized.
INNOVATIVE INDUSTRIAL PROPERTIES, INC.
By: /s/ Paul Smithers
Paul Smithers
President, Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/ David Smith
David Smith
Chief Financial Officer and Treasurer
(Principal Financial Officer)
By: /s/ Andy Bui
Andy Bui
Vice President, Chief Accounting Officer
(Principal Accounting Officer)
Dated February 21, 2025
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons in the capacities and on the dates indicated.
Name
Capacity
Date
/s/ Alan Gold
Executive Chairman
February 21, 2025
Alan Gold
/s/ Gary Kreitzer
Vice Chairman
February 21, 2025
Gary Kreitzer
/s/ Mary Curran
Director
February 21, 2025
Mary Curran
/s/ Paul Smithers
President, Chief Executive Officer and
February 21, 2025
Paul Smithers
Director
/s/ Scott Shoemaker
Director
February 21, 2025
Scott Shoemaker
/s/ David Stecher
Director
February 21, 2025
David Stecher
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F-1
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Innovative Industrial Properties, Inc.
(a) Financial Statements:
Report of Independent Registered Public Accounting Firm (BDO USA, P.C.; San Diego, California; PCAOB ID
#243)
F-2
Consolidated Balance Sheets as of December 31, 2024 and 2023
F-4
Consolidated Statements of Income for the years ended December 31, 2024, 2023 and 2022
F-5
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2024, 2023 and 2022
F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2024, 2023 and 2022
F-7
Notes to Consolidated Financial Statements
F-8
(b) Financial Statement Schedule:
Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2024
F-30
Table of Contents
F-2
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Innovative Industrial Properties, Inc.
Park City, Utah
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Innovative Industrial Properties, Inc. (the “Company”) as
of December 31, 2024 and 2023, the related consolidated statements of income, stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2024, and the related notes and financial statement schedule listed in the
accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2024 and
2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in
conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company's internal control over financial reporting as of December 31, 2024, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) and our report dated February 21, 2025 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our
opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate
opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Real Estate Acquisitions - Fair Value of Assets Acquired
As described in Note 6 to the consolidated financial statements, the Company completed two real estate property acquisitions,
which totaled approximately $18.6 million during the year ended December 31, 2024. As described in Note 2 to the
consolidated financial statements, the assets acquired are initially measured based upon their relative fair values. The
Company may engage third-party valuation specialists to assist in the estimation of the fair value of land by reviewing
comparable sales within the same submarket and/or region, and the estimation of the fair value of buildings and
Table of Contents
F-3
improvements as if the property was vacant utilizing a direct capitalization approach and a current replacement costs approach
and takes into consideration other relevant market data.
We identified the estimation of the fair values used in the allocation of the land and buildings and improvements acquired for
the two 2024 property acquisitions as a critical audit matter. The principal considerations for our determination included
significant judgments used to evaluate certain assumptions used in the fair values of land and buildings and improvements
acquired, including the comparable sales of land, and current replacement cost of the buildings and improvements for the two
real estate asset acquisitions. Auditing these elements involved a high degree of auditor judgment and subjectivity due to the
nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge
needed.
The primary procedures we performed to address this critical audit matter included:
●
Utilizing personnel with specialized knowledge and skills in valuation to assist in the evaluation of the fair values
used in the allocation of land and buildings and improvements acquired, including the comparable sales of land, and
current replacement cost of the buildings and improvements taking into consideration the comparison of these
assumptions to market data.
/s/ BDO USA, P.C.
We have served as the Company’s auditor since 2016.
San Diego, California
February 21, 2025
Table of Contents
F-4
Innovative Industrial Properties, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
December 31,
December 31,
Assets
2024
2023
Real estate, at cost:
Land
$
146,772
$
142,524
Buildings and improvements
2,230,807
2,108,218
Construction in progress
62,393
117,773
Total real estate, at cost
2,439,972
2,368,515
Less accumulated depreciation
(271,190)
(202,692)
Net real estate held for investment
2,168,782
2,165,823
Construction loan receivable
22,800
22,000
Cash and cash equivalents
146,245
140,249
Restricted cash
—
1,450
Investments
5,000
21,948
Right of use office lease asset
946
1,355
In-place lease intangible assets, net
7,385
8,245
Other assets, net
26,889
30,020
Total assets
$ 2,378,047
$ 2,391,090
Liabilities and stockholders’ equity
Liabilities:
Exchangeable Senior Notes, net
$
—
$
4,431
Notes due 2026, net
297,865
296,449
Building improvements and construction funding payable
10,230
9,591
Accounts payable and accrued expenses
10,561
11,406
Dividends payable
54,817
51,827
Rent received in advance and tenant security deposits
57,176
59,358
Other liabilities
11,338
5,056
Total liabilities
441,987
438,118
Commitments and contingencies (Notes 6 and 11)
Stockholders’ equity:
Preferred stock, par value $0.001 per share, 50,000,000 shares authorized: 9.00% Series A
cumulative redeemable preferred stock, liquidation preference of $25.00 per share,
1,002,673 and 600,000 shares issued and outstanding at December 31, 2024 and December
31, 2023, respectively
23,632
14,009
Common stock, par value $0.001 per share, 50,000,000 shares authorized: 28,331,833 and
28,140,891 shares issued and outstanding at December 31, 2024 and December 31, 2023,
respectively
28
28
Additional paid-in capital
2,124,113
2,095,789
Dividends in excess of earnings
(211,713)
(156,854)
Total stockholders’ equity
1,936,060
1,952,972
Total liabilities and stockholders’ equity
$ 2,378,047
$ 2,391,090
See the accompanying notes to the consolidated financial statements.
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F-5
Innovative Industrial Properties, Inc.
Consolidated Statements of Income
(In thousands, except share and per share amounts)
Years Ended December 31,
2024
2023
2022
Revenues:
Rental (including tenant reimbursements)
$
306,936
$
307,349
$
274,377
Other
1,581
2,157
1,982
Total revenues
308,517
309,506
276,359
Expenses:
Property expenses
28,472
24,893
10,520
General and administrative expense
37,444
42,832
38,520
Depreciation and amortization expense
70,807
67,194
61,303
Total expenses
136,723
134,919
110,343
Gain (loss) on sale of real estate
(3,449)
—
3,601
Income from operations
168,345
174,587
169,617
Interest income
10,988
8,446
3,195
Interest expense
(17,672)
(17,467)
(18,301)
Gain (loss) on exchange of Exchangeable Senior Notes
—
22
(125)
Net income
161,661
165,588
154,386
Preferred stock dividends
(1,804)
(1,352)
(1,352)
Net income attributable to common stockholders
$
159,857
$
164,236
$
153,034
Net income attributable to common stockholders per share (Note 8):
Basic
$
5.58
$
5.82
$
5.57
Diluted
$
5.52
$
5.77
$
5.52
Weighted-average shares outstanding:
Basic
28,226,402
27,977,807
27,345,047
Diluted
28,530,650
28,255,797
27,663,169
See accompanying notes to the consolidated financial statements.
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F-6
Innovative Industrial Properties, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)
Shares of
Additional Dividends in
Total
Series A
Series A
Shares of
Common
Paid-In-
Excess of
Stockholders'
Preferred Stock
Preferred Stock
Common Stock
Stock
Capital
Earnings
Equity
Balance, December 31, 2021
600,000
$
14,009
25,612,541
$
26
$ 1,672,882
$
(75,218)
$
1,611,699
Adjustment to opening balance
upon adoption of ASU 2020-06
(Note 2)
—
—
—
—
(1,340)
728
(612)
Net income
—
—
—
—
—
154,386
154,386
Exchange of Exchangeable Senior
Notes
—
—
413,166
—
26,682
—
26,682
Net proceeds from sale of
common stock
—
—
1,932,813
2
351,958
—
351,960
Preferred stock dividend
—
—
—
—
—
(1,352)
(1,352)
Common stock dividend
—
—
—
—
—
(195,936)
(195,936)
Issuance of unvested restricted
stock, net of forfeitures
—
—
14,310
—
(2,441)
—
(2,441)
Stock-based compensation
—
—
—
—
17,507
—
17,507
Balance, December 31, 2022
600,000
14,009
27,972,830
28
2,065,248
(117,392)
1,961,893
Net income
—
—
—
—
—
165,588
165,588
Exchange of Exchangeable Senior
Notes
—
—
32,200
—
1,964
—
1,964
Net proceeds from sale of
common stock
—
—
101,061
—
9,564
—
9,564
Preferred stock dividend
—
—
—
—
—
(1,352)
(1,352)
Common stock dividend
—
—
—
—
—
(203,698)
(203,698)
Issuance of unvested restricted
stock, net of forfeitures
—
—
34,800
—
(568)
—
(568)
Stock-based compensation
—
—
—
—
19,581
—
19,581
Balance, December 31, 2023
600,000
14,009
28,140,891
28
2,095,789
(156,854)
1,952,972
Net income
—
—
—
—
—
161,661
161,661
Exchange of Exchangeable Senior
Notes
—
—
28,408
—
—
—
—
Net proceeds from sale of
preferred stock
402,673
9,623
—
—
—
—
9,623
Net proceeds from sale of
common stock
—
—
123,224
—
11,757
—
11,757
Preferred stock dividend
—
—
—
—
—
(1,804)
(1,804)
Common stock dividend
—
—
—
—
—
(214,716)
(214,716)
Issuance of unvested restricted
stock, net of forfeitures
—
—
39,310
—
(750)
—
(750)
Stock-based compensation
—
—
—
—
17,317
—
17,317
Balance, December 31, 2024
1,002,673
$
23,632
28,331,833
$
28
$ 2,124,113
$
(211,713)
$
1,936,060
See accompanying notes to the consolidated financial statements.
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F-7
Innovative Industrial Properties, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
2024
2023
2022
Cash flows from operating activities
Net income
$
161,661
$
165,588
$
154,386
Adjustments to reconcile net income to net cash provided by (used in) operating
activities
Depreciation and amortization
70,807
67,194
61,303
Loss (gain) on exchange of Exchangeable Senior Notes
—
(22)
125
Loss (gain) on sale of real estate
3,449
—
(3,601)
Other non-cash adjustments
103
111
185
Stock-based compensation
17,317
19,581
17,507
Amortization of discounts on investments
(506)
(3,198)
(2,246)
Amortization of debt discount and issuance costs
1,669
1,371
1,349
Changes in assets and liabilities
Other assets, net
126
352
(3,506)
Accounts payable, accrued expenses and other liabilities
6,002
3,924
2,717
Rent received in advance and tenant security deposits
(2,182)
642
5,911
Net cash provided by (used in) operating activities
258,446
255,543
234,130
Cash flows from investing activities
Purchases of investments in real estate
(18,666)
(34,906)
(150,090)
Proceeds from sale of real estate asset
9,100
—
23,500
Funding of draws for improvements and construction
(63,084)
(150,088)
(373,878)
Funding of construction loan and other investments
(800)
(3,979)
(21,683)
Deposits in escrow for acquisitions
—
—
(250)
Purchases of short-term investments
(45,110)
(111,872)
(388,800)
Maturities of short-term investments
62,564
294,057
515,000
Net cash provided by (used in) investing activities
(55,996)
(6,788)
(396,201)
Cash flows from financing activities
Issuance of common stock, net of offering costs
11,757
9,564
351,960
Issuance of preferred stock, net of offering costs
9,623
—
—
Principal payment on Exchangeable Senior Notes
(4,436)
—
—
Payment of deferred financing costs
(567)
(561)
—
Dividends paid to common stockholders
(211,953)
(202,711)
(183,943)
Dividends paid to preferred stockholders
(1,578)
(1,352)
(1,352)
Taxes paid related to net share settlement of equity awards
(750)
(568)
(2,441)
Net cash provided by (used in) financing activities
(197,904)
(195,628)
164,224
Net increase (decrease) in cash, cash equivalents and restricted cash
4,546
53,127
2,153
Cash, cash equivalents and restricted cash, beginning of year
141,699
88,572
86,419
Cash, cash equivalents and restricted cash, end of year
$
146,245
$
141,699
$
88,572
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net of interest capitalized
$
16,051
$
16,125
$
17,247
Supplemental disclosure of non-cash investing and financing activities:
Accrual for current-period additions to real estate
$
9,722
$
8,385
$
29,376
Deposits applied for acquisitions
—
250
25
Accrual for common and preferred stock dividends declared
54,817
51,827
50,840
Reclassification from other assets to real estate held for investment
3,152
—
—
Exchange of Exchangeable Senior Notes for common stock
—
2,000
26,682
Operating lease liability for obtaining right of use asset
—
—
1,017
See accompanying notes to the consolidated financial statements.
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F-8
Innovative Industrial Properties, Inc.
Notes to Consolidated Financial Statements
1. Organization
As used herein, the terms “we”, “us”, “our”, or the “Company” refer to Innovative Industrial Properties, Inc., a Maryland
corporation, and any of our subsidiaries, including IIP Operating Partnership, LP, a Delaware limited partnership (our
“Operating Partnership”).
We are an internally-managed real estate investment trust (“REIT”) focused on the acquisition, ownership and
management of specialized industrial properties leased to experienced, state-licensed operators for their regulated cannabis
facilities. We have acquired and intend to continue to acquire our properties through sale-leaseback transactions and third-
party purchases. We have leased and expect to continue to lease our properties on a triple-net lease basis, where the tenant is
responsible for all aspects of and costs related to the property and its operation during the lease term, including structural
repairs, maintenance, real estate taxes and insurance.
We were incorporated in Maryland on June 15, 2016. We conduct our business through a traditional umbrella partnership
real estate investment trust, or UPREIT structure, in which our properties are owned by our Operating Partnership, directly or
through subsidiaries. We are the sole general partner of our Operating Partnership and own, directly or through subsidiaries,
100% of the limited partnership interests in our Operating Partnership.
Information with respect to rentable square footage is unaudited.
2. Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements
Basis of Presentation. The consolidated financial statements include all of the accounts of the Company, the Operating
Partnership and all of our wholly owned subsidiaries, are presented in accordance with U.S. generally accepted accounting
principles.
Federal Income Taxes. We believe that we have operated our business so as to qualify to be taxed as a REIT for U.S.
federal income tax purposes. Under the REIT operating structure, we are permitted to deduct dividends paid to our
stockholders in determining our taxable income. Assuming our dividends equal or exceed our taxable net income, we
generally will not be required to pay federal corporate income taxes on such income. The income taxes recorded on our
consolidated statements of income represent amounts paid for city and state income and franchise taxes and are included in
general and administrative expenses in the accompanying consolidated statements of income.
Use of Estimates. The preparation of the consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires management to make a number of estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements
and reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from these
estimates and assumptions. The most significant estimates and assumptions made include determination of lease accounting
and fair value of acquisition of real estate properties.
Reportable Segment. We have aggregated our properties into one reportable segment as the properties share similar
long-term economic characteristics and have other similarities, including the fact that they are operated using consistent
business strategies. Our chief operating decision maker (“CODM”) reviews financial information for our entire consolidated
operations when making decisions related to assessing our operating performance. See Note 12 “Segment Information” for
additional information.
Acquisition of Real Estate Properties. Our investment in real estate is recorded at historical cost, less accumulated
depreciation. Upon acquisition of a property, the tangible and intangible assets acquired and liabilities assumed are initially
measured based upon their relative fair values. We estimate the fair value of land by reviewing comparable sales within the
same submarket and/or region. We estimate the fair value of buildings and improvements as if the property was vacant
utilizing a direct capitalization approach and take into consideration current replacement costs and other relevant market rate
information and may engage third-party valuation specialists. Acquisition costs are capitalized as incurred. All of our
acquisitions to date were recorded as asset acquisitions.
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F-9
The fair value of acquired in-place leases is derived based on our assessment of estimated lost revenue and costs incurred
for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amounts recorded
for acquired in-place leases are reflected as in-place lease intangible assets, net on the consolidated balance sheets and are
amortized on a straight-line basis as a component of depreciation and amortization expense over the remaining term of the
applicable leases.
The fair value of the above-market component of an acquired in-place operating lease is based upon the present value
(calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease
over its remaining non-cancellable lease term and (ii) our estimate of the rents that would be paid using fair market rental rates
and rent escalations at the date of acquisition measured over the remaining non-cancellable term of the lease. The amount
recorded for one above-market operating lease is included in other assets, net on the consolidated balance sheets and is
amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable lease.
Certain acquisitions of real estate did not satisfy the requirements for sale-leaseback accounting and therefore as of
December 31, 2024 and 2023, acquisitions of $16.8 million and $20.0 million, respectively, have been recognized as notes
receivable and are included in other assets, net on our consolidated balance sheets. During the year ended December 31, 2024,
a $3.2 million acquisition of real estate which previously did not satisfy the requirements for sale-leaseback accounting was
reclassified to real estate held for investment as the requirements for sale-leaseback accounting were satisfied.
Sale of Real Estate. When a real estate asset is sold, we evaluate the provisions of Accounting Standards Codification
(“ASC”) 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”) to determine whether the
asset is within the scope of ASC 610-20, including an evaluation of whether the asset being sold is a nonfinancial asset and
whether the buyer has gained control of an asset within the scope of ASC 610-20. In assessing whether the buyer has gained
control of the asset, we must determine whether the contract criteria in ASC 606, Revenue from Contracts with Customers
(Topic 606) have been met, including 1) the parties to the contract have approved the contract and the contract has commercial
substance, 2) we can identify each party’s rights regarding the asset to be transferred, 3) we can identify the payment terms for
the asset to be transferred, and 4) it is probable that we will collect substantially all of the consideration to which we will be
entitled in exchange for the asset to be transferred. If all of the contract criteria have been met, the carrying amount of the
applicable asset is derecognized with a corresponding gain or loss from the sale recognized in our consolidated statements of
income. If the contract criteria are not all met, the asset transferred is not derecognized and we continue to report the asset in
our consolidated balance sheet. See Note 6 “Investments in Real Estate - Property Dispositions” for further information.
Cost Capitalization and Depreciation. We capitalize costs (including interest) associated with development and
redevelopment activities and improvements when we are considered to be the accounting owner of the resulting assets. The
development and redevelopment activities may be funded by us pursuant to the lease. We are generally considered the
accounting owner for such improvements that are attached to or built into the premises, which are required under the lease to
be surrendered to us upon the expiration or earlier termination of the lease. Typically, such improvements include, but are not
limited to, ground up development, and enhanced HVAC, plumbing, electrical and other building systems.
Amounts capitalized are depreciated on a straight-line basis over the estimated useful lives determined by management.
We depreciate buildings and improvements based on our evaluation of the estimated useful life of each specific asset, not to
exceed 40 years. For the years ended December 31, 2024, 2023 and 2022, we recognized depreciation expense of $69.9
million, $66.3 million and $60.5 million, respectively, which are included in depreciation and amortization expense in our
consolidated statements of income. We depreciate office equipment and furniture and fixtures on a straight-line basis over the
estimated useful lives ranging from three to seven years. We depreciate the leasehold improvements at our corporate office on
a straight-line basis over the shorter of the estimated useful lives or the remaining lease term. Depreciation expense relating to
our corporate assets is included in general and administrative expense in our consolidated statements of income.
Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires
management to exercise significant judgment. Project costs that are clearly associated with the acquisition and development or
redevelopment of a real estate project, for which we are the accounting owner, are capitalized as a cost of that project.
Expenditures that meet one or more of the following criteria generally qualify for capitalization:
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F-10
●
the expenditure provides benefit in future periods; and
●
the expenditure extends the useful life of the asset beyond our original estimates.
We define redevelopment properties as existing properties for which we expect to spend significant development and
construction costs that are not reimbursements to tenants for improvements at the properties. When existing properties are
determined to be redevelopment properties, the net carrying value of the buildings and improvements are transferred to
construction in progress while the redevelopment activities are in process. Costs capitalized to construction in progress related
to redevelopment properties are transferred to buildings and improvements at historical cost of the properties as the
redevelopment project or phases of projects are placed in service.
Provision for Impairment. On a quarterly basis, we review current activities and changes in the business conditions of
all of our properties prior to and subsequent to the end of each quarter to determine the existence of any triggering events or
impairment indicators requiring an impairment analysis. If triggering events or impairment indicators are identified, we review
an estimate of the future undiscounted cash flows for the properties.
Long-lived assets are individually evaluated for impairment when conditions exist that may indicate that the carrying
amount of a long-lived asset may not be recoverable. The carrying amount of a long-lived asset to be held and used is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of
the asset. Impairment indicators or triggering events for long-lived assets to be held and used are assessed by project and
include significant fluctuations in estimated net operating income, occupancy changes, significant near-term lease expirations,
current and historical operating and/or cash flow losses, construction costs, estimated completion dates, rental rates, and other
market factors. We assess the expected undiscounted cash flows based upon numerous factors, including, but not limited to,
construction costs, available market information, current and historical operating results, known trends, current
market/economic conditions that may affect the property, and our assumptions about the use of the asset, including, if
necessary, a probability-weighted approach if multiple outcomes are under consideration. Upon determination that an
impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value. We may adjust
depreciation of properties that are expected to be disposed of or redeveloped prior to the end of their useful lives. No
impairment losses were recognized during the years ended December 31, 2024, 2023 and 2022.
Revenue Recognition. Our leases are triple-net leases, an arrangement under which the tenant maintains the property
while paying us rent. We recognize revenue for each of the leases at our properties that are classified as operating leases on a
cash basis due to the uncertain regulatory environment in the United States pertaining to the regulated cannabis industry, the
limited operating history of certain tenants and the resulting uncertainty of collectability of lease payments from each tenant
over the duration of the lease term. We evaluate a number of factors in our initial and ongoing assessments of collectability of
lease payments for each tenant on a lease-by-lease basis, including evaluations of each tenant’s financial performance,
liquidity and overall credit profile, availability and terms of capital for each tenant needed to conduct operations or refinance
existing obligations, utilization rates by property and lease duration. We also consider current market conditions, impact of
federal, state and local taxation and regulatory burdens and reasonable and supportable forecasts of future economic
conditions. Additionally, for operating leases, contractually obligated reimbursements from tenants for recoverable real estate
taxes, insurance and operating expenses are included in rental revenues in the period when such costs are reimbursed by the
tenants. Contractually obligated real estate taxes that are paid directly by the tenant to the tax authorities are not reflected in
our consolidated financial statements.
For the years ended December 31, 2024, 2023 and 2022, rental revenue included the application of $7.7 million, $8.7
million and $2.7 million of security deposits for contractual rent with certain tenants.
Construction Loan. We executed a construction loan agreement with a developer, pursuant to which we agreed to lend
up to $23.0 million for the development of a regulated cannabis cultivation and processing facility in California. We have an
option to purchase the property, and may execute a negotiated lease with an affiliate of the developer or with another third
party, if we determine to exercise our purchase option. In February 2023, we amended the construction loan to provide for,
among other things, an extension of the loan term to December 31, 2023. Interest on the loan accrued through March 31,
2023, with monthly payments of interest commencing April 1, 2023. In December 2023, we further amended the construction
loan to extend the loan term to June 30, 2024, with an option for the borrower to extend the loan term to December 31, 2024
upon satisfaction of certain conditions and payment of an extension fee. The borrower exercised this extension option in June
2024. In November 2024, we further amended the construction loan to extend the
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F-11
loan term to June 30, 2025 upon satisfaction of certain conditions and payment of an extension fee. As of December 31, 2024
and 2023, we had funded $22.8 million and $22.0 million, respectively, of the construction loan. Interest income on the
construction loan is recognized on a cash basis.
Cash and Cash Equivalents. We consider all highly-liquid investments with original maturities of 90 days or less to be
cash equivalents, which is comprised of short-term money market funds, obligations of the U.S. government and certificates
of deposit with an original maturity at the time of purchase of less than or equal to 90 days.
Restricted Cash. Restricted cash relates to cash held in escrow accounts for future draws for improvements for tenants in
accordance with certain lease agreements.
Investments. Investments consist of short-term obligations of the U.S. government and certificates of deposit with an
original maturity at the time of purchase of greater than 90 days. Investments in obligations of the U.S. government are
classified as held-to-maturity and stated at amortized cost. Investments in certificates of deposit are classified as held-to-
maturity and stated at cost.
Exchangeable Notes. In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging
— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s
Own Equity. ASU 2020-06 simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash
conversion accounting models, and convertible debt proceeds, unless issued with a substantial premium or an embedded
conversion feature, will no longer be allocated between debt and equity components. ASU 2020-06 also updates the earnings
per share calculation and requires entities to assume share settlement when the convertible debt can be settled in cash or
shares. We adopted ASU 2020-06 on January 1, 2022 and recognized a cumulative-effect adjustment of approximately
$728,000 to the opening balance of retained earnings and derecognized approximately $1.3 million of the remaining equity
component relating to the outstanding principal balance of our Exchangeable Senior Notes at the date of adoption. The
Exchangeable Senior Notes matured in February 2024.
Deferred Financing Costs. The deferred financing costs relating to our Exchangeable Senior Notes and Notes due 2026
are included as a reduction in the net book value of the related liability on our consolidated balance sheets. These costs are
amortized as non-cash interest expense using the effective interest method over the life of the related obligations. Deferred
financing costs relating to our Revolving Credit Facility are included in other assets, net on our consolidated balance sheets.
These costs are being amortized on a straight-line basis and recognized as non-cash interest expense over the remaining term
of the Revolving Credit Facility.
Stock-Based Compensation. Stock-based compensation for equity awards is based on the grant date fair value of the
equity awards and is recognized over the requisite service or performance period. If awards are forfeited prior to vesting, we
reverse any previously recognized expense related to such awards in the period during which the forfeiture occurs and
reclassify any non-forfeitable dividends and dividend equivalents previously paid on these awards from retained earnings to
compensation expense. Forfeitures are recognized as incurred. Certain equity awards are subject to vesting based upon the
satisfaction of various market conditions. Forfeiture of share awards with market-based restrictions does not result in a
reversal of previously recognized share-based compensation expense.
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F-12
Lease Accounting. We account for our leases under ASC 842, Leases, and have elected the practical expedient not to
separate certain non-lease components from the lease component if the timing and pattern of transfer are the same for the non-
lease component and associated lease component, and the lease component would be classified as an operating lease if
accounted for separately. We also elected the short-term lease exception for lessees for leases that are less than 12 months. As
lessee, we recognized a liability to account for our future obligations and a corresponding right-of-use asset related to our
corporate office lease, which ends in January 2027 and contains annual escalations. We measured the lease liability based on
the present value of the future lease payments (excluding the extension option that we are not reasonably certain to exercise),
discounted using the estimated incremental borrowing rates of 7.25% and 5.5%, which were the interest rates that we
estimated we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease
payments at initial commencement in December 2019 and upon an amendment in November 2021, respectively. Subsequently,
the lease liability is accreted by applying a discount rate established at the lease commencement date to the lease liability
balance as of the beginning of the period and is reduced by the payments made during the period.
The right-of-use asset is measured based on the corresponding lease liability. We did not incur any initial direct leasing
costs and any other consideration exchanged with the landlord prior to the commencement of the lease. Subsequently, the
right-of-use asset is amortized on a straight-line basis during the lease term. For each of the years ended December 31, 2024,
2023 and 2022, we recognized office lease expense of $0.5 million, which are included in general and administrative expense
in our consolidated statements of income. For the years ended December 31, 2024, 2023 and 2022, amounts paid and
classified as operating activities in our consolidated statements of cash flows for the office lease were $0.5 million, $0.5
million and $0.4 million, respectively.
As lessor, for each of our real estate transactions involving the leaseback of the related property to the seller or affiliates
of the seller, we determine whether these transactions qualify as sale and leaseback transactions under the accounting
guidance. For these transactions, we consider various inputs and assumptions including, but not necessarily limited to, lease
terms, renewal options, discount rates, and other rights and provisions in the purchase and sale agreement, lease and other
documentation to determine whether control has been transferred to the Company or remains with the lessee. A transaction
involving a sale leaseback will be treated as a purchase of a real estate property if it is considered to transfer control of the
underlying asset from the lessee. A lease will be classified as direct-financing if risks and rewards are conveyed without the
transfer of control and will be classified as a sales-type lease if control of the underlying asset is transferred to the lessee.
Otherwise, the lease is treated as an operating lease. These criteria also include estimates and assumptions regarding the fair
value of the leased facilities, minimum lease payments, the economic useful life of the facilities, the existence of a purchase
option, and certain other terms in the lease agreements. The lease accounting guidance requires accounting for a transaction as
a financing in a sale leaseback when the seller-lessee is provided an option to purchase the property from the landlord at the
tenant’s option. Substantially all of our leases continued to be classified as operating leases and we continue to record revenue
for each of our properties on a cash basis. Our tenant reimbursable revenue and property expenses continue to be presented on
a gross basis as rental revenues and as property expenses, respectively, on our consolidated statements of income. Property
taxes paid directly by the lessee to a third party continue to be excluded from our consolidated financial statements.
Lease amendments are evaluated to determine if the modification grants the lessee an additional right-of-use not included
in the original lease and if the lease payments increase commensurate with the standalone price of the additional right-of-use,
adjusted for the circumstances of the particular contract. If both conditions are present, the lease amendment is accounted for
as a new lease that is separate from the original lease. In January 2024, the lease modifications for two of our leases to extend
the initial term of each lease changed the lease classification from operating lease to sales-type lease that did not satisfy all the
criteria for recognition as a completed sale. Accordingly, we continue to recognize the underlying assets within net real estate
held for investment and all lease payments received, as well as any future lease payments, will be recognized as a deposit
liability and will be included in other liabilities on our consolidated balance sheets until certain criteria are met. As of
December 31, 2024, we have received lease payments of $4.9 million that have been included in other liabilities on our
consolidated balance sheets. The underlying assets’ land and building and improvements had a gross carrying value of $4.1
million and $28.9 million, respectively, and accumulated depreciation of $3.5 million as of December 31, 2024.
Our leases generally contain options to extend the lease terms at the prevailing market rate or at the expiring rental rate at
the time of expiration. Certain of our leases provide the lessee with a right of first refusal or right of first offer in the event we
market the leased property for sale.
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F-13
Recent Accounting Pronouncements. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic
280): Improvements to Reportable Segment Disclosures. The amendments in ASU 2023-07 improve reportable segment
disclosure requirements, primarily through enhanced disclosures about significant segment expenses, measures of segment
profit and loss, and disclosures of how the CODM uses the reported measure(s) of a segment’s profit or loss in assessing
segment performance and deciding how to allocate resources. The ASU also requires a public entity that has a single
reportable segment to provide all the disclosures required by the amendments in this ASU and all existing segment disclosures
in Topic 280. We adopted ASU 2023-07 for the year ending December 31, 2024 which resulted in incremental disclosures
relating to reportable segment within the footnotes to our consolidated financial statements.
In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses. The amendments in
ASU 2024-03 require entities to provide enhanced disclosures related to certain expense categories included in income
statement captions. Under ASU 2024-03, entities are required to disaggregate, in a tabular format, expense captions presented
on the face of the income statement — excluding earnings or losses from equity method investments — if they include any of
the following expense categories: purchases of inventory, employee compensation, depreciation, intangible asset amortization,
and depreciation, depletion, and amortization recognized as part of oil and gas-producing activities (or other amounts of
depletion expense). For any remaining items within each relevant expense caption, entities must provide a qualitative
description of the nature of those expenses. ASU 2024-03 is effective for annual reporting periods beginning after December
15, 2026 and interim reporting periods beginning after December 15, 2027. Early adoption is permitted. We expect to adopt
this ASU on January 1, 2027. While the adoption is not expected to have an impact on our consolidated financial statements, it
is expected to result in incremental disclosures within the footnotes to our consolidated financial statements.
Concentration of Credit Risk. As of December 31, 2024, we owned 109 properties located in 19 states. The ability of
any of our tenants to honor the terms of their leases is dependent upon the economic, regulatory, competition, natural and
social factors affecting the community in which that tenant operates.
The following tables set forth the five tenants in our portfolio that represented the largest percentage of our total rental
revenues for the years ended December 31, 2024, 2023 and 2022, including tenant reimbursements:
For the Year Ended
December 31, 2024
Percentage of
Number of
Rental
Leases
Revenue
PharmaCann Inc. ("PharmaCann")
11
17 %
Ascend Wellness Holdings, Inc. ("Ascend")
4
11 %
Green Thumb Industries, Inc. ("Green Thumb")
3
8 %
Holistic Industries, Inc. ("Holistic")
5
7 %
Curaleaf Holdings, Inc. ("Curaleaf")
8
7 %
For the Year Ended
December 31, 2023
Percentage of
Number of
Rental
Leases
Revenue
PharmaCann
11
15 %
Ascend
4
10 %
Green Thumb
3
8 %
SH Parents, Inc. ("Parallel")(1)
4
7 %
Curaleaf
8
7 %
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F-14
For the Year Ended
December 31, 2022
Percentage of
Number of
Rental
Leases
Revenue
PharmaCann
11
14 %
Parallel(1)
4
10 %
Ascend
4
9 %
Green Thumb
3
7 %
Trulieve Cannabis Corp. ("Trulieve")
6
7 %
(1)
We regained possession of two properties previously leased to Parallel in Texas and Pennsylvania in 2023.
In each of the tables above, these leases include leases with affiliates of each entity, for which the entity has provided a
corporate guaranty.
As of December 31, 2024, our largest property was located in New York and accounted for 5.5% of our net real estate
held for investment. No other properties accounted for more than 5% of our net real estate held for investment as of December
31, 2024. As of December 31, 2023, our largest property was located in New York and accounted for 5.4% of our net real
estate held for investment. No other properties accounted for more than 5% of our net real estate held for investment as of
December 31, 2023.
We have deposited cash with financial institutions that is insured by the Federal Deposit Insurance Corporation (“FDIC”)
up to $250,000. As of December 31, 2024, we had cash accounts in excess of FDIC insured limits. We have not experienced
any losses in such accounts.
3. Common Stock
As of December 31, 2024, the Company was authorized to issue up to 50,000,000 shares of common stock, par value
$0.001 per share, and there were 28,331,833 shares of common stock issued and outstanding.
In January 2023, we entered into new equity distribution agreements with four sales agents, pursuant to which we may
offer and sell from time-to-time through an “at-the-market” offering program (the “Prior ATM Program”) up to $500.0 million
in shares of our common stock.
In May 2024, we terminated the Prior ATM Program and entered into new equity distribution agreements with four sales
agents, pursuant to which we may offer and sell from time to time through an “at-the-market” offering program (the “ATM
Program”), including on a forward basis, shares of our common stock and 9.00% Series A Cumulative Redeemable Preferred
Stock, $0.001 par value per share (the “Series A Preferred Stock”), up to an aggregate offering price of $500.0 million. See
Note 4 “Preferred Stock” for information regarding the sale of Series A Preferred Stock under the ATM Program.
During the years ended December 31, 2024, 2023 and 2022, we sold 123,224 shares, 101,061 shares and 117,023 shares
of our common stock pursuant to the Prior ATM Program for net proceeds of $11.8 million, $9.6 million and $21.1 million,
respectively.
In April 2022, we issued 1,815,790 shares of common stock in an underwritten public offering, including the exercise in
full of the underwriters’ option to purchase an additional 236,842 shares, resulting in net proceeds of approximately
$330.9 million.
During the year ended December 31, 2022, we issued 413,166 shares of our common stock upon exchange by holders of
approximately $26.9 million of outstanding principal amount of our Exchangeable Senior Notes.
During the year ended December 31, 2023, we issued 32,200 shares of our common stock upon exchange by holders of
$2.0 million of outstanding principal amount of our Exchangeable Senior Notes.
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F-15
During the year ended December 31, 2024, we issued 28,408 shares of our common stock related to the exchange
premium upon exchange by holders of $4.3 million of outstanding principal amount of our Exchangeable Senior Notes.
4. Preferred Stock
As of December 31, 2024, the Company was authorized to issue up to 50,000,000 shares of preferred stock, par value
$0.001 per share, and there were issued and outstanding 1,002,673 shares of 9.00% Series A Cumulative Redeemable
Preferred Stock (the “Series A Preferred Stock”). The Company may, at its option, redeem the Series A Preferred Stock, in
whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus all accrued and
unpaid dividends on such Series A Preferred Stock up to, but excluding the redemption date. Holders of the Series A Preferred
Stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more
quarterly periods (whether or not consecutive) and in certain other circumstances.
During the year ended December 31, 2024, we sold 402,673 shares of our Series A Preferred Stock pursuant to the ATM
Program for net proceeds of $9.6 million.
Table of Contents
F-16
5. Dividends
The following table describes the dividends declared by the Company during the years ended December 31, 2024, 2023
and 2022:
Amount
Dividend
Dividend
Declaration Date
Security Class
Per Share
Period Covered
Paid Date
Amount
(In thousands)
March 14, 2022
Common stock
$
1.75
January 1, 2022 to March 31, 2022
April 14, 2022
$
45,830
March 14, 2022
Series A preferred stock
$
0.5625
January 15, 2022 to April 14, 2022
April 14, 2022
$
338
June 15, 2022
Common stock
$
1.75
April 1, 2022 to June 30, 2022
July 15, 2022
$
49,101
June 15, 2022
Series A preferred stock
$
0.5625
April 15, 2022 to July 14, 2022
July 15, 2022
$
338
September 15, 2022
Common stock
$
1.80
July 1, 2022 to September 30, 2022
October 14, 2022
$
50,503
September 15, 2022
Series A preferred stock
$
0.5625
July 15, 2022 to October 14, 2022
October 14, 2022
$
338
December 15, 2022
Common stock
$
1.80
October 1, 2022 to December 31,
2022
January 13, 2023
$
50,502
December 15, 2022
Series A preferred stock
$
0.5625
October 15, 2022 to January 14,
2023
January 13, 2023
$
338
March 15, 2023
Common stock
$
1.80
January 1, 2023 to March 31, 2023
April 14, 2023
$
50,725
March 15, 2023
Series A preferred stock
$
0.5625
January 15, 2023 to April 14, 2023
April 14, 2023
$
338
June 15, 2023
Common stock
$
1.80
April 1, 2023 to June 30, 2023
July 14, 2023
$
50,742
June 15, 2023
Series A preferred stock
$
0.5625
April 15, 2023 to July 14, 2023
July 14, 2023
$
338
September 15, 2023
Common stock
$
1.80
July 1, 2023 to September 30, 2023
October 13, 2023
$
50,742
September 15, 2023
Series A preferred stock
$
0.5625
July 15, 2023 to October 14, 2023
October 13, 2023
$
338
December 15, 2023
Common stock
$
1.82
October 1, 2023 to December 31,
2023
January 12, 2024
$
51,489
December 15, 2023
Series A preferred stock
$
0.5625
October 15, 2023 to January 14,
2024
January 12, 2024
$
338
March 15, 2024
Common stock
$
1.82
January 1, 2024 to March 31, 2024
April 15, 2024
$
51,957
March 15, 2024
Series A preferred stock
$
0.5625
January 15, 2024 to April 14, 2024
April 15, 2024
$
338
June 14, 2024
Common stock
$
1.90
April 1, 2024 to June 30, 2024
July 15, 2024
$
54,253
June 14, 2024
Series A preferred stock
$
0.5625
April 15, 2024 to July 14, 2024
July 15, 2024
$
338
September 13, 2024
Common stock
$
1.90
July 1, 2024 to September 30, 2024
October 15, 2024
$
54,253
September 13, 2024
Series A preferred stock
$
0.5625
July 15, 2024 to October 14, 2024
October 15, 2024
$
564
December 13, 2024
Common stock
$
1.90
October 1, 2024 to December 31,
2024
January 15, 2025
$
54,253
December 13, 2024
Series A preferred stock
$
0.5625
October 15, 2024 to January 14,
2025
January 15, 2025
$
564
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F-17
6. Investments in Real Estate
Acquisitions
The Company made the following acquisitions during the year ended December 31, 2024 (dollars in thousands):
Rentable
Initial
Square
Purchase
Transaction
Property
Market
Closing Date
Feet(1)
Price
Costs
Total
Ocala
Florida
June 7, 2024
145,000
$
13,000
$
26
$
13,026 (2)
108 Western Maryland
Parkway
Maryland
October 2, 2024
23,000
5,570
70
5,640
Total
168,000
$
18,570
$
96
$
18,666 (3)
(1)
Includes expected rentable square feet at completion of construction of certain properties.
(2)
The tenant is expected to complete improvements at the property, for which we agreed to provide funding of up to $30.0 million.
(3)
$2.8 million was allocated to land and $15.9 million was allocated to building and improvements.
Acquired In-Place Lease Intangible Assets
In-place lease intangible assets and related accumulated amortization as of December 31, 2024 and 2023 is as follows (in
thousands):
December 31, 2024
December 31, 2023
In-place lease intangible assets
$
9,979
$
9,979
Accumulated amortization
(2,594)
(1,734)
In-place lease intangible assets, net
$
7,385
$
8,245
Amortization of in-place lease intangible assets classified in depreciation and amortization expense in our consolidated
statements of income was $0.9 million, $0.9 million and $0.8 million for the years ended December 31, 2024, 2023 and 2022,
respectively. The remaining weighted-average amortization period of the value of acquired in-place leases was 8.8 years, and
the estimated annual amortization of the value of the acquired in-place leases as of December 31, 2024 is as follows (in
thousands):
Year
Amount
2025
$
860
2026
860
2027
860
2028
860
2029
860
Thereafter
3,085
Total
$
7,385
Above-Market Lease
The above-market lease and related accumulated amortization included in other assets, net on our consolidated balance
sheets as of December 31, 2024 and 2023 is as follows (in thousands):
December 31, 2024
December 31, 2023
Above-market lease
$
1,054
$
1,054
Accumulated amortization
(279)
(187)
Above-market lease, net
$
775
$
867
Table of Contents
F-18
The above-market lease is amortized on a straight-line basis as a reduction to rental revenues over the remaining lease
term of 8.5 years. For all three years ended December 31, 2024, 2023 and 2022, the amortization of the above-market lease
was $0.1 million. As of December 31, 2024, the amortization for each of the next five years is $0.1 million and $0.3 million
thereafter.
Lease Amendments
In January 2024, we entered into lease amendments with subsidiaries of 4Front Ventures Corp. (“4Front”) at the four
properties we lease to them in Illinois, Massachusetts and Washington, extending the term of each lease. We amended the
Illinois lease to reduce base rent through September 30, 2024, defer the payback of the security deposit applicable to the lease
(with the security deposit being subject to future pro-rata monthly payback), and increase the base rent for the remainder of
the term commencing November 1, 2024.
In February 2024, we amended our lease and development agreement with PharmaCann at one of our New York
properties, increasing the construction funding commitment by $16.0 million, which also resulted in a corresponding
adjustment to the base rent for the lease at the property. We also amended the lease to extend the term.
In April 2024, we amended our lease with a subsidiary of Battle Green Holdings LLC at one of our Ohio properties to
provide an additional improvement allowance of $4.5 million, which also resulted in a corresponding adjustment to the base
rent for the lease at the property.
In April 2024, we amended the lease with a subsidiary of 4Front at one of our Illinois properties to provide an additional
improvement allowance of $1.6 million, which also resulted in a corresponding adjustment to the base rent for the lease at the
property and increased the annual base rent escalations for the remainder of the lease term.
New Leases
In January 2024, we executed a new lease with a tenant at one of our retail properties in Michigan.
In March 2024, we executed a new long-term lease with a subsidiary of Gold Flora Corporation (“Gold Flora”) at our
property located at 63795 19th Avenue in Palm Springs, California (the “19th Ave. Lease”).
In April 2024, we executed a new long-term lease with Lume Cannabis Co. at our property located at 10070 Harvest Park
in Dimondale, Michigan.
In May 2024, we executed a new long-term lease with a subsidiary of Gold Flora at our property located at 19533
McLane Street in Palm Springs, California (the “McLane Lease”).
The commencement date under each of the 19th Ave. Lease and McLane Lease is conditioned upon, among other things,
the tenant’s receipt of approvals to conduct cannabis operations by the requisite state and local authorities.
Capitalized Costs
Including all of our properties, during the year ended December 31, 2024, we capitalized costs of $63.7 million relating to
improvements and construction activities at our properties.
Property Dispositions
In November 2022, we sold one of our Pennsylvania properties that was leased to a subsidiary Maitri Holdings, LLC for
$23.5 million, excluding transaction costs, and recognized a gain on sale of the property of approximately $3.6 million.
In March 2023, we sold the portfolio of four properties in California previously leased to affiliates of Medical Investor
Holdings, LLC (“Vertical”) for $16.2 million (excluding transaction costs) and provided a secured loan for $16.1 million to
the buyer of the properties. The loan matures on February 29, 2028 with two options to extend the maturity for twelve months,
conditional in each instance on the payment of an extension fee and at least $0.5 million of the principal balance. The loan is
interest only and payments are payable monthly in advance. The transaction did not qualify for recognition as a completed sale
under GAAP since not all of the criteria were met. Accordingly, we have not derecognized the assets transferred on our
consolidated balance sheets. All consideration received, as well as any future
Table of Contents
F-19
payments, from the buyer will be recognized as a deposit liability and will be included in other liabilities on our consolidated
balance sheets until such time the criteria for recognition as a sale have been met. As of December 31, 2024, we received
interest payments of $2.4 million. In addition, as we have not met all of the held-for-sale criteria, land and building and
improvements with gross carrying values of $3.4 million and approximately $13.9 million, respectively, and accumulated
depreciation of $2.0 million as of December 31, 2024, remain on the consolidated balance sheets, and the buildings and
improvements continue to be depreciated.
In May 2024, we sold a property in Los Angeles, California for $9.1 million (excluding closing costs) to a third-party
buyer. Concurrently with the sale, pursuant to a separate agreement previously executed between us and the tenant, the tenant
paid us a lease termination fee of $3.9 million and paid for the closing and other costs incurred by us in connection with the
sale of the property. In connection with this sale, during the year ended December 31, 2024, we recognized a disposition-
contingent lease termination fee of $3.9 million, which is included in rental revenue (including tenant reimbursements) on our
consolidated statements of income, and a loss on sale of real estate of $3.4 million.
Future Contractual Minimum Rent
Future contractual minimum rent (including base rent and property management fees) to be received on our leases as of
December 31, 2024 for future periods is summarized as follows (in thousands):
Year
Contractual Minimum Rent
2025
$
311,157
2026
323,281
2027
331,954
2028
338,995
2029
348,298
Thereafter
3,643,029
Total
$
5,296,714
Future contractual minimum rent includes payments to be received on two sale-type leases, which will be recognized as a
deposit liability and will be included in other liabilities on our consolidated balance sheet until certain criteria are met (see
Note 2 “Lease Accounting” for further details).
7. Debt
Exchangeable Senior Notes
As of December 31, 2023, our Operating Partnership had outstanding $4.4 million of principal amount of 3.75%
Exchangeable Senior Notes due 2024 (the “Exchangeable Senior Notes”). The Exchangeable Senior Notes were senior
unsecured obligations of our Operating Partnership, were fully and unconditionally guaranteed by us and our Operating
Partnership’s subsidiaries and were exchangeable for cash, shares of our common stock, or a combination of cash and shares
of our common stock, at our Operating Partnership’s option, at any time prior to the close of business on the second scheduled
trading day immediately preceding the stated maturity date. The Exchangeable Senior Notes paid interest semiannually at a
rate of 3.75% per annum and matured on February 21, 2024. The effective interest rate including amortization of issuance
costs was 4.53%.
During the year ended December 31, 2024, we issued 28,408 shares of our common stock and paid $4.3 million in cash
upon exchange by holders of $4.3 million principal amount of Exchangeable Senior Notes and paid off the remaining $0.1
million principal amount at maturity in February 2024, in accordance with terms of the indenture for the Exchangeable Senior
Notes.
During the year ended December 31, 2023, we issued 32,200 shares of our common stock upon exchanges by holders of
$2.0 million of outstanding principal amount of our Exchangeable Senior Notes. For the year ended December 31, 2023, we
recognized a gain on the exchange totaling $22,000, resulting from the difference between the fair value and carrying value of
the debt as of the date of the exchange. The issuance of the shares pursuant to the exchanges resulted in a net non-cash
increase to our additional paid-in capital account of $2.0 million for the year ended December 31, 2023.
Table of Contents
F-20
During the year ended December 31, 2022, we issued 413,166 shares of our common stock upon exchanges by holders of
$26.9 million of outstanding principal amount of our Exchangeable Senior Notes. For the year ended December 31, 2022, we
recognized a loss on the exchange totaling approximately $0.1 million resulting from the difference between the fair value and
carrying value of the debt as of the date of the exchange. The issuance of the shares pursuant to the exchanges resulted in a
non-cash increase to our additional paid-in capital account of $26.7 million for the year ended December 31, 2022.
The following table details our interest expense related to the Exchangeable Senior Notes (in thousands):
For the Year Ended December 31,
2024
2023
2022
Cash coupon
$
24
$
182
$
452
Amortization of issuance cost
5
37
94
Capitalized interest
(1)
(7)
—
Total interest expense
$
28
$
212
$
546
The following table details the carrying value of our Exchangeable Senior Notes (in thousands):
December 31, 2024 December 31, 2023
Principal amount
$
— $
4,436
Unamortized issuance cost
—
(5)
Carrying value
$
— $
4,431
Accrued interest payable for the Exchangeable Senior Notes was $49,000 as of December 31, 2023 and is included in
accounts payable and accrued expenses on our consolidated balance sheets.
Notes due 2026
On May 25, 2021, our Operating Partnership issued $300.0 million aggregate principal amount of its 5.50% Senior Notes
due 2026 (the “Notes due 2026”). The Notes due 2026 are senior unsecured obligations of our Operating Partnership, are fully
and unconditionally guaranteed by us and rank equally in right of payment with all of the Operating Partnership’s existing and
future senior unsecured indebtedness, including the Exchangeable Senior Notes which matured in February 2024. However,
the Notes due 2026 are effectively subordinated to any of the Company’s, the Operating Partnership’s and the Operating
Partnership’s subsidiaries’ future secured indebtedness to the extent of the value of the assets securing such indebtedness. The
Notes due 2026 will pay interest semiannually at a rate of 5.50% per year and will mature on May 25, 2026. The terms of the
Notes due 2026 are governed by an indenture, dated May 25, 2021, among the Operating Partnership, as issuer, the Company
and the Operating Partnership’s subsidiaries, as guarantors, Argent Institutional Trust Company, as trustee (as successor-in-
interest to GLAS Trust Company LLC), and Securities Transfer Corporation, as registrar (as successor-in-interest to GLAS
Trust Company LLC). The terms of the indenture provide that if the debt rating on the Notes due 2026 is downgraded or
withdrawn entirely, interest on the Notes due 2026 will increase to a range of 6.0% to 6.5% based on such debt rating.
In connection with the issuance of the Notes due 2026, we recorded $6.8 million of issuance costs, which are being
amortized using the effective interest method and recognized as non-cash interest expense over the term of the Notes due
2026. The effective interest rate including amortization of issuance costs is 6.03%.
The following table details our interest expense related to the Notes due 2026 (in thousands):
For the Year Ended December 31,
2024
2023
2022
Cash coupon
$
16,500
$
16,500
$
16,500
Amortization of issuance cost
1,416
1,334
1,255
Capitalized interest
(565)
(620)
—
Total interest expense
$
17,351
$
17,214
$
17,755
Table of Contents
F-21
The following table details the carrying value of our Notes due 2026 (in thousands):
December 31, 2024 December 31, 2023
Principal amount
$
300,000 $
300,000
Unamortized issuance cost
(2,135)
(3,551)
Carrying value
$
297,865 $
296,449
The Operating Partnership may redeem some or all of the notes at its option at any time at the applicable redemption
price. If the notes are redeemed prior to February 25, 2026, the redemption price will be equal to 100% of the principal
amount of the notes being redeemed, plus a make-whole premium and accrued and unpaid interest thereon to, but excluding,
the applicable redemption date. If the notes are redeemed on or after February 25, 2026, the redemption price will be equal to
100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest thereon to, but excluding, the
applicable redemption date.
The terms of the indenture for the Notes due 2026 require compliance with various financial covenants, including
minimum level of debt service coverage and limits on the amount of total leverage and secured debt maintained by the
Operating Partnership. Management believes that it was in compliance with those covenants as of December 31, 2024.
Accrued interest payable for the Notes due 2026 as of December 31, 2024 and 2023 was $2.1 million and is included in
accounts payable and accrued expenses on our consolidated balance sheets.
Revolving Credit Facility
In October 2023, our Operating Partnership entered into a loan and security agreement (the “Loan Agreement”) with a
federally regulated commercial bank, as lender and as agent for lenders that become party thereto from time to time, which
matures on October 23, 2026. The Loan Agreement provided $50.0 million in aggregate commitments for secured revolving
loans (the “Revolving Credit Facility”), the availability of which is based on a borrowing base consisting of real properties
owned by subsidiaries (the “Subsidiary Guarantors”) of the Operating Partnership that satisfy eligibility criteria set forth in the
Loan Agreement. The obligations of the Operating Partnership under the Loan Agreement are guaranteed by the Company and
the Subsidiary Guarantors, and are secured by (i) operating accounts of the Operating Partnership into which lease payments
under the real property included in the borrowing base are paid, (ii) the equity interest of the Subsidiary Guarantors, (iii) the
real estate included in the borrowing base and the leases and rents thereunder, and (iv) all personal property of the Subsidiary
Guarantors. Borrowings under the Revolving Credit Facility bear interest at a variable rate based on the greater of the prime
rate and an applicable margin based on deposits with the participating bank(s) and a stipulated interest rate. The Revolving
Credit Facility is subject to an unused line of credit fee, calculated in accordance with the Loan Agreement. The Loan
Agreement is subject to certain liquidity and operating covenants and includes customary representations and warranties,
affirmative and negative covenants and events of default. The Loan Agreement also allows the Operating Partnership, subject
to the satisfaction of certain conditions, to request additional revolving loan commitments up to a specified amount. In
November 2024, our Operating Partnership entered into an amendment to the Loan Agreement, pursuant to which the
aggregate commitments under the Revolving Credit Facility were increased from $50.0 million to $87.5 million. There were
no amounts outstanding under the Revolving Credit Facility as of December 31, 2024 and 2023.
In connection with the Revolving Credit Facility, we recorded $0.8 million of issuance costs, which are being amortized
on a straight-line basis and recognized as non-cash interest expense over the term of the Revolving Credit Facility. For the
year ended December 31, 2024 and 2023, we recognized $0.3 million and $41,000 of non-cash interest expense related to the
Revolving Credit Facility.
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F-22
The following table summarizes the principal payments on our outstanding indebtedness as of December 31, 2024 (in
thousands):
Payments Due
by Year
Amount
2025
$
—
2026
300,000
2027
—
2028
—
2029
—
Thereafter
—
Total
$
300,000
8. Net Income Per Share
Grants of restricted stock and restricted stock units (“RSUs”) of the Company in share-based payment transactions are
considered participating securities prior to vesting and, therefore, are considered in computing basic earnings per share under
the two-class method. The two-class method is an earnings allocation method for calculating earnings per share when a
company’s capital structure includes either two or more classes of common stock or common stock and participating
securities. Earnings per basic share under the two-class method is calculated based on dividends declared on common shares
and other participating securities (“distributed earnings”) and the rights of participating securities in any undistributed
earnings, which represents net income remaining after deduction of dividends and dividend equivalents accruing during the
period. The undistributed earnings are allocated to all outstanding common shares and participating securities based on the
relative percentage of each security to the total number of outstanding participating securities. Earnings per basic share
represents the summation of the distributed and undistributed earnings per share class divided by the total number of shares.
Through December 31, 2024, all of the Company’s participating securities received dividends or dividend equivalents at
an equal dividend rate per share. As a result, distributions to participating securities have been included in net income
attributable to common stockholders to calculate net income per basic and diluted share.
The 9,468 shares, 81,169 shares and 202,076 shares necessary to settle the Exchangeable Senior Notes on the if-
exchanged method basis were dilutive for the years ended December 31, 2024, 2023 and 2022, respectively, and were
included in the computation of diluted earnings per share.
For the years ended December 31, 2024, 2023 and 2022, the performance share units (“PSUs”) granted to certain
employees were not included in dilutive securities as the performance thresholds for the vesting of the PSUs were not met as
measured as of the respective dates. (see Note 10 for further discussion of the PSUs).
Table of Contents
F-23
Computations of net income per basic and diluted share were as follows (in thousands, except share and per share data):
Years Ended December 31,
2024
2023
2022
Net income
$
161,661
$
165,588
$
154,386
Preferred stock dividends
(1,804)
(1,352)
(1,352)
Distribution to participating securities
(2,254)
(1,482)
(834)
Net income attributable to common stockholders used to compute net
income per share – basic
157,603
162,754
152,200
Dilutive effect of Exchangeable Senior Notes
28
212
546
Net income attributable to common stockholders used to compute net
income per share – diluted
$
157,631
$
162,966
$
152,746
Weighted-average common shares outstanding:
Basic
28,226,402
27,977,807
27,345,047
Restricted stock and RSUs
294,780
196,821
116,046
Dilutive effect of Exchangeable Senior Notes
9,468
81,169
202,076
Diluted
28,530,650
28,255,797
27,663,169
Net income attributable to common stockholders per share:
Basic
$
5.58
$
5.82
$
5.57
Diluted
$
5.52
$
5.77
$
5.52
9. Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants on the measurement date. Accounting guidance also establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Includes other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or no market activities, therefore requiring an entity to develop
its own assumptions.
The following table presents the carrying value and approximate fair value of financial instruments at December 31, 2024
and 2023 (in thousands):
At December 31, 2024
At December 31, 2023
Carrying Value
Fair Value
Carrying Value
Fair Value
Investments(1)
$
5,000
$
5,000
$
21,948
$
21,951
Investments as cash equivalents(2)
$
45,714
$
45,714
$
15,187
$
15,029
Exchangeable Senior Notes(3)
$
—
$
—
$
4,431
$
7,576
Notes due 2026(3)
$
297,865
$
289,077
$
296,449
$
278,325
Construction loan(4)
$
22,800
$
28,245
$
22,000
$
27,543
Notes receivable(5)
$
16,786
$
16,786
$
20,028
$
20,028
(1)
At December 31, 2024, investments consisting of short-term certificates of deposit with an original maturity at the time of purchase of greater than 90
days and less than one year are classified as held-to-maturity, stated at cost and valued using Level 2 inputs. At December 31, 2023, investments
consisting of short-term obligations of the U.S. government with an original maturity at the time of purchase of greater than 90 days and less than one
year are classified as held-to-maturity, stated at amortized cost and valued using Level 1 inputs. At December 31, 2023, the unrecognized gain was
$78,000.
(2)
Investments included in cash and cash equivalents consisting of obligations of the U.S. government with an original maturity at the time of purchase of
less than or equal to 90 days are classified as held-to-maturity and valued using Level 1 inputs.
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F-24
(3)
The fair value is determined based upon Level 2 inputs as the Exchangeable Senior Notes and Notes due 2026 were trading in the private market. Th
Exchangeable Senior Notes matured in February 2024.
(4)
The construction loan receivable is categorized as Level 3 and was valued using a yield analysis, which is typically performed for non-credit impaired
loans. To determine fair value using a yield analysis, a current price is imputed for the loan based upon an assessment of the expected market yield for a
similarly structured loan with a similar level of risk. In the yield analysis, the Company considers the current contractual interest rate, the maturity and
other terms of the loan relative to risk of the company and the specific loan. At both December 31, 2024 and 2023, the expected market yields used to
determine fair value was 16.25%. Changes in market yields may change the fair value of the construction loan. Generally, an increase in market yields
may result in a decrease in the fair value of the construction loan. Due to the inherent uncertainty of determining the fair value of a loan that does not
have a readily available market value, the fair value of the construction loan may fluctuate from period to period. Additionally, the fair value of the
construction loan may differ significantly from the value that would have been used had a readily available market existed for such loan and may differ
materially from the value that the Company may ultimately realize.
(5)
Notes receivable relate to certain acquisitions of real estate which did not satisfy the requirements for sale-leaseback accounting (see Note 2
“Acquisition of Real Estate Properties” to our consolidated financial statements for more information). The notes receivable are categorized as Level 3
and were also valued using a yield analysis. At December 31, 2024 and 2023, the weighted average expected market yields used to determine fair values
were 20.6% and 17.2%, respectively.
The carrying amounts of cash equivalents, accounts payable, accrued expenses and other liabilities approximate fair
values.
10. Common Stock Incentive Plan
Our board of directors adopted our 2016 Omnibus Incentive Plan (the “2016 Plan”), to enable us to motivate, attract and
retain the services of directors, employees and consultants considered essential to our long-term success. The 2016 Plan offers
our directors, employees and consultants an opportunity to own our stock or rights that will reflect our growth, development
and financial success. Under the terms of the 2016 Plan, the aggregate number of shares of our common stock subject to
options, restricted stock, stock appreciation rights, restricted stock units and other awards, will be no more than 1,000,000
shares. Any equity awards that lapse, expire, terminate, are canceled or are forfeited (including forfeitures in connection with
satisfaction of tax withholding obligations of the recipient) are re-credited to the 2016 Plan’s reserve for future issuance. The
2016 Plan automatically terminates on the date which is ten years following the effective date of the 2016 Plan.
A summary of the restricted stock activity under the 2016 Plan and related information for the years ended December 31,
2024, 2023 and 2022 is included in the table below:
Weighted-
Restricted
Average Grant Date
Shares
Fair Value
Nonvested balance at December 31, 2021
37,767
$
92.49
Granted
24,456
$
205.62
Vested
(18,051)
$
91.57
Forfeited(1)
(10,146)
$
69.74
Nonvested balance at December 31, 2022
34,026
$
181.08
Granted
40,770
$
105.85
Vested
(12,115)
$
173.37
Forfeited(1)
(5,970)
$
116.31
Nonvested balance at December 31, 2023
56,711
$
135.46
Granted
46,752
$
93.26
Vested
(18,753)
$
111.84
Forfeited(1)
(7,442)
$
205.15
Nonvested balance at December 31, 2024
77,268
$
108.95
(1)
Shares that were forfeited to cover the employees’ tax withholding obligation upon vesting or employees’ cessation of employment.
The remaining unrecognized compensation cost of $4.1 million for restricted stock awards is expected to be recognized
over a weighted-average amortization period of 1.7 years as of December 31, 2024. The fair value of restricted stock that
vested in 2024, 2023 and 2022 was $2.6 million, $1.7 million and $6.9 million, respectively.
The following table summarizes our RSU activity for the years ended December 31, 2024, 2023 and 2022. RSUs are
issued as part of the Innovative Industrial Properties, Inc. Nonqualified Deferred Compensation Plan (the “Deferred
Compensation Plan”), which allows a select group of management and our non-employee directors to defer receiving
Table of Contents
F-25
certain of their cash and equity-based compensation. RSUs are subject to vesting conditions of the Deferred Compensation
Plan and have the same economic rights as shares of restricted stock under the 2016 Plan:
Weighted-
Unvested
Average Grant Date
RSUs
Fair Value
Balance at December 31, 2021
60,326
$
120.24
Granted
23,351
$
206.45
Balance at December 31, 2022
83,677
$
144.30
Granted
66,279
$
101.40
Balance at December 31, 2023
149,956
$
125.34
Granted
72,546
$
92.64
Balance at December 31, 2024
222,502
$
114.68
The remaining unrecognized compensation cost of $6.5 million for RSU awards is expected to be recognized over an
amortization period of 1.7 years as of December 31, 2024.
In January 2021, we initiated the PSU program and issued 70,795 “target” PSUs to a select group of officers, which vest
and are settled in shares of common stock (“Award Shares”) based on the Company’s total stockholder return over a period
commencing on January 11, 2021 and ending on December 31, 2023 (the “Performance Period”) relative to two different
comparator groups of companies. In January 2022, we issued 102,641 “target” PSUs to a select group of officers, which vest
and are settled in shares of common stock (referred to herein together with the 2021 PSU Award Shares as the “Award
Shares”) based on the Company’s total stockholder return over a period commencing on January 11, 2022 and ending on
December 31, 2024 (referred to herein together with the 2021 PSU Performance Period as the “Performance Periods”) relative
to two different comparator groups of companies.
Stock-based compensation for market-based PSU awards is based on the grant date fair value of the equity awards and is
recognized over the applicable performance period. For the year ended December 31, 2024, 2023 and 2022, we recognized
stock-based compensation expense of $6.7 million, $10.7 million and $10.7 million, respectively, relating to PSU awards.
The PSUs granted in January 2021 were forfeited in their entirety on December 31, 2023 pursuant to the terms of the
agreements, as the PSUs failed to meet the performance threshold for vesting. The PSUs granted in January 2022 were
forfeited in their entirety on December 31, 2024 pursuant to the terms of the agreements, as the PSUs failed to meet the
performance threshold for vesting.
11. Commitments and Contingencies
Office Lease. The future contractual lease payments for our office lease and the reconciliation to the office lease liability
reflected in other liabilities in our consolidated balance sheet as of December 31, 2024 is presented in the table below (in
thousands):
Year
Amount
2025
$
526
2026
543
2027
45
2028
—
2029
—
Total future contractual lease payments
1,114
Effect of discounting
(66)
Office lease liability
$
1,048
Improvement Allowances. As of December 31, 2024, we had $37.1 million of commitments related to improvement
allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial
term of the applicable lease.
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F-26
Construction Commitments. As of December 31, 2024, we had approximately $1.2 million of commitments related to
contracts with vendors for improvements at our properties.
Construction Loan. As of December 31, 2024, we had $0.2 million of commitments related to our construction loan for
the development of a regulated cannabis cultivation and processing facility in California.
Environmental Matters. We follow the policy of monitoring our properties, both targeted acquisition and existing
properties, for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental
liability does not exist, we are not currently aware of any environmental liabilities that would have a material adverse effect on
our financial condition, results of operations and cash flow, or that we believe would require disclosure or the recording of a
loss contingency.
Litigation.
Class Action Lawsuits
On April 25, 2022, a federal securities class action lawsuit was filed against the Company and certain of its officers. The
case was named Michael V. Mallozzi, individually and on behalf of others similarly situated v. Innovative Industrial
Properties, Inc., Paul Smithers, Catherine Hastings and Andy Bui, Case No. 2-22-cv-02359, and was filed in the U.S. District
Court for the District of New Jersey. The lawsuit was purportedly brought on behalf of purchasers of our common stock and
alleges that we and certain of our officers made false or misleading statements regarding our business in violation of Section
10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), SEC Rule 10b-5, and Section 20(a) of the
Exchange Act. According to the filed complaint, the plaintiff is seeking an undetermined amount of damages, interest,
attorneys’ fees and costs and other relief on behalf of the putative classes of all persons who acquired shares of the Company’s
common stock between May 7, 2020 and April 13, 2022.
On September 29, 2022, an Amended Class Action Complaint was filed under the same Case Number, adding as
defendants Alan D. Gold and Benjamin C. Regin, and asserting causes of action under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. According to the Amended Class Action Complaint,
the plaintiff is seeking an undetermined amount of damages, interest, attorneys’ fees and costs and other relief on behalf of the
putative classes of all persons who acquired shares of the Company’s common stock between August 7, 2020 and August 4,
2022. On December 1, 2022, defendants moved to dismiss the Amended Class Action Complaint. On September 19, 2023, the
court granted defendants’ motion to dismiss the Amended Class Action Complaint without prejudice.
On October 19, 2023, a Second Amended Class Action Complaint was filed under the same Case Number, and asserted
causes of action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. According to the Second Amended Class Action Complaint, the plaintiff is seeking an undetermined amount of
damages, interest, attorneys’ fees and costs and other relief on behalf of the putative classes of all persons who acquired shares
of the Company’s common stock between August 7, 2020 and August 4, 2022. On December 18, 2023, defendants moved to
dismiss the Second Amended Class Action Complaint; on February 1, 2024, plaintiff responded with their opposition to
defendants’ motion to dismiss the Second Amended Class Action Complaint; and on March 1, 2024, defendants replied to
plaintiff’s response. On September 25, 2024, the court granted defendants’ motion to dismiss the Second Amended Class
Action Complaint with prejudice. On September 30, 2024, plaintiff filed a notice of appeal of the court’s dismissal of the
Second Amended Class Action Complaint with prejudice. On December 9, 2024, plaintiff filed their opening appellate brief
with the United States Court of Appeals for the Third Circuit. On January 23, 2025, defendants filed their appellate brief.
On January 17, 2025, a second federal securities class action lawsuit was filed against the Company and certain of its
officers. The case was named Alain Giraudon, individually and on behalf of others similarly situated v. Innovative Industrial
Properties, Inc., Alan D. Gold, Paul E. Smithers, David Smith and Ben Regin, Case No. 1:25-cv-00182-RDB, and was filed in
the U.S. District Court for the District of Maryland. The lawsuit was purportedly brought on behalf of purchasers of our
common stock and alleges that we and certain of our officers made false or misleading statements regarding our business in
violation of Section 10(b) of the Exchange Act, SEC Rule 10b-5, and Section 20(a) of the Exchange Act. According to the
filed complaint, the plaintiff is seeking an undetermined amount of damages, interest, attorneys’ fees and costs and other relief
on behalf of the putative classes of all persons who acquired shares of the Company’s common stock between February 27,
2024 and December 19, 2024.
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F-27
It is possible that similar lawsuits may yet be filed in the same or other courts that name the same or additional
defendants. We intend to defend the lawsuit vigorously. However, at this time, we cannot predict the probable outcome of this
action, and, accordingly, no amounts have been accrued in the Company’s consolidated financial statements.
Derivative Action Lawsuits
On July 26, 2022, a derivative action lawsuit was filed against the Company and certain of its officers and directors. The
case was named John Rice, derivatively on behalf of Innovative Industrial Properties, Inc. v. Paul Smithers, Catherine
Hastings, Andy Bui, Alan Gold, Gary Kreitzer, Mary Curran, Scott Shoemaker, David Stecher, and Innovative Industrial
Properties, Inc., Case Number 24-C-22-003312, and was filed in the Circuit Court for Baltimore City, Maryland. The lawsuit
asserts putative derivative claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and
waste of corporate assets against the directors and certain officers of the Company. The plaintiffs are seeking declaratory
relief, direction to reform and improve corporate governance and internal procedures, and an undetermined amount of
damages, restitution, interest, and attorneys’ fees and costs. On September 6, 2022, the defendants in this action filed a
Consent Motion to Stay the Proceedings, which was granted on October 11, 2022. On September 28, 2022, a second
derivative action lawsuit was filed against the Company and certain of its officers and directors. The case was named Karen
Draper, derivatively on behalf of Innovative Industrial Properties, Inc. v. Paul Smithers, Catherine Hastings, Andy Bui, Alan
Gold, Gary Kreitzer, Mary Curran, Scott Shoemaker, David Stecher, Defendants, and Innovative Industrial Properties Inc.,
Nominal Defendant, Case Number 24-C-22-004243, and filed in the Circuit Court for Baltimore City, Maryland. The lawsuit
asserts putative derivative claims for breach of fiduciary duty, and seeks actions to reform and improve the Company, and an
undetermined amount of damages, restitution, interest, and attorneys’ fees and costs. On October 19, 2022, the parties to both
cases filed a Joint Motion to Consolidate Related Shareholder Derivative Actions and to Appoint Lead and Liaison Counsel
for plaintiffs, which was granted on December 19, 2022, along with a stay in the lawsuit pending a ruling on the defendants’
motion to dismiss the federal class action lawsuit described above. On April 17, 2023, a third derivative action lawsuit was
filed against the Company and certain of its officers and directors. The case was named Ross Weintraub, derivatively on behalf
of Innovative Industrial Properties, Inc. v. Alan Gold, Paul Smithers, Catherine Hastings, Ben Regin, Andy Bui, Tracie Hager,
Gary Kreitzer, David Stecher, Scott Shoemaker, Mary Curran, and Innovative Industrial Properties, Inc., Case Number 1:23-
cv-00737-GLR, and filed in the United States District Court for the District of Maryland. The lawsuit asserts putative
derivative claims for breach of fiduciary duty and violations of Section 14(a) of the Exchange Act, and seeks an undetermined
amount of damages, equitable relief, and attorneys’ fees and costs. Defendants in this action filed a Consent Motion to Stay
the Proceeding, which was granted on April 17, 2023. On June 5, 2023, a fourth derivative action lawsuit was filed against the
Company and certain of its officers and directors. The case was named Franco DeBlasio, on behalf of Gerich Melenth Nin
(GMN) LP, derivatively on behalf of Innovative Industrial Properties, Inc. v. Paul Smithers, Catherine Hastings, Alan D. Gold,
Tracie J. Hager, Benjamin C. Regin, Andy Bui, Gary A. Kreitzer, David Stecher, Scott Shoemaker, Mary Curran, and
Innovative Industrial Properties, Inc., Case Number 1:23-cv-01513-GLR, and filed in the United States District Court for the
District of Maryland. On July 19, 2023, the United States Court for the District of Maryland consolidated Case Nos. 1:23-cv-
00737-GLR and 1:23-cv-01513-GLR with case number 1:23-cv-00737-GLR as the lead case, and kept the stay in place. The
consolidated case remains stayed as Case Number 24-C-22-003312. This derivative action relates to the same allegations as
those made in the Mallozzi class action, detailed above.
On May 9, 2024, a fifth derivative action lawsuit was filed against the Company and certain of its officers and directors.
The case was named Gary A Gedig, derivatively on behalf of Innovative Industrial Properties, Inc. v. Paul Smithers, Catherine
Hastings, Ben Regin, Andy Bui, Tracy Hager, Alan Gold, Gary A. Kreitzer, Mary Curran, Scott Shoemaker, M.D., and David
Stecher, and Innovative Industrial Properties, Inc., Civil No. C-24-CV-24-000130, and filed in the Circuit Court for Baltimore
City, Maryland. Plaintiff and defendants in this action filed a Joint Stipulation to Stay the Proceedings, which was granted on
September 17, 2024. This derivative action also relates to the same allegations as those made in the Mallozzi class action,
detailed above.
On February 12, 2025, a derivative action lawsuit was filed against the Company and certain of its officers and directors.
The case was named Joshua Steffens, derivatively on behalf of Innovative Industrial Properties, Inc. v. Alan Gold, Paul
Smithers, David Smith, Ben Regin, Gary Kreitzer, Gary Stecher, Scott Shoemaker, Mary Allis Curran, and Innovative
Industrial Properties, Inc., Case Number 1:25-cv-00456-ABA, and was filed in the United States District Court for the District
of Maryland. The lawsuit asserts putative derivative claims for violations of the Exchange Act, breach of fiduciary duty, aiding
and abetting breach of fiduciary duty, unjust enrichment, waste of corporate assets, and
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F-28
contribution against the directors and certain officers of the Company. The plaintiffs are seeking an undetermined amount of
damages, interest, an accounting and constructive trust, punitive damages, and attorneys’ fees and costs. This derivative action
relates to the same allegations as those made in the Giraudon class action, detailed above.
On February 13, 2025, a derivative action lawsuit was filed against the Company and certain of its officers and directors.
The case was named Joshua Albers, derivatively on behalf of Innovative Industrial Properties, Inc. v. Alan Gold, Paul
Smithers, David Smith, Ben Regin, Gary Kreitzer, Gary Stecher, Scott Shoemaker, Mary Allis Curran, and Innovative
Industrial Properties, Inc., Case Number 1:25-cv-00469-BAH, and was filed in the United States District Court for the District
of Maryland. The lawsuit asserts putative derivative claims for violations of the Exchange Act, breach of fiduciary duty, aiding
and abetting breach of fiduciary duty, unjust enrichment, waste of corporate assets, and contribution against the directors and
certain officers of the Company. The plaintiffs are seeking an undetermined amount of damages, interest, reform, punitive
damages, and attorneys’ fees and costs. This derivative action also relates to the same allegations as those made in the
Giraudon class action, detailed above.
The Company intends to vigorously defend each of these lawsuits. However, at this time, the Company cannot predict the
probable outcome of these actions, and, accordingly, no amounts have been accrued in the Company’s consolidated financial
statements.
We may, from time to time, be a party to other legal proceedings, which arise in the ordinary course of our business.
Although the results of these proceedings, claims, inquiries, and investigations cannot be predicted with certainty, we do not
believe that the final outcome of these matters is reasonably likely to have a material adverse effect on our business, financial
condition, or results of operations. Regardless of final outcomes, however, any such proceedings, claims, inquiries, and
investigations may nonetheless impose a significant burden on management and employees and may come with significant
defense costs or unfavorable preliminary and interim rulings.
Deferred Compensation Plan. In November 2019, we adopted the Innovative Industrial Properties, Inc. Nonqualified
Deferred Compensation Plan (the “Plan”), which allows a select group of management and non-employee directors to defer
receipt of their compensation, including up to 80% of base salary, 100% of bonus, 100% of director fees and 100% of
restricted equity awards. The Plan assets are held in a rabbi trust which is consolidated and included in the consolidated
financial statements.
12. Segment Information
We operate in one reportable segment of acquiring, developing/redeveloping and leasing real estate to tenants on a long-
term triple-net basis. All of our revenues are generated in the United States and the CODM manages the business activities on
a consolidated basis. The CODM is our President and Chief Executive Officer. The CODM assesses performance for the
segment and decides how to allocate resources based on net income, which is reported on the consolidated statements of
income. The CODM uses net income to evaluate return on investments and determine whether to reinvest profits or to pay
dividends. The evaluation is also used to establish management’s compensation. The revenues, expenses (including stock-
based compensation) and net income for the reportable segment are the same as those presented on the consolidated financial
statements. The measure of segment assets is reported on the consolidated balance sheets as total consolidated assets.
13. Subsequent Events
Lease Amendments
In January 2025, we entered into lease amendments with PharmaCann with respect to nine of its leases for properties
located in New York, Illinois, Pennsylvania, Ohio, and Colorado. Those lease amendments reduced cumulative total base rent
from $2.8 million per month to $2.6 million per month, with cash rent payments commencing February 1, 2025, and provided
for pro-rata replenishment of security deposits over thirty-six months commencing February 1, 2027. We also entered into
lease amendments with PharmaCann with respect to two of its leases for cultivation properties in Michigan and
Massachusetts. Those amendments provide that monthly base rent of $1.3 million for these two properties will be abated in
full effective February 1, 2025 and, if the properties have not been transitioned to new tenant(s) by August 1, 2025, we will
regain full control over the properties. We applied security deposits held by us pursuant to all of the PharmaCann leases for the
payment in full of all defaulted rent for December 2024 and January 2025 and certain penalties. If PharmaCann is not able to
refinance its existing senior secured credit facility maturing
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F-29
June 30, 2025, all modifications to our leases with PharmaCann described above will immediately be null and void and the
leases will revert to the terms in effect as of January 1, 2025.
Litigation
On January 17, 2025, a federal securities class action lawsuit was filed against us and certain of our officers. On February
12, 2025 and February 13, 2025, derivative actions were filed against us and certain of our officers and directors. See Note 11
“Commitments and Contingencies” for a description of these actions.
Table of Contents
INNOVATIVE INDUSTRIAL PROPERTIES, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 2024
(In thousands)
Initial Costs
Total Costs
Costs
Capitalized
Year
Building and
Subsequent to
Building and
Accumulated
Net Cost
Property
Property Type(1)
State
Built/Renovated Land Improvements Acquisition Land Improvements(7) Total Depreciation Basis Year Acquired
East Cherry
Street
Industrial
Arizona
1971 / 2016
$ 723
$
3,995
$
—
$ 723
$
3,995
$ 4,718
$
(270)
$ 4,448
2022
West
Greenhouse
Drive
Industrial
Arizona
1995 / 2017
398
14,629
5,003
398
19,632
20,030
(4,889)
15,141
2017
Perez Road
Industrial
California
1981 / 2024
734
5,634
9,241
734
14,875
15,609
(734)
14,875
2022
64125 19th
Avenue
Industrial
California
2019 / 2023
5,930
45,081
12,614
5,930
57,695
63,625
(4,647)
58,978
2021
McLane
Street
Industrial
California
2005 / 2019
1,577
15,935
1,327
1,577
17,262
18,839
(1,847)
16,992
2020
Inland
Center
Drive(5)
Industrial(4)
California
1969 / (2)
3,485
21,911
11,413
3,485
33,324
36,809
—
36,809
2020
63795 19th
Avenue(5)
Industrial
California
2004 / (2)
3,534
12,852
19,601
3,534
32,453
35,987
(2,250)
33,737
2019
North Anza
Road
Industrial(4)
California
1980 / 2017
916
5,406
11
916
5,417
6,333
(946)
5,387
2019
North Anza
Road & Del
Sol Road
Industrial(6)
California
1980 / 2017
840
4,959
36
840
4,995
5,835
(868)
4,967
2019
1804
Needles
Highway(3)
Industrial
California
1964 / 2019
174
715
1
174
716
890
(103)
787
2019
West
Broadway(3)
Industrial
California
1976 / 2019
289
1,185
2
289
1,187
1,476
(171)
1,305
2019
3253
Needles
Highway(3)
Industrial
California
2018 / 2019
949
3,900
8
949
3,908
4,857
(563)
4,294
2019
3241 &
3247
Needles
Highway(3)
Industrial
California
2020 / 2020
1,981
8,138
16
1,981
8,154
10,135
(1,177)
8,958
2019
Sacramento
Industrial
California
1990 / 2019
1,376
5,321
6,033
1,376
11,354
12,730
(2,055)
10,675
2019
Steele
Street
Industrial
Colorado
1967 / 1978 /
2018
2,101
9,176
—
2,101
9,176
11,277
(1,854)
9,423
2018
Washington
Street
Industrial
Colorado
1975 / 2017
4,309
4,988
—
4,309
4,988
9,297
(404)
8,893
2021
West
Barberry
Place
Industrial
Colorado
1971 / 2012
389
2,478
—
389
2,478
2,867
(193)
2,674
2021
Hamilton
Road
Industrial
Florida
1982 / 2021
2,186
17,371
36,340
2,186
53,711
55,897
(5,305)
50,592
2020
West Lake
Drive
Industrial
Florida
2014 / 2021
1,071
34,249
16,007
1,071
50,256
51,327
(7,520)
43,807
2020
NW
Highway
441
Industrial
Florida
1981 / 2021
752
23,064
17,782
752
40,846
41,598
(4,428)
37,170
2021
Ben Bostic
Road
Industrial
Florida
2019 / 2020
274
16,729
—
274
16,729
17,003
(2,740)
14,263
2019
33rd Street
& 36th
Avenue
Industrial
Florida
1991 / (2)
2,080
12,876
12,362
2,080
25,238
27,318
(253)
27,065
2024
East Mazon
Avenue
Industrial
Illinois
1992 / 2020
201
17,807
10,008
201
27,815
28,016
(5,147)
22,869
2019
Revolution
Road
Industrial
Illinois
2015 / 2020
563
18,457
51,538
563
69,995
70,558
(12,270)
58,288
2018
East 4th
Street
Industrial
Illinois
2015 / 2020
739
8,284
40,998
739
49,282
50,021
(7,634)
42,387
2020
Industrial
Drive
Industrial
Illinois
1984 / 2020
350
10,191
29,446
350
39,637
39,987
(6,858)
33,129
2019
S US
Highway 45
52
Industrial
Illinois
2015 / 2019
268
11,840
13,279
268
25,119
25,387
(4,207)
21,180
2019
Centerpoint
Way
Industrial
Illinois
2016 / 2019
2,947
17,761
254
2,947
18,015
20,962
(2,938)
18,024
2019
Adams
Street
Industrial
Illinois
2024
6,518
—
65,316
6,518
65,316
71,834
(4,222)
67,612
2021
South Street
Industrial
Maryland
1980 / 2021
1,861
14,775
12,858
1,861
27,633
29,494
(3,095)
26,399
2021
Alaking
Court
Industrial
Maryland
2017 / 2017
2,785
8,410
22,765
2,785
31,175
33,960
(7,005)
26,955
2017
560 Western
Maryland
Parkway
Industrial
Maryland
1996 / 2021
1,849
23,441
—
1,849
23,441
25,290
(1,587)
23,703
2022
108 Western
Maryland
Parkway
Industrial
Maryland
1976 / 2024
729
4,910
—
729
4,910
5,639
(29)
5,610
2024
Hopping
Brook Road
Industrial
Massachusetts
2020 / 2020
3,030
—
27,512
3,030
27,512
30,542
(3,942)
26,600
2018
Chestnut
Hill Avenue
Industrial
Massachusetts
1938 / 2021
2,202
24,568
36,965
2,202
61,533
63,735
(8,119)
55,616
2020
Worcester
Road
Industrial
Massachusetts
1973 / 2022
4,063
16,462
1,000
4,063
17,462
21,525
(967)
20,558
2022
Canal
Street/7
North
Bridge
Street
Industrial
Massachusetts
1890 / 2021
694
2,831
40,035
694
42,866
43,560
(8,023)
35,537
2019
Palmer
Road
Industrial
Massachusetts
1980 / 2018
1,059
11,717
6,977
1,059
18,694
19,753
(3,163)
16,590
2018
East Main
F-30
Street
Industrial
Massachusetts
1991 / 2019
2,316
13,194
—
2,316
13,194
15,510
(1,508)
14,002
2020
Curran
Highway
Industrial
Massachusetts
1978 / 2021
2,082
1,026
23,685
2,082
24,711
26,793
(2,425)
24,368
2021
Hoover
Road
Industrial
Michigan
1940 / 2020 /
2021
1,237
17,791
64,484
1,237
82,275
83,512
(10,233)
73,279
2019
Table of Contents
F-31
East Hazel Street
Industrial
Michigan
1929 / 2021
409
4,360
19,297
409
23,657
24,066
(3,419)
20,647
2019
Oliver Drive
Industrial
Michigan
1930 / 1972 /
2021
1,385
3,631
26,755
1,385
30,386
31,771
(4,005)
27,766
2020
Davis Highway
Industrial
Michigan
1999 / 2024
1,907
13,647
56,278
1,907
69,925
71,832
(1,386)
70,446
2021
Harvest Park
Industrial
Michigan
2018 / 2021
1,933
3,559
12,096
1,933
15,655
17,588
(3,117)
14,471
2018
Executive Drive
Industrial
Michigan
1960 / 2020
389
6,489
3,140
389
9,629
10,018
(1,771)
8,247
2019
77th Street Northeast
Industrial
Minnesota
2015 / 2017 /
2019
427
2,644
6,618
427
9,262
9,689
(1,953)
7,736
2017
Industrial Drive
Industrial
Missouri
2022
753
787
26,717
753
27,504
28,257
(2,291)
25,966
2021
East Cheyenne Avenue
Industrial
Nevada
1984 / 2020
1,088
2,768
5,771
1,088
8,539
9,627
(1,589)
8,038
2019
Munsonhurst Road
Industrial
New Jersey
1956 / 2022
4,987
30,421
19,648
4,987
50,069
55,056
(4,139)
50,917
2022
South Route 73
Industrial
New Jersey
1995 / 2020
702
4,857
29,511
702
34,368
35,070
(6,089) 28,981
2020
North West Blvd
Industrial
New Jersey
1962 / 2020
222
10,046
1,580
222
11,626
11,848
(1,593)
10,255
2020
Hudson Crossing Drive
Industrial
New York
2016 / (2)
7,600
22,475
101,060
7,600
123,535
131,135
(11,102) 120,033
2016
County Route 117
Industrial
New York
1970 / 2024
1,593
3,157
76,751
1,593
79,908
81,501
(6,511) 74,990
2017
98th Ave South
Industrial
North Dakota
2018 / 2020
191
9,743
2,272
191
12,015
12,206
(2,000) 10,206
2019
Hunts Landing Road
Industrial
Ohio
2019 / 2019
712
—
19,309
712
19,309
20,021
(2,637) 17,384
2019
Jason Street
Industrial
Ohio
1937 / 2020
239
2,688
29,250
239
31,938
32,177
(4,354) 27,823
2020
Springs Way
Industrial
Ohio
2018 / 2020
235
10,377
2,972
235
13,349
13,584
(1,903) 11,681
2020
East Tallmadge Ave.
Industrial
Ohio
1954 / 1986 /
2020
22
1,014
2,501
22
3,515
3,537
(720)
2,817
2019
Boltonfield Street
Industrial
Ohio
2023 / (2)
1,253
18,876
25,278
1,253
44,154
45,407
(1,918)
43,489
2023
Scott Technology Park
Industrial
Pennsylvania
2020 / 2020
954
—
27,070
954
27,070
28,024
(3,106) 24,918
2019
New Beaver Avenue
Industrial
Pennsylvania
1976 / 2021
6,979
34,781
26,107
6,979
60,888
67,867
(6,736) 61,131
2021
East Market Street
Industrial
Pennsylvania
1927 / 2017
1,435
19,098
74,306
1,435
93,404
94,839
(13,869) 80,970
2019
Wayne Avenue
Industrial
Pennsylvania
1980 / 2024
1,228
13,080
47,359
1,228
60,439
61,667
(8,276) 53,391
2019
Horton Drive
Industrial
Pennsylvania
1988 / 2020
1,353
11,854
29,745
1,353
41,599
42,952
(5,835)
37,117
2019
Industrial Street
Industrial
Pennsylvania
1930 / 2020
941
7,941
16,712
941
24,653
25,594
(3,348)
22,246
2020
Rosanna Avenue
Industrial
Pennsylvania
1959 / 2020
3,540
5,603
36,671
3,540
42,274
45,814
(6,870)
38,944
2018
Susquehanna Street
Industrial
Pennsylvania
1968 / 2017
1,318
13,708
—
1,318
13,708
15,026
(702)
14,324
2023
FM 969
Industrial
Texas
(2)
—
11,157
9,758
—
20,915
20,915
(1,104)
19,811
2022
Decatur Street
Industrial
Virginia
2019 / 2020
231
11,582
7,936
231
19,518
19,749
(4,065)
15,684
2020
Lathrop Industrial Drive
SW
Industrial
Washington
1997 / 2015
1,826
15,684
—
1,826
15,684
17,510
(1,998)
15,512
2020
East Glendale Avenue
Retail
Arizona
2019 / 2019
1,216
811
501
1,216
1,312
2,528
(284)
2,244
2019
Dahlia Street
Retail
Colorado
2019 / 2019
179
2,132
—
179
2,132
2,311
(260)
2,051
2020
East Colfax Avenue
Retail
Colorado
1998 / 2020
244
307
916
244
1,223
1,467
(116)
1,351
2021
North 2nd Street
Retail
Colorado
1973 / 2020
140
258
810
140
1,068
1,208
(95)
1,113
2021
West Railroad Avenue
Retail
Colorado
1977 / 2020
149
618
168
149
786
935
(92)
843
2021
Southgate Pl
Retail
Colorado
1998 / 2019
367
645
54
367
699
1,066
(95)
971
2020
Wewatta Street
Retail
Colorado
2015 / 2018
4,036
2,417
—
4,036
2,417
6,453
(192)
6,261
2021
Southgate Place
Retail
Colorado
2018 / 2018
942
3,314
—
942
3,314
4,256
(289)
3,967
2021
South Peoria Court
Retail
Colorado
1979 / 2016
938
2,770
—
938
2,770
3,708
(241)
3,467
2021
Highway 6 & 24
Retail
Colorado
1960 / 2019
892
1,996
—
892
1,996
2,888
(173)
2,715
2021
North College Avenue
Retail
Colorado
1952 / 2017
527
2,952
—
527
2,952
3,479
(232)
3,247
2021
East Quincy Avenue
Retail
Colorado
2018 / 2018
659
2,493
—
659
2,493
3,152
(207)
2,945
2021
East Montview
Boulevard
Retail
Colorado
1952 / 2019
256
1,490
—
256
1,490
1,746
(119)
1,627
2021
South Federal Blvd
Retail
Colorado
1980 / 2017
193
1,361
—
193
1,361
1,554
(106)
1,448
2021
Santa Fe Trail
Retail
Colorado
1948 / 2000
232
1,110
—
232
1,110
1,342
(95)
1,247
2021
Water Street
Retail
Colorado
1930 / 2013
319
945
—
319
945
1,264
(84)
1,180
2021
Gregory Street
Retail
Colorado
1875 / 2014
101
1,058
—
101
1,058
1,159
(80)
1,079
2021
West 20th Avenue
Retail
Colorado
1970 / 2014
289
666
—
289
666
955
(57)
898
2021
South Federal Blvd.
Retail
Colorado
1941 / 2018
461
319
—
461
319
780
(30)
750
2021
West 6th Street
Retail
Colorado
2019 / 2019
60
272
—
60
272
332
(27)
305
2021
Elm Avenue
Retail
Colorado
1962 / 2020
21
311
—
21
311
332
(33)
299
2021
Bent Avenue North
Retail
Colorado
2019 / 2019
49
284
—
49
284
333
(28)
305
2021
Coolidge Rd
Retail
Michigan
2019 / 2019
1,635
—
1,727
1,635
1,727
3,362
(281)
3,081
2019
South Cedar Street
Retail
Michigan
1957 / 2019
282
1,951
—
282
1,951
2,233
(354)
1,879
2019
West Pierson Road
Retail
Michigan
1975 / 2019
122
2,065
—
122
2,065
2,187
(372)
1,815
2019
Wilder Road
Retail
Michigan
1988 / 2019
49
1,696
—
49
1,696
1,745
(308)
1,437
2019
East Front Street
Retail(6)
Michigan
1992 / 2019
449
827
—
449
827
1,276
(150)
1,126
2019
Table of Contents
F-32
South Mason Drive
Retail
Michigan
1970 / 2019
25
973
—
25
973
998
(176)
822
2019
N Delsea Dr
Retail
New Jersey
1974 / 2020
244
1,928
—
244
1,928
2,172
(215)
1,957
2020
24th Street East
Retail
North Dakota
2019 / 2019
348
1,368
—
348
1,368
1,716
(125)
1,591
2021
Highway 2 East
Retail
North Dakota
1976 / 2019
120
1,225
—
120
1,225
1,345
(116)
1,229
2021
Main Street
Retail
Pennsylvania
1980 / 2019
57
840
—
57
840
897
(64)
833
2021
South 17th Street
Retail
Pennsylvania
2021 / 2021
553
2,000
—
553
2,000
2,553
(140)
2,413
2022
Grape Street
Industrial/Retail Colorado
1982 / 2018
1,380
5,786
—
1,380
5,786
7,166
(459)
6,707
2021
US 50 Business and
Baxter Road
Industrial/Retail Colorado
1929 / 2019
119
1,652
—
119
1,652
1,771
(158)
1,613
2021
South Fox Street
Industrial/Retail Colorado
1965 / 2014
297
829
—
297
829
1,126
(66)
1,060
2021
West Street
Industrial/Retail Massachusetts 1880 / 2021
650
7,119
19,781
650
26,900
27,550
(3,316)
24,234
2020
Mozzone Boulevard
Industrial/Retail Massachusetts 1975 / 2019
1,626
38,406
—
1,626
38,406
40,032
(2,774)
37,258
2022
Stephenson Highway
Industrial/Retail Michigan
2021 / 2021
6,211
—
22,304
6,211
22,304
28,515
(2,397)
26,118
2020
Hoover Road
Industrial/Retail Michigan
1951 / 2021
700
9,557
6,988
700
16,545
17,245
(1,789)
15,456
2021
Leah Avenue(5)
Industrial/Retail Texas
(2)
2,222
1,195
4,536
2,222
5,731
7,953
—
7,953
2021
Total
$146,772
$
898,030
$1,395,170
$146,772
$ 2,293,200
$2,439,972
$(271,190) $2,168,782
(1)
“Industrial” reflects facilities utilized or expected to be utilized for regulated cannabis cultivation, processing and/or distribution activities, which can consist of
industrial and/or greenhouse space.
(2)
As of December 31, 2024, all or a portion of the property was under development or redevelopment.
(3)
These four properties were sold in March 2023 but the transaction did not qualify for recognition as a completed sale under GAAP. As such, the properties remain
on the consolidated balance sheets. Refer to Note 6 “Investments in Real Estate” for more information.
(4)
As of December 31, 2024, we are evaluating alternative non-cannabis uses for the properties, due in part to changes in the zoning of the properties that no longer
allow for regulated cannabis cultivation and processing.
(5)
As of December 31, 2024, these properties were vacant and excluded from our operating portfolio.
(6)
As of December 31, 2024, these properties were leased to non-cannabis tenants.
(7)
Building and improvements balance includes Construction in progress.
As of December 31, 2024, the aggregate gross cost of the properties included above for federal income tax purposes was $2.5 billion,
which excludes the four properties that were sold in March 2023 that did not qualify for recognition as a completed sale under GAAP
but is recognized as a sale for tax purposes.
A reconciliation of historical cost and related accumulated depreciation is as follows (in thousands):
Years Ended December 31,
2024
2023
2022
Investment in real estate, at cost:
Balance at beginning of year
$ 2,368,515
$ 2,204,687
$ 1,722,104
Purchases of investments in real estate
18,666
35,155
149,317
Additions and improvements, net(1)
66,790
128,673
355,633
Sale of real estate investments
(13,999)
—
(22,367)
Balance at end of year
$ 2,439,972
$ 2,368,515
$ 2,204,687
Accumulated Depreciation:
Balance at beginning of year
$ (202,692)
$ (138,405)
$
(81,938)
Depreciation expense
(69,842)
(64,287)
(58,935)
Sale of real estate investments
1,344
—
2,468
Balance at end of year
$ (271,190)
$ (202,692)
$ (138,405)
(1) During the year ended December 31, 2024, a $3.2 million acquisition of real estate which previously did not satisfy the requirements for sale-leaseback
accounting was reclassified to real estate held for investment as the requirements for sale-leaseback accounting were satisfied.
Exhibit 4.4
Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934, as amended
As of December 31, 2024, Innovative Industrial Properties, Inc. (the “Company,” “we,” “us,” and “our”) had two
classes of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”): (1) our common stock, par value $0.001 per share, and (2) our Series A Preferred Stock, par value $0.001 per
share.
Description of Our Common Stock
The following is a summary description of our common stock. This description does not purport to be complete
and is subject to and qualified in its entirety by reference to the Maryland General Corporation Law (“MGCL”), and to
our charter and our bylaws. For a more complete understanding of our common stock, we encourage you to read
carefully our charter and our bylaws, copies of which are filed as exhibits to our Annual Report on Form 10-K.
General. Our charter provides that we may issue up to 50,000,000 shares of common stock, $0.001 par value per
share, and up to 50,000,000 shares of preferred stock, $0.001 par value per share, of which 690,000 shares are designated
as Series A Preferred Stock pursuant to articles supplementary filed with the State of Maryland. Under the MGCL and
other applicable law, our stockholders are not generally liable for our debts or obligations. Our charter authorizes our
board of directors to amend our charter to increase or decrease the aggregate number of shares of stock or the number of
shares of stock of any class or series that we are authorized to issue with the approval of a majority of our entire board of
directors and without stockholder approval.
Dividends. Subject to the preferential rights, if any, of holders of any other class or series of our stock (including
our Series A Preferred Stock) and to the provisions of our charter regarding the restrictions on ownership and transfer of
our stock, holders of outstanding shares of common stock are entitled to receive dividends on such shares of common
stock out of assets legally available therefor if, as and when authorized by our board of directors and declared by us.
Liquidation. Subject to the preferential rights, if any, of holders of any other class or series of our stock
(including our Series A Preferred Stock) and to the provisions of our charter regarding the restrictions on ownership and
transfer of our stock, the holders of outstanding shares of common stock are entitled to share ratably in our assets legally
available for distribution to our stockholders in the event of our liquidation, dissolution or winding up after payment of or
adequate provision for all our known debts and liabilities.
Voting Rights. Subject to the provisions of our charter regarding the restrictions on ownership and transfer of our
stock and except as may otherwise be specified in the terms of any class or series of stock, each outstanding share of
common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of
directors, and, except as provided with respect to any other class or series of shares of our stock (including the Series A
Preferred Stock), the holders of shares of common stock will possess the exclusive voting power. A plurality of the votes
cast in the election of directors is sufficient to elect a director and there is no cumulative voting in the election of
directors, which means that the holders of a majority of the outstanding shares of common stock can elect all of the
directors then standing for election, and the holders of the remaining shares will not be able to elect any directors.
Other Rights. Holders of shares of common stock have no preference, conversion, exchange, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for any securities of the Company. Subject to
the provisions of our charter regarding the restrictions on ownership and transfer of our stock, shares of common stock
will have equal dividend, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or
substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary
course of business, unless declared advisable by the board of directors and approved by the affirmative vote of
stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland
corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of
all the votes entitled to be cast on the matter. Our charter provides for approval of these matters by the affirmative vote of
holders of shares entitled to cast a majority of all the votes entitled to be cast on the matter, except for amendments to our
charter that would alter only the contract rights, as expressly set forth in the charter, of a specified class or series of stock
(including the Series A Preferred Stock) with respect to which the holders of such class or series of stock have exclusive
voting rights as provided in our charter. Also, our operating assets are held by our subsidiaries and these subsidiaries may
be able to merge or sell all or substantially all of their assets without the approval of our stockholders.
Power to Reclassify Our Unissued Shares of Stock. Our charter authorizes our board of directors to classify and
reclassify any unissued shares of common or preferred stock into other classes or series of stock, including one or more
classes or series of stock that have priority with respect to voting rights, dividends or upon liquidation over our common
stock, and authorize us to issue the newly-classified shares. Prior to the issuance of shares of each new class or series, our
board of directors is required by Maryland law and by our charter to: (a) designate that series or class to distinguish it
from all other classes and series of capital stock outstanding, (b) specify the number of shares to be included in such class
or series, and (c) to set, subject to the provisions of our charter regarding the restrictions on ownership and transfer of our
stock described below, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends
or other distributions, qualifications and terms or conditions of redemption for each class or series. Our board of directors
may take these actions without stockholder approval unless stockholder approval is required by the terms of any other
class of series of our stock or the rules of any stock exchange or automatic quotation system on which our securities may
be listed or traded. Therefore, our board could authorize the issuance of shares of common or preferred stock with terms
and conditions that could have the effect of delaying, deferring or preventing a change in control or other transaction that
might involve a premium price for shares of our common stock or otherwise be in the best interest of our stockholders.
Power to Increase or Decrease Authorized Shares of Stock and Issue Additional Shares of Common and
Preferred Stock. We believe that the power of our board of directors to amend our charter to increase or decrease the
number of authorized shares of our stock, to authorize us to issue additional authorized but unissued shares of common or
preferred stock and to classify or reclassify unissued shares of common or preferred stock and thereafter to authorize us to
issue such classified or reclassified shares of stock will provide us with increased flexibility in structuring possible future
financings and acquisitions and in meeting other needs that might arise. Subject to the rights holders of the Series A
Preferred Stock will have to approve the classification or issuance of shares of a class or series of our stock ranking senior
to the Series A Preferred Stock, the additional classes or series, as well as the additional shares of common stock, will be
available for issuance without further action by our stockholders, unless such approval is required by the terms of any
other class or series of our stock or the rules of any stock exchange or automated quotation system on which our securities
may be listed or traded. Although our board of directors does not intend to do so, it could authorize us to issue a class or
series of stock that could, depending upon the terms of the particular class or series, delay, defer or prevent a change in
control or other transaction that might involve a premium price for shares of our common stock or otherwise be in the
best interest of our stockholders.
Restrictions on Ownership and Transfer. In order for us to qualify as a real estate investment trust (“REIT”)
under the Internal Revenue Code of 1986, as amended (the “Code”), shares of our stock must be owned by 100 or more
persons during at least 335 days of a taxable year of 12 months (other than the first year for which an election to be taxed
as a REIT has been made) or during a proportionate part of a shorter taxable year. Also, under Section 856(h) of the Code,
a REIT cannot be “closely held.” In this regard, not more than 50% of the value of the outstanding shares of stock may be
owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the
last half of a taxable year (other than the first year for which an election to be a REIT has been made).
Our charter contains restrictions on the ownership and transfer of shares of our common stock and other
outstanding shares of stock. The relevant sections of our charter provide that, subject to the exceptions described
below, no person or entity may own, or be deemed to own, by virtue of the applicable constructive ownership provisions
of the Code, more than 9.8% (in value or number of shares, whichever is more restrictive) of the aggregate of our
outstanding shares of stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of our
outstanding common stock or any class or series of our outstanding preferred stock; we refer to these limitations as the
“ownership limits.” In addition, the Series A Preferred Stock articles supplementary provide that generally no person may
own, or be deemed to own, by virtue of the applicable constructive ownership provisions of the Code, more than 9.8% (in
value or in number of shares, whichever is more restrictive) of the outstanding Series A Preferred Stock.
The constructive ownership rules under the Code are complex and may cause shares of stock owned actually or
constructively by a group of related individuals or entities to be owned constructively by one individual or entity. As a
result, the acquisition of less than 9.8% in value of the aggregate of our outstanding shares of stock and 9.8% (in value or
in number of shares, whichever is more restrictive) of any class or series of our shares of stock (or the acquisition of an
interest in an entity that owns, actually or constructively, shares of our stock by an individual or entity), could,
nevertheless, cause that individual or entity, or another individual or entity, to violate the ownership limits.
Our board of directors may, upon receipt of certain representations, undertakings and agreements and in its sole
discretion, exempt (prospectively or retroactively) any person from the ownership limits and establish a different limit, or
excepted holder limit, for a particular person if the person’s ownership in excess of the ownership limits will not then or
in the future result in us failing the “closely held” test under Section 856(h) of the Code (without regard to whether the
person’s interest is held during the last half of a taxable year) or otherwise cause us to fail to qualify as a REIT. In order to
be considered by our board of directors for exemption, a person also must not own, actually or constructively, an interest
in one of our tenants (or a tenant of any entity which we own or control) that would cause us to own, actually or
constructively, more than a 9.9% interest in the tenant unless the revenue derived by us from such tenant is sufficiently
small that, in the opinion of our board of directors, rent from such tenant would not adversely affect our ability to qualify
as a REIT. The person seeking an exemption must provide such representations and undertakings to the satisfaction of our
board of directors that it will not violate these two restrictions. The person also must agree that any violation or attempted
violation of these restrictions will result in the automatic transfer to a trust of the shares of stock causing the violation. As
a condition of granting an exemption or creating an excepted holder limit, our board of directors may, but is not be
required to, obtain an opinion of counsel or private ruling from the Internal Revenue Service (the “Service”) satisfactory
to our board of directors with respect to our qualification as a REIT and may impose such other conditions or restrictions
as it deems appropriate.
In connection with granting an exemption from the ownership limits or establishing an excepted holder limit or
at any other time, our board of directors may increase or decrease the ownership limits. Any decrease in the ownership
limits will not be effective for any person whose percentage ownership of shares of our stock is in excess of such
decreased limits until such person’s percentage ownership of shares of our stock equals or falls below such decreased
limits (other than a decrease as a result of a retroactive change in existing law, which will be effective immediately), but
any further acquisition of shares of our stock in excess of such percentage ownership will be in violation of the applicable
limits. Our board of directors may not increase or decrease the ownership limits if, after giving effect to such increase or
decrease, five or fewer persons could beneficially own or constructively own in the aggregate more than 49.9% in value
of the shares of our stock then outstanding. Prior to any modification of the ownership limits, our board of directors may
require such opinions of counsel, affidavits, undertakings or agreements as it may deem necessary or advisable in order to
determine or ensure our qualification as a REIT.
Our charter further prohibits:
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any person from beneficially or constructively owning, applying certain attribution rules of the Code, shares of
our stock that would result in us failing the “closely held” test under Section 856(h) of the Code (without regard
to whether the stockholder’s interest is held during the last half of a taxable year) or otherwise cause us to fail to
qualify as a REIT; and
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any person from transferring shares of our stock if such transfer would result in shares of our stock to be
beneficially owned by fewer than 100 persons (determined without reference to any rules of attribution).
Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of our
stock that will or may violate the ownership limits or any of the other foregoing restrictions on ownership and transfer of
our stock will be required to immediately give written notice to us or, in the case of a proposed or attempted transaction,
give at least 15 days’ prior written notice to us, and provide us with such other information as we may request in order to
determine the effect of such transfer on our qualification as a REIT. The ownership limits and the other restrictions on
ownership and transfer of our stock will not apply if our board of directors determines that it is no longer in our best
interests to continue to qualify as a REIT or that compliance with the restrictions on ownership and transfer of our stock is
no longer required in order for us to qualify as a REIT.
If any transfer of shares of our stock would result in shares of our stock to be beneficially owned by fewer than
100 persons, such transfer will be void from the time of such purported transfer and the intended transferee will acquire
no rights in such shares. In addition, if any purported transfer of shares of our stock or any other event would otherwise
result in:
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any person violating the ownership limits or such other limit established by our board of directors; or our
Company to be “closely held” under Section 856(h) of the Code (without regard to whether the stockholder’s
interest is held during the last half of a taxable year) or otherwise failing to qualify as a REIT, then that number
of shares (rounded up to the nearest whole share) that would cause us to violate such restrictions will
automatically be transferred to, and held by, a charitable trust for the exclusive benefit of one or more charitable
organizations selected by us, and the intended transferee will acquire no rights in such shares. The transfer will
be deemed to be effective as of the close of business on the business day prior to the date of the transfer in
violation of the ownership limit or other event that results in the transfer to the charitable trust. A person who,
but for the transfer of the shares to the charitable trust, would have beneficially or constructively owned the
shares so transferred, or a “prohibited owner,” which, if appropriate in the context, also means any person who
would have been the record owner of the shares that the prohibited owner would have so owned. If the transfer
to the charitable trust as described above would not be effective, for any reason, to prevent violation of the
applicable restriction on ownership and transfer contained in our charter, then our charter provides that the
transfer of the shares will be void from the time of such purported transfer.
Shares of stock transferred to a charitable trust are deemed offered for sale to us, or our designee, at a price per
share equal to the lesser of (1) the price paid per share in the transaction that resulted in such transfer to the charitable
trust (or, if the event that resulted in the transfer to the charitable trust did not involve a purchase of such shares of stock
at market price, defined generally as the last reported sales price reported on the NYSE (or other applicable exchange),
the market price per share of such stock on the day of the event which resulted in the transfer of such shares of stock to
the charitable trust) and (2) the market price on the date we, or our designee, accept such offer. We may reduce the
amount payable to the charitable trust by the amount of dividends and other distributions which have been paid to the
prohibited owner and are owed by the prohibited owner to the charitable trust as described below. We may pay the
amount of such reduction to the charitable trust for the benefit of the charitable beneficiary. We have the right to accept
such offer until the trustee of the charitable trust has sold the shares held in the charitable trust as discussed below. Upon a
sale to us, the interest of the charitable beneficiary in the shares sold terminates, and the charitable trustee must distribute
the net proceeds of the sale to the prohibited owner.
Within 20 days of receiving notice from us of the transfer of the shares to the charitable trust, the charitable
trustee will sell the shares to a person or entity designated by the charitable trustee who could own the shares without
violating the ownership limits or the other restrictions on ownership and transfer of our stock described above. Upon such
sale, the interest of the charitable beneficiary in the shares will terminate and the charitable trustee must distribute to the
prohibited owner an amount equal to the lesser of (1) the price paid by the prohibited owner for the shares in the
transaction that resulted in the transfer to the charitable trust (or, if the event that resulted in the transfer to the charitable
trust did not involve a purchase of such shares at market price, the market price per share of such stock on the day of the
event that resulted in the transfer to the charitable trust) and (2) the sales proceeds (net of commissions and other
expenses of sale) received by the charitable trust for the shares. The charitable trustee may reduce the amount payable to
the prohibited owner by the amount of dividends and other distributions which have been paid to the prohibited owner
and are owed by the prohibited owner to the charitable trust. Any net sales proceeds in excess of the amount payable to
the prohibited owner will be immediately paid to the charitable beneficiary, together with any dividends and other
distributions thereon. In addition, if, prior to discovery by us that shares of stock have been transferred to a charitable
trust, such shares of stock are sold by a prohibited owner, then such shares will be deemed to have been sold on behalf of
the charitable trust and to the extent that the prohibited owner received an amount for or in respect of such shares that
exceeds the amount that such prohibited owner was entitled to receive, such excess amount will be paid to the charitable
trust upon demand by the charitable trustee. The prohibited owner will have no rights in the shares held by the charitable
trust.
The charitable trustee will be designated by us and will be unaffiliated with us and with any prohibited owner.
Prior to the sale of any shares by the charitable trust, the charitable trustee will receive, in trust for the charitable
beneficiary, all distributions made by us with respect to such shares and may also exercise all voting rights with respect to
such shares. Any dividend or other distribution paid prior to our discovery that shares of stock have been transferred to
the charitable trust will be paid by the recipient to the charitable trust upon demand by the charitable trustee. These rights
will be exercised for the exclusive benefit of the charitable beneficiary.
Subject to Maryland law, effective as of the date that the shares have been transferred to the charitable trust, the
charitable trustee will have the authority, at the charitable trustee’s sole discretion:
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to rescind as void any vote cast by a prohibited owner prior to our discovery that the shares have been
transferred to the charitable trust; and
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to recast the vote in accordance with the desires of the charitable trustee acting for the benefit of the
charitable beneficiary
However, if we have already taken irreversible action, then the charitable trustee may not rescind and recast the
vote. If our board of directors determines in good faith that a proposed transfer would violate the restrictions on
ownership and transfer of our stock set forth in our charter, our board of directors may take such action as it deems
advisable to refuse to give effect to or to prevent such transfer, including, but not limited to, causing us to redeem shares
of stock, refusing to give effect to the transfer on our books or instituting proceedings to enjoin the transfer.
Every owner of more than 5% (or such lower percentage as required by the Code or the regulations promulgated
thereunder) of the outstanding shares of all classes or series of our stock, including common stock, will be required to
give written notice to us within 30 days after the end of each taxable year stating the name and address of such owner, the
number of shares of each class and series of our stock that the person beneficially owns and a description of the manner in
which such shares are held. Each such owner will be required to provide to us such additional information as we may
request in order to determine the effect, if any, of such beneficial ownership on our qualification as a REIT and to ensure
compliance with the ownership limits. In addition, each stockholder will, upon demand, be required to provide to us such
information as we may request, in good faith, in order to determine our qualification as a REIT and to comply with the
requirements of any taxing authority or governmental authority or to determine such compliance.
Any certificates representing shares of our stock, or any written statements of information delivered in lieu of
certificates, will bear a legend referring to the restrictions described above. These restrictions on ownership and
transfer of our stock could delay, defer or prevent a transaction or a change in control that might involve a premium price
for our common stock or otherwise be in the best interest of our stockholders.
Transfer Agent and Registrar. The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust.
Listings. Our common stock is traded on the New York Stock Exchange (“NYSE”) under the ticker symbol
“IIPR.”
Description of Our Series A Preferred Stock
The following description of our Series A Preferred Stock does not purport to be complete and is subject to and
qualified in its entirety by reference to the articles supplementary setting forth the terms of the Series A Preferred Stock, to
the MGCL and to our charter and bylaws, copies of which are filed as exhibits to our Annual Report on Form 10-K.
General. Our board of directors has classified 23,350,000 shares of the Company’s authorized but unissued
preferred stock as Series A Preferred Stock, and has approved articles supplementary setting forth the terms of the Series
A Preferred Stock. Our board of directors may authorize the issuance and sale of additional shares of Series A Preferred
Stock from time to time.
Ranking. The Series A Preferred Stock ranks, with respect to dividend rights and rights upon voluntary or
involuntary liquidation, dissolution or winding up of our affairs:
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senior to all classes or series of our common stock, and to any other class or series of our capital stock
expressly designated as ranking junior to the Series A Preferred Stock;
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on parity with any future class or series of our capital stock expressly designated as ranking on parity
with the Series A Preferred Stock (the “Parity Preferred Stock”); and
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junior to any other class or series of our capital stock expressly designated as tanking senior to the
Series A Preferred Stock.
The term “capital stock” does not include convertible or exchangeable debt securities, which, prior to conversion
or exchange, will rank senior in right of payment to the Series A Preferred Stock. The Series A Preferred Stock will also
rank junior in right of payment to our future debt obligations.
Dividends. We pay cumulative dividends on the Series A Preferred Stock, when and as authorized by our board
of directors, at a rate of 9.0% per annum of the $25.00 liquidation preference per share (equivalent to the fixed annual rate
of $2.25 per share); provided that dividends on the Series A Preferred Stock shall accrue whether or not the Company has
earnings, whether or not there are funds legally available for the payment of such dividends, and whether or not such
dividends are authorized by our board of directors or declared by us. Dividends on the Series A Preferred Stock are
payable quarterly in arrears on or about the 15th day of January, April, July and October of each year (or if such day is not
a business day, on the next succeeding business day). The term “business day” means each day, other than a Saturday or a
Sunday, which is not a day on which banks in New York, New York are authorized or required to close.
The amount of any dividend payable on the Series A Preferred Stock for any dividend period is computed on the
basis of a 360-day year consisting of twelve 30-day months. A dividend period is the respective period commencing on
and including the 15th day of January, April, July and October of each year and ending on and including the day
preceding the first day of the next succeeding dividend period (other than the initial dividend period and the dividend
period during which any shares of Series A Preferred Stock shall be redeemed). Dividends are payable to holders of
record as they appear in our stock records at the close of business on the applicable record
date, which shall be the date designated by our board of directors as the record date for the payment of dividends that is
not more than 35 and not fewer than ten days prior to the scheduled dividend payment date.
Except as described in the next two paragraphs, unless full cumulative dividends on the Series A Preferred Stock
for all past dividend periods that have ended shall have been or contemporaneously are declared and paid in cash or
declared and a sum sufficient for the payment thereof is set apart for payment, we will not:
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declare and pay or declare and set apart for payment of dividends, and we will not declare and make
any distribution of cash or other property, directly or indirectly, on or with respect to any shares of our
common stock or shares of any other class or series of our capital stock ranking, as to dividends, on
parity with or junior to the Series A Preferred Stock, for any period; or
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redeem, purchase or otherwise acquire for any consideration, or make any other distribution of cash or
other property, directly or indirectly, on or with respect to, or pay or make available any monies for a
sinking fund for the redemption of, any common stock or shares of any other class or series of our
capital stock ranking, as to payment of dividends and the distribution of assets upon our liquidation,
dissolution or winding up, on parity with or junior to the Series A Preferred Stock.
The foregoing sentence, however, will not prohibit:
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dividends payable solely in shares of capital stock ranking, as to payment of dividends and the distribution of
assets upon our liquidation, dissolution or winding up, junior to the Series A Preferred Stock;
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conversion into or exchange for other shares of any class or series of our capital stock ranking junior to the
Series A Preferred Stock as to payment of dividends and the distribution of assets upon our liquidation,
dissolution or winding up;
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our purchase of shares of Series A Preferred Stock or any other class or series of capital stock ranking, as to
payment of dividends and the distribution of assets upon our liquidation, dissolution or winding up, on parity
with or junior to the Series A Preferred Stock pursuant to our charter to the extent necessary to qualify or
preserve our qualification as a REIT as discussed under “— Restrictions on Ownership and Transfer;” and
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our purchase of shares of any other class or series of capital stock ranking on parity with the Series A Preferred
Stock as to payment of dividends and the distribution of assets upon our liquidation, dissolution or winding up
pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series A
Preferred Stock.
When we do not pay dividends in full (and do not set apart a sum sufficient to pay them in full) on the Series A
Preferred Stock and the shares of any other class or series of capital stock ranking, as to dividends, on parity with the
Series A Preferred Stock, we will declare any dividends upon the Series A Preferred Stock and each such other class or
series of capital stock ranking, as to dividends, on parity with the Series A Preferred Stock pro rata, so that the amount of
dividends declared per share of Series A Preferred Stock and such other class or series of capital stock will in all cases
bear to each other the same ratio that accrued dividends per share on the Series A Preferred Stock and such other class or
series of capital stock (which will not include any accrual in respect of unpaid dividends on such other class or series of
capital stock for prior dividend periods if such other class or series of capital stock does not have a cumulative dividend)
bear to each other. No interest, or sum of money in lieu of interest, will be payable in respect of any dividend payment or
payments on the Series A Preferred Stock which may be in arrears.
Holders of shares of Series A Preferred Stock are not entitled to any dividend, whether payable in cash, property
or shares of capital stock, in excess of full cumulative dividends on the Series A Preferred Stock as described above. Any
dividend payment made on the Series A Preferred Stock will first be credited against the earliest accrued but unpaid
dividends due with respect to those shares which remain payable. Accrued but unpaid
dividends on the Series A Preferred Stock will accrue as of the dividend payment date on which they first become
payable.
We do not intend to declare dividends on the Series A Preferred Stock, or pay or set apart for payment dividends
on the Series A Preferred Stock, if the terms of any of our agreements, including any agreements relating to our
indebtedness, prohibit such a declaration, payment or setting apart for payment or provide that such declaration, payment
or setting apart for payment would constitute a breach of or default under such an agreement. Likewise, no dividends will
be authorized by our board of directors and declared by us or paid or set apart for payment if such authorization,
declaration or payment is restricted or prohibited by law.
If a default or event of default under the terms of any future indebtedness occurs and is continuing, we may be
precluded from paying certain distributions (other than those required to allow us to maintain our qualification as a REIT)
under the terms of such future indebtedness. Further, our board of directors may elect not to pay distributions in the event
of poor historical or projected cash flows.
Liquidation Preference. Upon any voluntary or involuntary liquidation, dissolution or winding up of our affairs,
before any distribution or payment shall be made to holders of shares of our common stock or any other class or series of
capital stock ranking, as to rights upon any voluntary or involuntary liquidation, dissolution or winding up of our affairs,
junior to the Series A Preferred Stock, holders of shares of Series A Preferred Stock will be entitled to be paid out of our
assets legally available for distribution to our stockholders, after payment of or provision for our debts and other
liabilities, a liquidation preference of $25.00 per share of Series A Preferred Stock, plus an amount per share equal to all
accrued but unpaid dividends (whether or not authorized or declared) to, but not including, the date of payment. If, upon
our voluntary or involuntary liquidation, dissolution or winding up, our available assets are insufficient to pay the full
amount of the liquidating distributions on all outstanding shares of Series A Preferred Stock and the corresponding
amounts payable on all shares of any other classes or series of our capital stock ranking, as to rights in the distribution of
assets upon our liquidation, dissolution or winding up, on parity with the Series A Preferred Stock, then holders of shares
of Series A Preferred Stock and such other classes or series of our capital stock ranking, as to rights in the distribution of
assets upon our liquidation, dissolution or winding up, on parity with the Series A Preferred Stock will share ratably in
any distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively
entitled.
Holders of shares of Series A Preferred Stock are entitled to written notice of any distribution in connection with
any voluntary or involuntary liquidation, dissolution or winding up of our affairs not less than 30 days and not more than
60 days prior to the distribution payment date. After payment of the full amount of the liquidating distributions to which
they are entitled, holders of shares of Series A Preferred Stock will have no right or claim to any of our remaining assets.
Our consolidation or merger with or into any other corporation, trust or other entity, or the voluntary sale, lease, transfer
or conveyance of all or substantially all of our property or business, will not be deemed to constitute a liquidation,
dissolution or winding up of our affairs and no such advance notice will be required.
In determining whether a distribution (other than upon voluntary or involuntary liquidation), by dividend,
redemption or other acquisition of shares of our capital stock or otherwise, is permitted under the MGCL, amounts that
would be needed, if we were to be dissolved at the time of the distribution, to satisfy the preferential rights upon
dissolution of holders of shares of Series A Preferred Stock will not be added to our total liabilities.
Optional Redemption. Except with respect to the special optional redemption described below and in certain
limited circumstances relating to our qualification and maintaining our qualification as a REIT as described in “-
Restrictions on Ownership and Transfer,” we may not redeem the Series A Preferred Stock prior to October 19, 2022. On
and after October 19, 2022, we may, at our option, upon not fewer than 30 and not more than 60 days’ written notice,
redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price
of $25.00 per share, plus an amount equal to all accrued but unpaid dividends (whether or not authorized or declared) to,
but not including, the date fixed for redemption, without interest, to the extent we have funds legally available for that
purpose.
If fewer than all of the outstanding shares of Series A Preferred Stock are to be redeemed, the shares of Series A
Preferred Stock to be redeemed will be redeemed pro rata (as nearly as may be practicable without creating fractional
shares) by lot, or by any other equitable method that we determine will not violate the 9.8% Series A Preferred Stock
ownership limit. If such redemption is to be by lot and, as a result of such redemption, any holder of shares of Series A
Preferred Stock, other than a holder of Series A Preferred Stock that has received an exemption from the ownership limit,
would have actual, beneficial or constructive ownership of more than 9.8% of the issued and outstanding shares of Series
A Preferred Stock by value or number of shares, whichever is more restrictive, because such holder’s shares of Series A
Preferred Stock were not redeemed, or were only redeemed in part, then, except as otherwise provided in our charter, we
will redeem the requisite number of shares of Series A Preferred Stock of such holder such that no holder will own in
excess of the 9.8% Series A Preferred Stock ownership limit subsequent to such redemption. See “- Restrictions on
Ownership and Transfer” below. In order for their shares of Series A Preferred Stock to be redeemed, holders must
surrender their shares at the place, or in accordance with the book-entry procedures, designated in the notice of
redemption. Holders will then be entitled to the redemption price of $25.00 per share plus an amount equal to all accrued
but unpaid dividends payable upon redemption following surrender of the shares as detailed below. If a notice of
redemption has been given (in the case of a redemption of the Series A Preferred Stock other than to qualify or preserve
our qualification as a REIT), if the funds necessary for the redemption have been set apart by us in trust for the benefit of
the holders of any shares of Series A Preferred Stock called for redemption and if irrevocable instructions have been given
to pay the redemption price of $25.00 per share plus an amount equal to all accrued but unpaid dividends, then from and
after the redemption date, dividends will cease to accrue on such shares of Series A Preferred Stock and such shares of
Series A Preferred Stock will no longer be deemed outstanding. At such time, all rights of the holders of such shares will
terminate, except the right to receive the redemption price plus an amount equal to all accrued but unpaid dividends
payable upon redemption, without interest.
Unless full cumulative dividends on all shares of Series A Preferred Stock have been or contemporaneously are
authorized, declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past
dividend periods that have ended, no shares of Series A Preferred Stock will be redeemed pursuant to the optional
redemption right or the special optional redemption right described below under “- Special Optional Redemption,” unless
all outstanding shares of Series A Preferred Stock are simultaneously redeemed and we will not purchase or otherwise
acquire, directly or indirectly, any shares of Series A Preferred Stock or any class or series of our capital stock ranking, as
to payment of dividends and the distribution of assets upon our liquidation, dissolution or winding up, on parity with or
junior to the Series A Preferred Stock (except by conversion into or exchange for our capital stock ranking junior to the
Series A Preferred Stock as to payment of dividends and the distribution of assets upon our liquidation, dissolution or
winding up); provided, however, that whether or not the requirements set forth above have been met, we may purchase
shares of Series A Preferred Stock or any other class or series of capital stock ranking, as to payment of dividends and the
distribution of assets upon our liquidation, dissolution or winding up, on parity with or junior to the Series A Preferred
Stock pursuant to our charter to the extent necessary to ensure that we meet the requirements for qualification as a REIT
for federal income tax purposes, and we may purchase or acquire shares of Series A Preferred Stock or the Parity
Preferred Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of
Series A Preferred Stock. See “- Restrictions on Ownership and Transfer” below.
Notice of redemption will be mailed, postage prepaid, not less than 30 days nor more than 60 days prior to the
redemption date, addressed to the respective holders of record of the Series A Preferred Stock to be redeemed at their
respective addresses as they appear on our stock transfer records as maintained by our transfer agent named in “- Transfer
Agent and Registrar.” No failure to give such notice or any defect therein or in the mailing thereof will affect the validity
of the proceedings for the redemption of any shares of Series A Preferred Stock except as to the holder to whom notice
was defective or not given; provided that, notice given to the last address of record will be deemed to be valid notice. In
addition to any information required by law or by the applicable rules of any exchange upon which the Series A Preferred
Stock may be listed or admitted to trading, each notice will state:
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the redemption date;
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the redemption price;
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the number of shares of Series A Preferred Stock to be redeemed;
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procedures of The Depository Trust Company (“DTC”) for book entry transfer of shares of Series A
Preferred Stock for payment of the redemption price;
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that dividends on the shares of Series A Preferred Stock to be redeemed will cease to accrue on such
redemption date; and
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that payment of the redemption price plus an amount equal to all accrued but unpaid dividends will be
made upon book entry transfer of such Series A Preferred Stock in compliance with DTC’s procedures.
If fewer than all of the shares of Series A Preferred Stock held by any holder are to be redeemed, the notice
mailed to such holder will also specify the number of shares of Series A Preferred Stock held by such holder to be
redeemed or the method for determining such number.
Any such redemption may be made conditional on such factors as may be determined by our board of directors
and as set forth in the notice of redemption.
We are not required to provide such notice in the event we redeem Series A Preferred Stock in order to qualify or
maintain our status as a REIT.
If a redemption date falls after a dividend record date and on or prior to the corresponding dividend payment
date, each holder of shares of the Series A Preferred Stock at the close of business on such dividend record date will be
entitled to the dividend payable on such shares on the corresponding dividend payment date notwithstanding the
redemption of such shares on or prior to such dividend payment date and each holder of shares of Series A Preferred
Stock that surrenders such shares on such redemption date will be entitled to an amount equal to the dividends accruing
after the end of the applicable dividend period, up to, but not including, the redemption date. Except as described above,
we will make no payment or allowance for unpaid dividends, whether or not in arrears, on Series A Preferred Stock for
which a notice of redemption has been given.
All shares of Series A Preferred Stock that we redeem, repurchase or otherwise acquire will be retired and
restored to the status of authorized but unissued shares of preferred stock, without designation as to series or class.
Subject to applicable law and the limitation on purchases when dividends on the Series A Preferred Stock are in
arrears, we may, at any time and from time to time either at a public or private sale, purchase all or any part of, the Series
A Preferred Stock, including the purchase of shares of Series A Preferred Stock in open market transactions and
individual purchases at such prices as we negotiate, in each case as duly authorized by our board of directors.
Future debt instruments or senior capital stock may prohibit us from redeeming or otherwise repurchasing any
shares of our capital stock, including the Series A Preferred Stock, except in limited circumstances.
Special Optional Redemption. Upon the occurrence of a Change of Control/Delisting (as defined below), we
may, at our option, redeem the Series A Preferred Stock, in whole or in part within 120 days after the first date on which
such Change of Control/Delisting occurred, by paying $25.00 per share, plus an amount equal to all accrued but unpaid
dividends to, but not including, the redemption date. If, prior to the Change of Control/Delisting Conversion Date (as
defined below), we have provided or provide notice of our election to redeem the Series A Preferred Stock (whether
pursuant to our optional redemption right or our special optional redemption right), the holders of Series A Preferred
Stock will not have the conversion right described below under “- Conversion Rights” with respect to the shares of Series
A Preferred Stock subject to such notice.
We will mail to you, if you are a record holder of the Series A Preferred Stock, a notice of redemption not fewer
than 30 days nor more than 60 days before the redemption date. We will send the notice to your address
shown on our stock transfer books. A failure to give notice of redemption or any defect in the notice or in its mailing will
not affect the validity of the redemption of any Series A Preferred Stock except as to the holder to whom notice was
defective. Each notice will state the following:
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the redemption date;
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the redemption price;
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the number of shares of Series A Preferred Stock to be redeemed;
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procedures of DTC for book entry transfer of shares of Series A Preferred Stock for payment of the
redemption price;
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that dividends on the shares of Series A Preferred Stock to be redeemed will cease to accrue on such
redemption date;
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that payment of the redemption price plus an amount equal to all accrued but unpaid dividends will be
made upon book entry transfer of such Series A Preferred Stock in compliance with DTC’s procedures;
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that the Series A Preferred Stock is being redeemed pursuant to our special optional redemption right in
connection with the occurrence of a Change of Control/Delisting and a brief description of the
transaction or transactions constituting such Change of Control/Delisting; and
●
that the holders of the Series A Preferred Stock to which the notice relates will not be able to tender
such Series A Preferred Stock for conversion in connection with the Change of Control/Delisting and
each share of Series A Preferred Stock tendered for conversion that is selected, prior to the Change of
Control/Delisting Conversion Date, for redemption will be redeemed on the related date of redemption
instead of converted on the Change of Control/Delisting Conversion Date.
If we redeem fewer than all of the outstanding shares of Series A Preferred Stock, the notice of redemption
mailed to each stockholder will also specify the number of shares of Series A Preferred Stock that we will redeem from
each stockholder or the method for determining such number. In this case, we will determine the number of shares of
Series A Preferred Stock to be redeemed as described above in “- Optional Redemption.”
If we have given a notice of redemption and have set apart sufficient funds for the redemption in trust for the
benefit of the holders of the Series A Preferred Stock called for redemption, then from and after the redemption date,
those shares of Series A Preferred Stock will be treated as no longer being outstanding, no further dividends will accrue
and all other rights of the holders of those shares of Series A Preferred Stock will terminate. The holders of those shares of
Series A Preferred Stock will retain their right to receive the redemption price for their shares and an amount equal to all
accrued but unpaid dividends to, but not including, the redemption date, without interest.
The holders of Series A Preferred Stock at the close of business on a dividend record date will be entitled to
receive the dividend payable with respect to the Series A Preferred Stock on the corresponding payment date
notwithstanding the redemption of the Series A Preferred Stock between such record date and the corresponding payment
date or our default in the payment of the dividend due. Except as provided above, we will make no payment or allowance
for unpaid dividends, whether or not in arrears, on Series A Preferred Stock for which a notice of redemption has been
given as described herein.
A “Change of Control/Delisting” is when, after the original issuance of the Series A Preferred Stock, any of the
following has occurred and is continuing:
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the acquisition by any person, including any syndicate or group deemed to be a “person” under Section
13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly, through a purchase, merger
or other acquisition transaction or series of purchases, mergers or other acquisition transactions of stock
of our Company entitling that person to exercise more than 50% of the total voting power of all stock of
our Company entitled to vote generally in the election of our directors (except that such person will be
deemed to have beneficial ownership of all securities that such person has the right to acquire, whether
such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition);
and
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following the closing of any transaction referred to in the bullet point above, neither we nor the
acquiring or surviving entity has a class of common securities (or ADRs representing such securities)
listed on the NYSE, the NYSE American or NASDAQ or listed or quoted on an exchange or quotation
system that is a successor to the NYSE, the NYSE American or NASDAQ.
Conversion Rights. Upon the occurrence of a Change of Control/Delisting, each holder of Series A Preferred
Stock will have the right (unless, prior to the Change of Control/Delisting Conversion Date, we have provided or provide
notice of our election to redeem the Series A Preferred Stock in whole or in part, as provided under “- Optional
Redemption” or “- Special Optional Redemption”) to convert some or all of such holder’s shares of Series A Preferred
Stock (the “Change of Control/Delisting Conversion Right”), on a date specified by us that can be no earlier than 20 days
and no later than 35 days following the date of delivery of the Change of Control/Delisting Company Notice (as defined
below) (the “Change of Control/Delisting Conversion Date”), into a number of shares of our common stock per share of
Series A Preferred Stock (the “Common Stock Conversion Consideration”), which is equal to the lesser of:
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the quotient obtained by dividing (i) the sum of (x) the liquidation preference amount of $25.00 per
share of Series A Preferred Stock, plus (y) the amount of any accrued but unpaid dividends (whether or
not declared) to, but not including, the Change of Control/Delisting Conversion Date (unless the
Change of Control/Delisting Conversion Date is after a record date for a Series A Preferred Stock
dividend payment and prior to the corresponding Series A Preferred Stock dividend payment date, in
which case no additional amount for such accrued but unpaid dividend will be included in this sum) by
(ii) the Common Stock Price (as defined below); and
●
2.617801 (the “Share Cap”), subject to certain adjustments described below;
subject, in each case, to provisions for the receipt of alternative consideration as described in this prospectus.
The Share Cap is subject to pro rata adjustments for any share splits (including those effected pursuant to a
distribution of our common stock), subdivisions or combinations (in each case, a “Share Split”) with respect to our
common stock as follows: the adjusted Share Cap as the result of a Share Split will be the number of shares of our
common stock that is equivalent to the product obtained by multiplying (i) the Share Cap in effect immediately prior to
such Share Split by (ii) a fraction, the numerator of which is the number of shares of our common stock outstanding after
giving effect to such Share Split and the denominator of which is the number of shares of our common stock outstanding
immediately prior to such Share Split.
For the avoidance of doubt, subject to the immediately succeeding sentence, the aggregate number of shares of
our common stock (or equivalent Alternative Form Consideration (as defined below), as applicable) issuable in
connection with the exercise of the Change of Control/Delisting Conversion Right and in respect of the Series A Preferred
Stock initially offered hereby will not exceed 1,570,680 shares of common stock (or equivalent Alternative Form
Consideration, as applicable) (the “Exchange Cap”). The Exchange Cap is subject to pro rata adjustments for any Share
Splits on the same basis as the corresponding adjustment to the Share Cap.
In the case of a Change of Control/Delisting pursuant to which our common stock will be converted into any
combination of cash, securities or other property or assets (the “Alternative Form Consideration”), a holder of Series A
Preferred Stock will receive upon conversion of such Series A Preferred Stock the kind and amount of
Alternative Form Consideration that such holder would have owned or to which that holder would have been entitled to
receive upon the Change of Control/Delisting had such holder held a number of shares of common stock equal to the
Common Stock Conversion Consideration immediately prior to the effective time of the Change of Control/Delisting (the
“Alternative Conversion Consideration” and the Common Stock Conversion Consideration or the Alternative Conversion
Consideration, as may be applicable to a Change of Control/Delisting, is referred to as the “Conversion Consideration”).
If the holders of our common stock have the opportunity to elect the form of consideration to be received in the
Change of Control/Delisting, the Conversion Consideration will be deemed to be the kind and amount of consideration
actually received by holders of a majority of our common stock that voted for such an election (if electing between two
types of consideration) or holders of a plurality of our common stock that voted for such an election (if electing between
more than two types of consideration), as the case may be, and will be subject to any limitations to which all holders of
our common stock are subject, including, without limitation, pro rata reductions applicable to any portion of the
consideration payable in the Change of Control/Delisting.
Within 15 days following the occurrence of a Change of Control/Delisting, we will provide to holders of Series
A Preferred Stock a notice of occurrence of the Change of Control/Delisting that describes the resulting Change of
Control/Delisting Conversion Right (the “Change of Control/Delisting Company Notice”), which will state the following:
●
the events constituting the Change of Control/Delisting;
the last date on which the holders of Series A Preferred Stock may exercise their Change
of Control/Delisting Conversion Right;
the method and period for calculating the Common Stock Price;
the Change of Control/Delisting Conversion Date;
that if, prior to the Change of Control/Delisting Conversion Date, we have provided or
provide notice of our election to redeem all or any portion of the Series A Preferred
Stock, holders will not be able to convert the shares of Series A Preferred Stock
designated for redemption and such shares will be redeemed on the related
redemption date, even if such shares have already been tendered for conversion
pursuant to the Change of Control/Delisting Conversion Right;
if applicable, the type and amount of Alternative Conversion Consideration entitled to be
received per share of Series A Preferred Stock;
the name and address of the paying agent and the conversion agent; and
the procedures that the holders of Series A Preferred Stock must follow to exercise the
Change of Control/Delisting Conversion Right.
We will issue a press release for publication on Dow Jones & Company, Inc., Business Wire, PR
Newswire or Bloomberg Business News (or, if these organizations are not in existence at the time of
issuance of the press release, such other news or press organization as is reasonably calculated to
broadly disseminate the relevant information to the public), or post a notice on our website, in any event
prior to the opening of business on the first business day following any date on which we provide the
notice described above to the holders of Series A Preferred Stock.
To exercise the Change of Control/Delisting Conversion Right, the holders of Series A Preferred Stock will be
required to deliver, on or before the close of business on the Change of Control/Delisting Conversion Date, the
certificates (if any) or book entries representing Series A Preferred Stock to be converted, duly endorsed for transfer (if
certificates are delivered), together with a completed written conversion notice to our transfer agent. The conversion
notice must state:
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the relevant Change of Control/Delisting Conversion Date;
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the number of shares of Series A Preferred Stock to be converted; and
●
that the Series A Preferred Stock is to be converted pursuant to the Change of Control/Delisting
Conversion Right held by holders of Series A Preferred Stock.
Holders of shares of Series A Preferred Stock may withdraw any notice of exercise of a Change of
Control/Delisting Conversion Right (in whole or in part) by a written notice of withdrawal delivered to the transfer
agent prior to the close of business on the business day prior to the Change of Control/Delisting Conversion Date. The
notice of withdrawal must state:
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the number of withdrawn shares of Series A Preferred Stock;
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if certificated shares of Series A Preferred Stock have been issued, the certificate numbers of the
withdrawn shares of Series A Preferred Stock; and
●
the number of shares of Series A Preferred Stock, if any, which remain subject to the conversion notice.
Notwithstanding the foregoing, if the shares of Series A Preferred Stock are held in global form, the conversion
notice and/or the notice of withdrawal, as applicable, must comply with applicable procedures of DTC.
We will not issue fractional shares of common stock upon the conversion of the Series A Preferred Stock.
Instead, we will pay the cash value of any fractional share otherwise due, computed on the basis of the applicable
Common Stock Price.
The “Common Stock Price” will be (i) if the consideration to be received in the Change of Control/Delisting by
the holders of our common stock is solely cash, the amount of cash consideration per share of our common stock, or (ii) if
the consideration to be received in the Change of Control/Delisting by holders of our common stock is other than solely
cash, (x) the average of the closing sale prices per share of our common stock (or, if no closing sale price is reported, the
average of the closing bid and ask prices or, if more than one in either case, the average of the average closing bid and the
average closing ask prices) for the ten consecutive trading days immediately preceding, but not including, the effective
date of the Change of Control/Delisting as reported on the principal U.S. securities exchange on which our common stock
is then traded, or (y) if our common stock is not then listed for trading on a U.S. securities exchange, the average of the
last quoted bid prices for our common stock in the over-the-counter market as reported by OTC Markets Group, Inc. or
similar organization for the ten consecutive trading days immediately preceding, but not including, the effective date of
the Change of Control/Delisting.
Series A Preferred Stock as to which the Change of Control/Delisting Conversion Right has been properly
exercised and for which the conversion notice has not been properly withdrawn will be converted into the applicable
Conversion Consideration in accordance with the Change of Control/Delisting Conversion Right on the Change of
Control/Delisting Conversion Date, unless prior to the Change of Control/Delisting Conversion Date we have provided or
provide notice of our election to redeem such Series A Preferred Stock, whether pursuant to our optional redemption right
or our special optional redemption right. If we elect to redeem Series A Preferred Stock that would otherwise be converted
into the applicable Conversion Consideration on a Change of Control/Delisting Conversion Date, such Series A Preferred
Stock will not be so converted and the holders of such shares will be entitled to receive on the applicable redemption date
$25.00 per share, plus an amount equal to all accrued but unpaid dividends thereon to, but not including, the redemption
date, in accordance with our optional redemption right or special optional redemption right. See “- Optional Redemption”
and “- Special Optional Redemption” above.
We will deliver amounts owing upon conversion no later than the third business day following the Change of
Control/Delisting Conversion Date.
In connection with the exercise of any Change of Control/Delisting Conversion Right, we will comply with all
federal and state securities laws and stock exchange rules in connection with any conversion of Series A Preferred Stock
into shares of our common stock. Notwithstanding any other provision of the Series A Preferred Stock, no holder of
Series A Preferred Stock will be entitled to convert such Series A Preferred Stock into shares of our common stock to the
extent that receipt of such common stock would cause such holder (or any other person) to exceed the share ownership
limits contained in our charter, including the articles supplementary setting forth the
terms of the Series A Preferred Stock, unless we provide an exemption from this limitation for such holder. See “-
Restrictions on Ownership and Transfer” below.
The Change of Control/Delisting conversion feature may make it more difficult for a party to take over our
Company or discourage a party from taking over our Company.
Except as provided above in connection with a Change of Control/Delisting, the Series A Preferred Stock is not
convertible into or exchangeable for any other securities or property.
No Maturity, Sinking Fund or Mandatory Redemption. The Series A Preferred Stock has no maturity date and
we are not required to redeem the Series A Preferred Stock at any time. Accordingly, the Series A Preferred Stock will
remain outstanding indefinitely unless we decide, at our option, to exercise our redemption right or, under circumstances
where the holders of the Series A Preferred Stock have a conversion right, such holders convert the Series A Preferred
Stock into our common stock. The Series A Preferred Stock is not subject to any sinking fund.
Limited Voting Rights. Holders of shares of the Series A Preferred Stock generally do not have any voting rights,
except as set forth below.
If dividends on the Series A Preferred Stock are in arrears for six or more quarterly periods, whether or not
consecutive (which we refer to as a preferred dividend default), the number of directors then constituting our board of
directors will be increased by two and holders of shares of Series A Preferred Stock (voting separately as a single class
together with the holders of the Parity Preferred Stock upon which like voting rights have been conferred and are
exercisable (the “Voting Preferred Stock”)) will be entitled to vote for the election of two additional directors to serve on
our board of directors, which we refer to as the Preferred Directors, until all unpaid dividends for past dividend periods
that have ended shall have been declared and paid in full with respect to the Series A Preferred Stock and the Parity
Preferred Stock. The Preferred Directors will be elected by a plurality of the votes cast in the election for a one-year term
and each Preferred Director will serve until the next annual meeting of stockholders and until his successor is duly elected
and qualified or until the Preferred Director’s right to hold the office terminates, whichever occurs earlier. The election
will take place at:
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a special meeting called upon the written request of holders of at least 10% of the outstanding shares of
Series A Preferred Stock and the Voting Preferred Stock, if this request is received more than 90 days
before the date fixed for our next annual or special meeting of stockholders or, if we receive the request
for a special meeting within 90 days before the date fixed for our next annual or special meeting of
stockholders, at our annual or special meeting of stockholders; and
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each subsequent annual meeting (or special meeting held in its place) until all accrued dividends on the
Series A Preferred Stock and the Parity Preferred Stock have been paid in full for all past dividend
periods that have ended.
If and when all accrued dividends on the Series A Preferred Stock and the Parity Preferred Stock shall have been
declared and paid in full, holders of shares of Series A Preferred Stock and the Voting Preferred Stock shall be divested of
the voting rights set forth above (subject to re-vesting in the event of each and every preferred dividend default) and the
term and office of each Preferred Director so elected will terminate and the number of directors will be reduced
accordingly.
Any Preferred Director may be removed at any time with or without cause by the vote of, and may not be
removed otherwise than by the vote of, the holders of record of a majority of the outstanding shares of Series A Preferred
Stock and the Voting Preferred Stock (voting together as a single class). The Preferred Directors will each be entitled to
one vote on any matter. So long as a preferred dividend default continues, any vacancy in the office of a Preferred
Director may be filled by written consent of the Preferred Director remaining in office, or if none remains in office, by a
vote of the holders of record of a majority of the outstanding shares of Series A Preferred Stock and the Voting Preferred
Stock (voting together as a single class).
So long as any shares of Series A Preferred Stock remain outstanding, in addition to any other vote or consent of
stockholders required by our charter, we will not, without the affirmative vote or consent of the holders of at least two-
thirds of the outstanding shares of Series A Preferred Stock voting together as a single class with the Voting Preferred
Stock, authorize, create or issue, or increase the number of authorized or issued shares of, any class or series of capital
stock ranking senior to the Series A Preferred Stock with respect to payment of dividends or the distribution of assets
upon our liquidation, dissolution or winding up, or reclassify any of our authorized capital stock into such capital stock, or
create, authorize or issue any obligation or security convertible into or evidencing the right to purchase such capital stock.
In addition, so long as any shares of Series A Preferred Stock remain outstanding, we will not, without the
affirmative vote or consent of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock,
amend, alter or repeal the provisions of our charter, or the terms of the Series A Preferred Stock, whether by merger,
consolidation, transfer or conveyance of all or substantially all of our assets or otherwise, so as to materially and
adversely affect any right, preference, privilege or voting power of the Series A Preferred Stock, except that with respect
to the occurrence of any of the events set forth above, so long as the Series A Preferred Stock remains outstanding with
the terms of the Series A Preferred Stock materially unchanged, taking into account that, upon the occurrence of an event
set forth above, we may not be the surviving entity, the occurrence of such event will not be deemed to materially and
adversely affect the rights, preferences, privileges or voting power of the Series A Preferred Stock, and in such case such
holders shall not have any voting rights with respect to the events set forth above; provided, further, that such vote or
consent will not be required with respect to any such amendment, alteration or repeal that equally affects the terms of the
Series A Preferred Stock and the Voting Preferred Stock, if such amendment, alteration or repeal is approved by the
affirmative vote or consent of the holders of two-thirds of the shares of Series A Preferred Stock and the Voting Preferred
Stock (voting together as a single class). Furthermore, if holders of shares of the Series A Preferred Stock will receive the
greater of the full trading price of the Series A Preferred Stock on the date of an event set forth above or the $25.00 per
share liquidation preference pursuant to the occurrence of any of the events set forth above, then such holders shall not
have any voting rights with respect to the events set forth above.
So long as any shares of Series A Preferred Stock remain outstanding, the holders of shares of Series A Preferred
Stock also will have the exclusive right to vote on any amendment, alteration or repeal of the provisions of our charter, or
the terms of the Series A Preferred Stock on which holders of Series A Preferred Stock are otherwise entitled to vote
pursuant to the paragraph set forth immediately above that would alter only the contract rights, as expressly set forth in
our charter, of the Series A Preferred Stock, and the holders of any other classes or series of our capital stock will not be
entitled to vote on such an amendment, alteration or repeal. With respect to any amendment, alteration or repeal of the
provisions of our charter, or the terms of the Series A Preferred Stock, that equally affects the terms of the Series A
Preferred Stock and the Voting Preferred Stock, so long as any shares of Series A Preferred Stock remain outstanding, the
holders of shares of Series A Preferred Stock and the Voting Preferred Stock (voting together as a single class), also will
have the exclusive right to vote on any amendment, alteration or repeal of the provisions of our charter, or the terms of the
Series A Preferred Stock on which holders of Series A Preferred Stock are otherwise entitled to vote pursuant to the
paragraph set forth immediately above, that would alter only the contract rights, as expressly set forth in our charter, of
the Series A Preferred Stock and Voting Preferred Stock, and the holders of any other classes or series of our capital stock
will not be entitled to vote on such an amendment, alteration or repeal.
Holders of shares of Series A Preferred Stock will not be entitled to vote with respect to any increase in the total
number of authorized shares of our common stock or preferred stock, any issuance or increase in the number of
authorized shares of Series A Preferred Stock or the creation or issuance of any other class or series of capital stock, or
any issuance or increase in the number of authorized shares of any class or series of capital stock, in each case ranking on
parity with or junior to the Series A Preferred Stock with respect to the payment of dividends and the distribution of assets
upon liquidation, dissolution or winding up.
Holders of shares of Series A Preferred Stock will not have any voting rights with respect to, and the consent of
the holders of shares of Series A Preferred Stock is not required for, the taking of any corporate action, including any
merger or consolidation involving us or a sale of all or substantially all of our assets, regardless of the
effect that such merger, consolidation or sale may have upon the powers, preferences, voting power or other rights or
privileges of the Series A Preferred Stock, except as set forth above.
In addition, the voting provisions above will not apply if, at or prior to the time when the act with respect to
which the vote would otherwise be required would occur, we have redeemed or called for redemption upon proper
procedures all outstanding shares of Series A Preferred Stock and sufficient funds, in cash, have been deposited in trust to
effect such redemption.
In any matter in which Series A Preferred Stock may vote (as expressly provided in the articles supplementary
setting forth the terms of the Series A Preferred Stock), each share of Series A Preferred Stock shall be entitled to one vote
per $25.00 of liquidation preference. As a result, each share of Series A Preferred Stock will be entitled to one vote.
Restrictions on Ownership and Transfer. In order for us to maintain our qualification as a REIT under the Code,
our shares of stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12
months or during a proportionate part of a shorter taxable year. Also, no more than 50% of the value of our outstanding
shares of capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined by the Code to
include certain entities) during the last half of any taxable year.
To help us to maintain our qualification as a REIT, our charter, subject to certain exceptions, contains, and the
Series A Preferred Stock articles supplementary contain, restrictions on the number of shares of our common stock, Series
A Preferred Stock and our capital stock that a person may own. Our charter provides that generally no person may own,
or be deemed to own by virtue of the attribution provisions of the Code, either more than 9.8% in value or in number of
shares, whichever is more restrictive, of our aggregate outstanding shares of capital stock, or more than 9.8% in value or
in number of shares, whichever is more restrictive, of our aggregate outstanding shares of common stock. In addition, the
Series A Preferred Stock articles supplementary provide that generally no person may own, or be deemed to own by virtue
of the attribution provisions of the Code, either more than 9.8% in value or in number of shares, whichever is more
restrictive, of our aggregate outstanding shares of Series A Preferred Stock. The beneficial ownership and/or constructive
ownership rules under the Code are complex and may cause shares of stock owned actually or constructively by a group
of related individuals and/or entities to be owned constructively by one individual or entity.
Transfer Agent and Registrar. The transfer agent and registrar for our Series A Preferred Stock is Continental
Stock Transfer & Trust.
Listings. Our Series A Preferred Stock is traded on the NYSE under the ticker symbol “IIPR Pr A.”
Certain Provisions of Maryland law and our Charter and Bylaws
The following summary of certain provisions of Maryland law and our charter and bylaws does not purport to
be complete and is subject to and qualified in its entirety by reference to Maryland law and our charter and bylaws,
copies of which are filed as exhibits to the Annual Report on Form 10-K.
Our Board of Directors. Our charter and bylaws provide that the number of directors we have may be
established only by our board of directors but may not be fewer than the minimum number required under the MGCL,
which is one, and our bylaws provide that the number of our directors may not be more than 15. Because our board of
directors has the power to amend our bylaws, it could modify the bylaws to change that range. Subject to the terms of any
class or series of preferred stock, vacancies on our board of directors may be filled only by a majority of the remaining
directors, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will hold
office for the remainder of the full term of the directorship in which the vacancy occurred and until his or her successor is
duly elected and qualifies.
Except as may be provided with respect to any class or series of our stock, under the MGCL at each annual
meeting of our stockholders, each of our directors is elected by our stockholders to serve until the next annual
meeting of our stockholders and until his or her successor is duly elected and qualifies. A plurality of the votes cast in the
election of directors is sufficient to elect a director, and holders of shares of common stock have no right to cumulative
voting in the election of directors. Consequently, at each annual meeting of stockholders, the holders of a majority of the
shares of common stock entitled to vote are able to elect all of our directors.
The Series A Preferred Stock articles supplementary provides that if dividends on the Series A Preferred Stock
are in arrears for six or more quarterly periods, whether or not consecutive, holders of shares of the Series A Preferred
Stock (voting together as a class with other voting preferred stock) will be entitled to vote for the election of two
additional directors to serve on our board of directors. The Series A Preferred Stock articles supplementary also separately
provide for the election, term, removal and filling of any vacancy in the office of such directors elected by the holders of
the Series A Preferred Stock.
Removal of Directors. Our charter provides that, subject to the rights of holders of any class or series of our
preferred stock to elect or remove one or more directors, a director may be removed only with cause and only by the
affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors. This provision,
when coupled with the exclusive power of our board of directors to fill vacancies on our board of directors, precludes
stockholders from (i) removing incumbent directors except with cause and upon a substantial affirmative vote and (ii)
filling the vacancies created by such removal with their own nominees.
No Appraisal Rights. As permitted by the MGCL, our charter provides that stockholders will not be entitled to
exercise appraisal rights unless a majority of our board of directors determines that appraisal rights apply, with respect to
all or any classes or series of stock, to one or more transactions occurring after the date of such determination in
connection with which stockholders would otherwise be entitled to exercise appraisal rights.
Dissolution. Our dissolution must be declared advisable by a majority of our board of directors and approved by
the affirmative vote of stockholders entitled to cast not less than a majority of the votes entitled to be cast on such matter.
Exclusive Forum for Certain Litigation. Our bylaws provide that, unless we consent in writing to an alternative
forum, the state and federal courts in Baltimore, Maryland are the exclusive forum for certain litigation, including (i)
derivative actions on our behalf, (ii) actions asserting claims of breach of any duty owed by any of our directors, officers
or employees, (iii) actions asserting a claim against us or any of our directors, officers or other employees arising under
the MGCL, our bylaws or our charter and (iv) actions governed by the internal affairs doctrine.
Business Combinations. Under the MGCL, certain “business combinations” (including a merger, consolidation,
statutory share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities)
between a Maryland corporation and an interested stockholder (defined generally as any person who beneficially owns,
directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock or an affiliate or
associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial
owner of 10% or more of the voting power of the then outstanding voting stock of the corporation) or an affiliate of such
an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder
becomes an interested stockholder. Thereafter, any such business combination must generally be recommended by the
board of directors of such corporation and approved by the affirmative vote of at least (1) 80% of the votes entitled to be
cast by holders of outstanding voting stock of the corporation and (2) two-thirds of the votes entitled to be cast by holders
of voting stock of the corporation other than shares held by the interested stockholder with whom (or with whose affiliate)
the business combination is to be effected or held by an affiliate or associate of the interested stockholder, unless, among
other conditions, the corporation’s common stockholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its
shares. A person is not an interested stockholder under the statute if the board of directors approved in advance the
transaction by which the person otherwise would have become an interested stockholder. A Maryland corporation’s board
of directors may provide that its approval is subject to compliance with any terms and conditions determined by it. These
provisions of the MGCL do not apply, however, to business combinations that are approved or
exempted by a Maryland corporation’s board of directors prior to the time that the interested stockholder becomes an
interested stockholder.
Control Share Acquisitions. The MGCL provides that a holder of “control shares” of a Maryland corporation
acquired in a “control share acquisition” has no voting rights with respect to the control shares except to the extent
approved by the affirmative vote of at least two-thirds of the votes entitled to be cast on the matter, excluding shares of
stock in the corporation in respect of which any of the following persons is entitled to exercise or direct the exercise of the
voting power of such shares in the election of directors: (i) a person who makes or proposes to make a control share
acquisition, (ii) an officer of the corporation or (iii) an employee of the corporation who is also a director of the
corporation. “Control shares” are voting shares of stock which, if aggregated with all other such shares of stock owned by
the acquirer, or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-tenth or more but less than one-third; (ii) one-third or more but less than a
majority; or (iii) a majority or more of all voting power. Control shares do not include shares that the acquiring person is
then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the
corporation. A “control share acquisition” means the acquisition of issued and outstanding control shares, subject to
certain exceptions.
A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions
(including an undertaking to pay expenses and delivering an “acquiring person statement” as described in the MGCL),
may compel the board of directors to call a special meeting of stockholders to be held within 50 days of demand to
consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does not deliver an “acquiring person
statement” as required by the statute, then, subject to certain conditions and limitations, the corporation may redeem any
or all of the control shares (except those for which voting rights have previously been approved) for fair value
determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share
acquisition by the acquirer or as of any meeting of stockholders at which the voting rights of such shares are considered
and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes
entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair
value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share
paid by the acquirer in the control share acquisition.
The control share acquisition statute does not apply to (i) shares acquired in a merger, consolidation or share
exchange if the corporation is a party to the transaction or (ii) acquisitions approved or exempted by the charter or bylaws
of the corporation. Our bylaws contain a provision exempting from the control share acquisition statute any and all
acquisitions by any person of shares of our stock. There can be no assurance that such provision will not be amended or
eliminated at any time in the future by our board of directors.
Subtitle 8. Subtitle 8 of the MGCL permits a Maryland corporation with a class of equity securities registered
under the Exchange Act and at least three independent directors to elect to be subject, by provision in its charter or bylaws
or a resolution of its board of directors and notwithstanding any contrary provision in the charter or bylaws, to any or all
of five provisions of the MGCL which provide for:
●
a classified board;
●
a two-thirds vote requirement for removing a director;
●
a requirement that the number of directors be fixed only by vote of the directors;
●
a requirement that a vacancy on the board of directors be filled only by the remaining directors in office
and (if the board of directors is classified) for the remainder of the full term of the class of directors in
which the vacancy occurred; and
●
a majority requirement for the calling of a stockholder-requested special meeting of stockholders.
Our charter provides that vacancies on our board may be filled only by the remaining directors and for the
remainder of the full term of the directorship in which the vacancy occurred. Through provisions in our charter and
bylaws unrelated to Subtitle 8, we already (i) require the affirmative vote of stockholders entitled to cast not less than
two-thirds of all of the votes entitled to be cast generally in the election of directors for the removal of any director from
the board, only with cause, (ii) vest in the board of directors the exclusive power to fix the number of directorships and
(iii) require, unless called by our chairman of the board, our chief executive officer or our board of directors, the written
request of stockholders entitled to cast not less than a majority of all votes entitled to be cast at such a meeting to call a
special meeting of our stockholders.
Meetings of Stockholders. Pursuant to our bylaws, a meeting of our stockholders for the election of directors
and the transaction of any business will be held annually on a date and at the time and place set by our board of directors.
The chairman of our board of directors, our chief executive officer or our board of directors may call a special meeting of
our stockholders. Subject to the procedural requirements specified in our bylaws, a special meeting of our stockholders to
act on any matter that may properly be brought before a meeting of our stockholders must also be called by our secretary
upon the written request of the stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting on
such matter and containing the information required by our bylaws. Only the matters set forth in the notice of special
meeting may be considered and acted upon at such meeting. Additionally, the Series A Preferred Stock articles
supplementary provides the holders of Series A Preferred Stock certain rights to have a special meeting called upon their
request in connection with the election of the preferred stock directors.
Amendment to Our Charter and Bylaws. Except for amendments to the provisions of our charter relating to the
removal of directors, and the vote required to amend this provision (which must be advised by our board of directors and
approved by the affirmative vote of stockholders entitled to cast not less than two-thirds of all the votes entitled to be cast
on the election), our charter generally may be amended only if advised by our board of directors and approved by the
affirmative vote of stockholders entitled to cast a majority of all of the votes entitled to be cast on the matter. As permitted
by the MGCL, our charter contains a provision permitting our directors, without any action by our stockholders, to amend
the charter to increase or decrease the aggregate number of shares of stock of any class or series that we have authority to
issue.
Our bylaws may be adopted, altered or repealed by the board of directors or by our stockholders, by the
affirmative vote of a majority of the outstanding shares entitled to vote on the matter.
Additionally, the Series A Preferred Stock articles supplementary provides the holders of Series A Preferred
Stock with voting rights with respect to certain amendments to our charter.
Advance Notice of Director Nominations and New Business. Our bylaws provide that, with respect to an annual
meeting of stockholders, nominations of individuals for election to our board of directors and the proposal of other
business to be considered by stockholders may be made only (i) pursuant to our notice of the meeting, (ii) by or at the
direction of our board of directors or (iii) by a stockholder who was a stockholder of record both at the time of giving the
notice required by our bylaws and at the time of the meeting, who is entitled to vote at the meeting on such business or in
the election of such nominee and who has provided notice to us within the time period, and containing the information
and other materials, specified by the advance notice provisions set forth in our bylaws.
With respect to special meetings of stockholders, only the business specified in our notice of meeting may be
brought before the meeting. Nominations of individuals for election to our board of directors may be made only (i) by or
at the direction of our board of directors or (ii) provided that the meeting has been called for the purpose of electing
directors, by a stockholder who was a stockholder of record both at the time of giving notice and at the time of the special
meeting, who is entitled to vote at the meeting in the election of such nominee and who has provided notice to us within
the time period, and containing the information and other materials, specified by the advance notice provisions set forth in
our bylaws.
Action by Stockholders. Our charter provides that stockholder action can be taken at an annual or special
meeting of stockholders and by consent in lieu of a meeting if such consent is approved unanimously. These provisions,
combined with the requirements of our bylaws regarding advance notice of nominations and other business to be
considered at a meeting of stockholders and the calling of a stockholder-requested special meeting of stockholders, may
have the effect of delaying consideration of a stockholder proposal.
Anti-Takeover Effect of Certain Provisions of Maryland Law and of Our Charter and Bylaws. The provisions
of the MGCL, our charter and our bylaws described above including, among others, the restrictions on ownership and
transfer of our stock, the exclusive power of our board of directors to fill vacancies on the board and the advance notice
provisions of our bylaws could delay, defer or prevent a change in control or other transaction that might involve a
premium price for shares of our common stock or otherwise be in the best interests of our stockholders. Likewise, if our
board of directors were to opt in to the classified board or other provisions of Subtitle 8 or if our board of directors were
to opt in to the control share acquisition of the MGCL, these provisions of the MGCL could have similar anti-takeover
effects.
Exhibit 19.1
Innovative Industrial Properties, Inc.
Insider Trading Compliance Program
This Statement consists of four sections:
●
Section I provides an overview;
●
Section II sets forth Innovative Industrial Properties, Inc.’s policies prohibiting insider trading;
●
Section III explains insider trading; and
●
Section IV consists of various procedures which have been put in place by Innovative
Industrial Properties, Inc. to prevent insider trading.
I.
SUMMARY
Preventing insider trading is necessary to comply with securities law and to preserve the
reputation and integrity of Innovative Industrial Properties, Inc. (the “Company”) as well as that of all
persons affiliated with it. “Insider trading” occurs when any person purchases or sells a security while in
possession of inside information relating to the security. As explained in Section III below, “inside
information” is information which is considered to be both “material” and “non-public.” Insider trading
is a crime and can undermine investor trust, harm the reputation and integrity of the Company, and result
in dismissal from the Company or even serious criminal and civil charges against the individual and the
Company.
This Statement applies to all officers, directors and employees of the Company (collectively,
“IIPR Personnel”) and extends to all activities within and outside an individual’s duties at the Company. Every
officer, director and employee must review this Statement. The policies set forth in this Statement also apply to
transactions by (i) each officer’s, director’s and employee’s spouse, children or other relatives living in the same
household (“family members”); (ii) corporations or other business entities controlled by an officer, director,
employee or any family member; (iii) corporations or other business entities controlled by an officer, director or
employee; and (iv) trusts in which an officer, director, employee or any family member acts as trustee or
otherwise has investment control. Questions regarding the Statement should be directed to the Company’s
Chief Executive Officer or Chief Financial Officer or his or her designee (the “Authorizing Officers”).
II.
STATEMENT OF POLICIES PROHIBITING INSIDER TRADING
No officer, director or employee shall purchase or sell any type of security while in
possession of material, non-public information relating to the security, whether the issuer of such security
is the Company or any other company. Additionally, except for the exercise of options that does not
involve the sale of Company securities (the cashless exercise of a Company stock option does involve the
sale of Company securities and therefore would not qualify under this exception) or purchases or sales
pursuant to a Rule 10b5-1 trading plan previously approved by an Authorizing Officer (or, in the case of
a trading plan of an Authorizing Officer, another Authorizing Officer or the
Audit Committee Chairperson), no officer, director or employee shall purchase or sell any security of
the Company during the period beginning two weeks before the end of any fiscal quarter of the
Company and ending two business days after the public release of earnings data for such fiscal
quarter.
No officer, director or employee shall directly or indirectly tip material, non-public
information to anyone while in possession of such information. In addition, material, non-public
information should not be communicated to anyone outside the Company under any circumstances, or to
anyone within the Company other than on a need-to-know basis.
III.
EXPLANATION OF INSIDER TRADING
As noted above, “insider trading” refers to the purchase or sale of a security while in
possession of “material” “non-public” information relating to the security. “Securities” include not only
stocks, bonds, notes and debentures, but also options, warrants and similar instruments. “Purchase” and
“sale” are defined broadly under the federal securities law. “Purchase” includes not only the actual
purchase of a security, but any contract to purchase or otherwise acquire a security. “Sale” includes not
only the actual sale of a security, but any contract to sell or otherwise dispose of a security. These
definitions extend to a broad range of transactions including conventional cash-for-stock transactions,
conversions, the grant and exercise of stock options and acquisitions and exercises of warrants or puts,
calls or other options related to a security. It is generally understood that insider trading includes the
following:
●
trading by insiders while in possession of material, non-public information;
●
trading by persons other than insiders while in possession of material, non-public
information where the information either was given in breach of an insider’s fiduciary
duty to keep it confidential or was misappropriated; or
●
communicating or tipping material, non-public information to others, including
recommending the purchase or sale of a security while in possession of such
information.
A.
What Facts are Material?
The materiality of a fact depends upon the circumstances. A fact is considered “material”
if there is a substantial likelihood that a reasonable investor would consider it important in making a
decision to buy, sell or hold a security or where the fact is likely to have a significant effect on the market
price of the security. Material information can be positive or negative and can relate to virtually any
aspect of a company’s business or to any type of security, debt or equity.
Examples of material information include (but are not limited to) facts concerning:
dividends; corporate earnings or earnings forecasts; mergers or acquisitions; major litigation; significant
borrowings or financings; defaults on borrowings; and bankruptcies. Moreover, material information
does not have to be related to a company’s business. For example, the contents of a forthcoming
newspaper column that is expected to affect the market price of a security can be material.
A good general rule of thumb: when in doubt, do not trade.
B.
What is Non-public?
Information is “non-public” if it is not available to the general public. In order for
information to be considered public, it must be widely disseminated in a manner making it generally
available to investors through such media as Dow Jones, Reuters Economic Services, The Wall Street
Journal, Associated Press, or United Press International. The circulation of rumors, even if accurate and
reported in the media, does not constitute effective public dissemination.
In addition, even after a public announcement, a reasonable period of time must lapse in
order for the market to react to the information. Generally, one should allow approximately 48 hours
following publication as a reasonable waiting period before such information is deemed to be public.
C.
Who is an Insider?
“Insiders” include officers, directors and employees of a company and anyone else who
has material inside information about a company. Insiders have independent fiduciary duties to their
company and its stockholders not to trade on material, non-public information relating to the company’s
securities. All officers, directors and employees of the Company should consider themselves insiders
with respect to material, non-public information about business, activities and securities. Officers,
directors and employees may not trade the Company’s securities while in possession of material, non-
public information relating to the Company nor tip (or communicate except on a need-to-know basis)
such information to others.
It should be noted that trading by members of an officer’s, director’s or employee’s
household can be the responsibility of such officer, director or employee under certain circumstances and
could give rise to legal and Company-imposed sanctions.
D.
Trading by Persons Other than Insiders
Insiders may be liable for communicating or tipping material, non-public information to a
third party (“tippee”), and insider trading violations are not limited to trading or tipping by insiders.
Persons other than insiders also can be liable for insider trading, including tippees who trade on material,
non-public information tipped to them or individuals who trade on material, non-public information
which has been misappropriated.
Tippees inherit an insider’s duties and are liable for trading on material, non-public
information illegally tipped to them by an insider. Similarly, just as insiders are liable for the insider
trading of their tippees, so are tippees who pass the information along to others who trade. In other
words, a tippee’s liability for insider trading is no different from that of an insider. Tippees can obtain
material, non-public information by receiving overt tips from others or through, among other things,
conversations at social, business or other gatherings.
E.
Penalties for Engaging in Insider Trading
Penalties for trading on or tipping material, non-public information can extend
significantly beyond any profits made or losses avoided, both for individuals engaging in such unlawful
conduct and their employers. The Securities and Exchange Commission (“SEC”) and Department of
Justice have made the civil and criminal prosecution of insider trading violations a top
priority. Enforcement remedies available to the government or private plaintiffs under the federal
securities laws include:
●
SEC administrative sanctions;
●
securities industry self-regulatory organization sanctions;
●
civil injunctions;
●
damage awards to private plaintiffs;
●
disgorgement of all profits;
●
civil fines for the violator of up to three times the amount of profit gained or loss
avoided;
●
civil fines for the employer or other controlling person of a violator (i.e., where the
violator is an employee or other controlled person);
●
criminal fines for individual violators; and
●
imprisonment.
In addition, insider trading could result in serious sanctions by the Company, including
dismissal. Insider trading violations are not limited to violations of the federal securities laws: other
federal and state civil or criminal laws, such as the laws prohibiting mail and wire fraud and the
Racketeer Influenced and Corrupt Organizations Act (RICO), also may be violated upon the
occurrence of insider trading.
F.
Examples of Insider Trading
Examples of insider trading cases include actions brought against: corporate officers,
directors and employees who traded a company’s securities after learning of significant confidential
corporate developments; friends, business associates, family members, and other tippees of such officers,
directors, and employees who traded the securities after receiving such information; government
employees who learned of such information in the course of their employment; and other persons who
misappropriated, and took advantage of, confidential information from their employers.
The following are illustrations of insider trading violations. These illustrations are
hypothetical and, consequently, not intended to reflect on the actual activities or business of the Company
or any other entity.
Trading by Insider
An officer of X Corporation learns that earnings to be reported by X Corporation will increase
dramatically. Prior to the public announcement of such earnings, the officer purchases X
Corporation’s stock. The officer, an insider, is liable for all profits as well as penalties. The officer
also is subject to, among other things, criminal prosecution, which may include additional
fines and imprisonment. Depending upon the circumstances, X Corporation and the individual to
whom the officer reports also could be liable as controlling persons.
Trading by Tippee
An officer of X Corporation tells a friend that X Corporation is about to publicly announce that
it has concluded an agreement for a major acquisition. This tip causes the friend to purchase X
Corporation’s stock in advance of the announcement. The officer is jointly liable with his or her
friend for all of the friend’s profits and each is liable for additional penalties. In addition, the officer
and his or her friend are subject to, among other things, criminal prosecution, as described above.
IV.
STATEMENT OF PROCEDURES PREVENTING INSIDER TRADING
The following procedures have been established, and will be maintained and enforced, by
the Company to prevent insider trading. Every officer, director and employee is required to follow these
procedures.
A.
Identifying Material, Non-public Information
No officer, director or employee shall purchase or sell any type of security while in
possession of material, non-public information relating to the security, whether the issuer of such security
is the Company or any other company. Additionally, prior to directly or indirectly trading any security of
the Company, every officer, director and employee is required to contact an Authorizing Officer (as part
of the pre-clearance procedure discussed below in Section D) and make an initial determination whether
the Company and/or such officer, director or employee is in possession of material, non-public
information relating to such security. In making such assessment, the explanations of “material” and
“non-public” information set forth above should be of assistance. If after consulting with an Authorizing
Officer it is determined that the Company and/or such officer, director or employee is in possession of
material, non-public information, there may be no trading in such security.
B.
Information Relating to the Company
1.
Access to Information
Access to material, non-public information about the Company, including the Company’s
business, earnings or prospects, should be limited to officers, directors and employees of the Company on
a need-to-know basis. In addition, such information should not be communicated to anyone outside the
Company under any circumstances or to anyone within the Company on an other than need to know
basis.
In communicating material, non-public information to employees of the Company, all
officers, directors and employees must take care to emphasize the need for confidential treatment of such
information and adherence to the Company’s policies with regard to confidential information.
2.
Inquiries From Third Parties
Inquiries from third parties, such as industry analysts or members of the media, about the
Company should be directed to the Chief Financial Officer.
C.
Limitations on Access to the Company Information
The following procedures are designed to maintain confidentiality with respect to the
Company’s business operations and activities.
1.
All officers, directors and employees should take all steps and precautions
necessary to restrict access to, and secure, material, non-public information by, among other things:
●
maintaining the confidentiality of Company related transactions;
●
conducting their business and social activities so as not to risk inadvertent disclosure
of confidential information. Review of confidential documents in public places
should be conducted so as to prevent access by unauthorized persons;
●
restricting access to documents and files (including computer files) containing
material, non-public information to individuals on a need-to-know basis (including
maintaining control over the distribution of documents and drafts of documents);
●
promptly removing and cleaning up all confidential documents and other materials
from conference rooms following the conclusion of any meetings;
●
disposing of all confidential documents and other papers, after there is no longer any
business or other legally required need, through shredders when appropriate;
●
restricting access to areas likely to contain confidential documents or material, non-
public information; and
●
avoiding the discussion of material, non-public information in places where the
information could be overheard by others such as in elevators, restrooms, hallways,
restaurants, airplanes or taxicabs.
2.
Personnel involved with material, non-public information, to the extent feasible,
should conduct their business and activities in areas separate from other Company activities.
D.
Pre-Clearance of All Trades by All Officers, Directors and Employees
To provide assistance in preventing inadvertent violations of applicable securities laws
and to avoid the appearance of impropriety in connection with the purchase and sale of the Company
securities, all transactions in Company securities (including without limitation, acquisitions and
dispositions of Company Stock (other than purchases or sales pursuant to a Rule 10b5-1 trading
plan previously approved by an Authorizing Officer ), the exercise of stock options and the sale of
Company Stock issued upon exercise of stock options) by officers, directors and employees must be
precleared by an Authorizing Officer . Preclearance should
not be understood to represent legal advice by the Company that a proposed transaction complies with the
law. Additionally, except for (i) purchases or sales made pursuant to a Rule 10b5-1 trading plan
previously approved by an Authorizing Officer or (ii) the exercise of options that does not involve the
sale of Company securities (the cashless exercise of a Company stock option does involve the sale of
Company securities and therefore would not qualify under this exception), neither the Company nor
any of its officers, directors or employees may trade in any securities of the Company during the
period beginning two weeks before the end of any fiscal quarter of the Company and ending two
business days after the public release of earnings data for such fiscal quarter. Also, please consult
the “Insider Trading Reminders” attached hereto as “Attachment A.”
E.
Purchases and Sales Pursuant to Rule 10b5-1 Plans
Purchases and sales pursuant to a contract, instruction or plan entered into by an officer or
director of the Company in good faith and in accordance with the terms of Rule 10b5-1 of the Securities
Exchange Act of 1934 shall be exempt from the trading restrictions set forth herein if the plan is
implemented and operated in accordance with the terms of Rule 10b5-1 and of this paragraph. Each Rule
10b5-1 trading plan, and any modification to a Rule 10b5-1 trading plan, must be submitted to and pre-
approved by an Authorizing Officer (or, in the case of a trading plan of an Authorizing Officer, another
Authorizing Officer or the Audit Committee Chairperson)
, who may impose any conditions on the implementation and operation of the trading plan as he
or she deems necessary or advisable. From time to time, for legal or other reasons, an Authorizing
Officer may direct that purchases and sales pursuant to any Rule 10b5-1 trading plan be suspended or
discontinued. Failure of the officer or director to discontinue purchases and sales as directed will be a
violation of the Company’s insider trading policy and result in a loss of the exemption under this
paragraph.
F.
Avoidance of Certain Aggressive or Speculative Trading
Officers, directors and employees and their respective family members (including
spouses, minor children, or any other family members living in the same household), should ordinarily
not directly or indirectly participate in transactions involving trading activities which by their aggressive
or speculative nature may give rise to an appearance of impropriety. Such activities would include the
purchase of put or call options, or the writing of such options.
G.
Derivatives Trading and Hedging Activities
Executive officers, directors and their respective family members (including spouses,
minor children, or any other family members living in the same household) are prohibited from entering
into any derivative transaction designed to limit the economic risk with respect to any Company
securities held by them (whether vested or unvested), including, without limitation, short-selling,
forward contracts, options, puts, calls, straddles and equity swaps.
H.
Trading on Margin and Pledging Activities
Executive officers, directors and their respective family members (including spouses,
minor children, or any other family members living in the same household) are prohibited from holding
Company securities in a margin account or pledging Company securities as collateral for any loan.
I.
Execution and Return of Certification of Compliance
To help facilitate compliance with this policy statement, the Company requires that all
IIPR Personnel review this policy statement upon hire and periodically, and acknowledge in writing their
understanding of, and their agreement to comply with, this policy.
Dated: January 15, 2025
Attachment A
Insider Trading Reminders For Employees,
Officers And Directors Of Innovative Industrial Properties, Inc.
Before engaging in any transaction in Innovative Industrial Properties, Inc. (the
“Company”) securities, please read the following:
Both the federal securities laws and the Company’s policy prohibit transactions in the
Company’s securities at a time when you may be in possession of material information about the
Company which has not been publicly disclosed. This also applies to members of your household as
well as all others whose transactions may be attributable to you.
Material information, in short, is any information which could affect the price of the
securities. Either positive or negative information may be material. Once a public announcement has
been made, you should wait until the information has been made available to the public for at least 48
hours before engaging in any transaction.
Except for (i) purchases or sales made pursuant to a Rule 10b5-1 trading plan previously
approved by the Company’s Chief Executive Officer or Chief Financial Officer or his or her designee
(the “Authorizing Officers”) or (ii) the exercise of options that does not involve the sale of Company
securities (the cashless exercise of a Company stock option does involve the sale of Company securities
and therefore would not qualify under this exception), neither the Company nor any of its officers,
directors or employees may trade in any securities of the Company during the period beginning
two weeks before the end of any fiscal quarter of the Company and ending two business days after
the public release of earnings data for such fiscal quarter. Important: All transactions by officers,
directors or employees (other than purchases or sales pursuant to a Rule 10b5-1 trading plan previously
approved by an Authorizing Officer ) must be precleared with an Authorizing Officer.
For further information and guidance, please refer to our Statement Governing the
Prevention of Insider Trading and do not hesitate to contact an Authorizing Officer.
All transactions in Innovative Industrial Properties, Inc. securities must be precleared by
contacting an Authorizing Office
Exhibit 21.1
Subsidiaries of the Registrant
The list below excludes subsidiaries in the same line of business (ownership and operation of commercial real
estate) and includes the immediate parent of each excluded subsidiary. The list also excludes subsidiaries that in the
aggregate, as a single subsidiary, would not constitute a significant subsidiary as of December 31, 2024. A total
of 70 subsidiaries have been excluded.
Subsidiary
State of Incorporation/Formation
IIP Operating Partnership, LP
Delaware
Innovative Industrial Properties, LP
Delaware
IIPR, Inc.
Maryland
IIP-GP 2 LLC
Delaware
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-4 (No. 333-258043) and Form
S-8 (No. 333-214919) of Innovative Industrial Properties, Inc. (the “Company”) of our reports dated February 21, 2025,
relating to the consolidated financial statements and financial statement schedule, and the effectiveness of the Company’s
internal control over financial reporting, which appear in this Annual Report on Form 10-K.
/s/ BDO USA, P.C.
San Diego, California
February 21, 2025
Exhibit 31.1
Innovative Industrial Properties, Inc.
Annual Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Paul Smithers, certify that:
1)
I have reviewed this Annual Report on Form 10-K of Innovative Industrial Properties, Inc.;
2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report, any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5)
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting,
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 21, 2025
/s/ Paul Smithers
Paul Smithers
Chief Executive Officer, President and Director
Exhibit 31.2
Innovative Industrial Properties, Inc.
Annual Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David Smith, certify that:
1)
I have reviewed this Annual Report on Form 10-K of Innovative Industrial Properties, Inc.;
2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report, any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5)
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting,
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 21, 2025
/s/ David Smith
David Smith
Chief Financial Officer and Treasurer
Exhibit 32.1
Innovative Industrial Properties, Inc.
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K of Innovative Industrial Properties, Inc. (the "Company") for the year
ended December 31, 2024, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Paul Smithers, Chief
Executive Officer, President and Director of the Company, and I, David Smith, Chief Financial Officer and Treasurer of the Company, each
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1)
The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
February 21, 2025
/s/ Paul Smithers
Paul Smithers
Chief Executive Officer, President and Director
/s/ David Smith
David Smith
Chief Financial Officer and Treasurer