Business Context and Reporting Period
Company: Innovative Industrial Properties, Inc.
Filing Type: Form 8-K (Current Report)
Date: March 13, 2019
Context: The Company, through its subsidiary IIP-OH 1 LLC, acquired a property in Buckeye Lake Village, Ohio, and entered into a triple-net lease and development agreement with PharmaCann Ohio LLC (an affiliate of PharmaCann LLC). The property is intended for use as a medical-use cannabis cultivation and processing facility.
Key Financial Metrics and Transaction Details
- Acquisition Cost: $700,000 (initial purchase price).
- Total Expected Investment: Approximately $20.0 million (including up to $19.3 million in construction funding).
- Lease Term: Initial term expires May 15, 2034, with two options to extend for five-year periods.
- Base Rent: $2,650,000 annualized, payable monthly. Rent is abated until May 15, 2019.
- Rent Escalation: 3.25% annual increases.
- Property Management Fee: 1.5% of current Base Rent.
- Security Deposit: Initial cash deposit of $23,187.50; full deposit of $662,500 required within 15 months of lease commencement.
- Development Scope: Tenant to develop a 32,000 sq. ft. greenhouse and a 26,000 sq. ft. industrial facility.
Material Changes and Agreements
The filing reports the completion of an asset acquisition and the entry into material definitive agreements on March 13, 2019:
- Triple-Net Lease: Tenant assumes responsibility for all structural repairs, maintenance, insurance, and taxes.
- Development Agreement: Landlord obligated to reimburse Tenant for development costs up to $19.3 million, subject to conditions.
- Multi-Party Agreement: Involves PharmaCann, MedMen Enterprises Inc., and the Company. Upon the consummation of the business combination between PharmaCann and MedMen, the surviving parent company (MedMen ParentCo) will execute a guaranty for obligations under this lease and other existing PharmaCann leases.
- Repurchase Option: If Tenant transfers required cannabis licenses within the first four years, Landlord may elect to have the transferee replace Tenant or require Tenant to repurchase the Property at the greater of appraised value or a yield-based calculation (9.75% cap rate).
Outlook, Risks, and Contingencies
- Forward-Looking Statements: The filing contains statements regarding the proposed transaction between PharmaCann and MedMen, which are subject to risks and uncertainties.
- Guaranty Contingency: The full guaranty by MedMen ParentCo is contingent upon the closing of the business combination between PharmaCann and MedMen.
- License Transfer Risk: The lease includes specific provisions regarding the transfer of government approvals and licenses, which could trigger a repurchase of the property by the Tenant.
- Construction Funding: The $19.3 million construction funding is subject to the satisfaction of certain conditions contained in the Development Agreement.
Investor Verification Checklist
- Verify the status of the business combination transaction between PharmaCann and MedMen to confirm the activation of the MedMen ParentCo guaranty.
- Confirm the timeline for the completion of the 32,000 sq. ft. greenhouse and 26,000 sq. ft. industrial facility to ensure rent commencement on May 15, 2019.
- Review the specific conditions in the Development Agreement that must be satisfied before the $19.3 million construction funding is released.
- Monitor the Tenant's progress in obtaining the required government approvals and licenses for medical-use cannabis cultivation.
- Assess the financial stability of PharmaCann Ohio LLC and its affiliates given the reliance on their ability to fund development and pay rent post-abatement.