Item 1.01. Entry into a Material
Definitive Agreement.
On
November 21, 2017, Innovative Industrial Properties, Inc. (the "Company"), through its operating partnership subsidiary,
IIP Operating Partnership, LP, entered into
a definitive purchase and sale agreement
(the "Purchase Agreement") with a subsidiary of The Pharm, LLC ("The Pharm") to acquire a property in Arizona
comprised of approximately 358,000 square feet of greenhouse and industrial space (the "Property") in a sale-leaseback
transaction. Concurrently with the closing of the acquisition of the Property, the Company expects to enter into a triple-net lease
(the "Lease") with The Pharm subsidiary for the entire Property, the form of which is attached as an exhibit to the Purchase
Agreement. The Pharm and its subsidiaries are state-licensed operators of medical-use cannabis cultivation, processing and dispensing
facilities in the state of Arizona. The Pharm intends to continue to operate the Property as a medical-use cannabis cultivation
and processing facility under the Lease.
The purchase price
for the Property is $15.0 million (the "Purchase Price"). Under the Lease, the Company is expected to reimburse The Pharm
for up to $3.0 million in tenant improvements at the Property (the "TI Allowance"). The Company intends to fund the Purchase
Price and TI Allowance in cash using the remaining proceeds from its initial public offering completed in December 2016 and a portion
of the proceeds from its offering of 9.0% Series A Cumulative Redeemable Preferred Stock completed in October 2017.
The initial Lease
term is 15 years, with two options to extend the term for two additional five-year periods. The initial annualized base rent (the
"Base Rent") under the Lease is $2,520,000, payable monthly, which is equal to 14% of the sum of the Purchase Price and
TI Allowance, and subject to annual increases of 3.25% during the Lease term. The Base Rent on $5.0 million of the Purchase Price
($58,333.33 per month) will be abated until March 31, 2018, and the Base Rent attributable to the TI Allowance ($35,000 per month)
will be abated until the earlier to occur of the drawdown of the TI Allowance by The Pharm subsidiary under the Lease and three
months after commencement of the Lease term.
The Lease will also provide that
The
Pharm subsidiary, as tenant, is responsible for paying all structural repairs, maintenance expenses, insurance and taxes related
to the Property. The Pharm subsidiary is also responsible for paying the Company a property management fee equal to 1.5% of the
then-existing Base Rent under the Lease.
Pursuant to the Lease,
The Pharm subsidiary is required to deliver to the Company an initial security deposit of $630,000 in cash upon execution of the
Lease. In addition, any entity affiliated with The Pharm and operating in the cannabis industry in the state of Arizona, including
any entity formed during the term of the Lease, shall enter into a full guaranty with respect to The Pharm subsidiary's obligations
under the Lease, the form of which is attached as an exhibit to the Lease.
The Company's purchase
of the Property is subject to the Company's ongoing diligence and the satisfaction of closing conditions as described in the Purchase
Agreement. There can be no assurance that the Company will consummate the acquisition of the Property on the terms described herein,
or at all.
The foregoing description
of the Purchase Agreement is not complete and is subject to, and qualified in its entirety by, the full text of the Purchase Agreement,
which is filed as an exhibit to this report and incorporated
herein
by
reference.
The Purchase Agreement contains representations and warranties made by the parties as of specific dates and solely
for their benefit. The representations and warranties reflect negotiations between the parties and are not intended as statements
of fact to be relied upon by the Company’s stockholders or any other person or entity other than the parties to the Purchase
Agreement and, in certain cases, represent allocation decisions among the parties and may be subject to important qualifications
and limitations agreed to by the parties in connection with the negotiation of the Purchase Agreement (which disclosures are not
reflected in the Purchase Agreement itself, may not be true as of any date other than the date made, or may apply standards of
materiality in a way that is different from what may be viewed as material by stockholders). Accordingly, the representations and
warranties may not describe the actual state of affairs at the date they were made or at any other time, and stockholders should
not rely on them as statements of fact. Moreover, information concerning the subject matter of the representations and warranties
may change after the date of the Purchase Agreement.