Item 1.01. Entry into
a Material Definitive Agreement.
On
August 9, 2019, in connection with the acquisition of the property located at Lot No. 4, Scott Technology Park, Scott Township,
Pennsylvania (the “Property”) from PharmaCann Penn Plant LLC (“Tenant”), an affiliate of PharmaCann LLC
(“PharmaCann”), described below in Item 2.01, IIP-PA 4 LLC (“Landlord”), a wholly owned subsidiary of IIP
Operating Partnership, LP (the “Operating Partnership”), the operating partnership subsidiary of Innovative Industrial
Properties, Inc. (the “Company”), entered into a triple-net lease (the “Lease”) with Tenant for the entire
Property. The Lease provides that
Tenant is responsible for paying all structural repairs, maintenance expenses, insurance
and taxes related to the Property. The initial Lease term expires on November 8, 2034, with two options to extend the term of the
Lease for two additional five-year periods. Tenant intends to operate the Property as a medical-use cannabis cultivation and processing
facility upon completion of development.
Also
on August 9, 2019, Tenant, Landlord and the Operating Partnership entered into a Development Agreement (the “Development
Agreement”), pursuant to which Tenant is responsible for the development of an approximately 31,000 square foot greenhouse
facility and an approximately 23,000 square foot industrial facility on the Property. Pursuant to the Development Agreement, Landlord
is obligated to reimburse Tenant for costs of development of up to approximately $25.1 million (the “Construction Funding”),
subject to the satisfaction of certain conditions contained therein. The Construction Funding may be increased by up to an additional
$4.0 million at PharmaCann’s election within the first nine months of the Lease term, subject to the satisfaction of certain
conditions (the “Additional Funding”).
The
initial annualized base rent (the “Base Rent”) under the Lease is $3,120,000, payable monthly. The Base Rent will
be abated until November 9, 2019 and is subject to annual increases during the Lease term. Tenant is also responsible for paying
the Landlord a property management fee equal to 1.5% of the then-current Base Rent under the Lease.
Pursuant
to the Lease, Tenant delivered to Landlord an initial security deposit of $28,260.00 in cash at the execution of the Lease. The
remainder of the security deposit shall be paid in an amount that is proportionate to the percentage derived from dividing the
amount of the construction payment made by the maximum Construction Funding, and the full security deposit of $780,000 shall be
funded no later than the date that is 18 months following the commencement date of the Lease. If PharmaCann requests the Additional
Funding, the Base Rent and full security deposit shall also be correspondingly increased.
In addition, any entity affiliated with
Tenant and operating in the cannabis industry, including any entity formed during the term of the Lease, shall enter into a full
guaranty with respect to Tenant’s obligations under the Lease, subject to adjustment pursuant to the Multi-Party PA Agreement
described below.
Also pursuant
to the Lease, Tenant has the option, at its discretion during the first four years of the term of the Lease, to sell or otherwise
transfer its interests in the government approvals and licenses required to conduct medical-use cannabis cultivation and processing
at the Property (the “Required Approvals”). If Tenant elects to make such a transfer of the Required Approvals, Landlord,
in its sole discretion, can elect to either a) consent to having the transferee of the Required Approvals replace Tenant and the
guarantors in connection with the Lease; or b) require that Tenant repurchase the Property from Landlord at a price equal to the
greater of x) the appraised value of the Property and y) the quotient of (i) the total Base Rent payable during the calendar year
in which the notice for the transfer of the Required Approvals is delivered, divided by (ii) 9.75%, less any unfunded Construction
Funding (and Additional Funding, if applicable) at the time of closing of the repurchase of the Property. Upon the receipt of the
Required Approvals and Tenant becoming a majority-owned subsidiary of MedMen ParentCo (as defined below), the Lease provisions
described in this paragraph shall automatically terminate.
Also on August
9, 2019, Landlord, Tenant and MedMen Enterprises Inc. (“MedMen”) entered into a Multi-Party PA Agreement (the “Multi-Party
PA Agreement”), pursuant to which, among other things, effective on the date of the closing and consummation of the business
combination transaction contemplated by the Business Combination Agreement dated December 23, 2018 between PharmaCann and MedMen,
the surviving parent company (“MedMen ParentCo”) of PharmaCann and MedMen shall execute a guaranty with respect to
PharmaCann’s and its subsidiaries’ obligations under the Lease.
The
foregoing descriptions of the Lease, the Development Agreement and the Multi-Party PA Agreement do not purport to be complete and
are qualified in their entirety by reference to the complete text of the Lease, the Development Agreement and the Multi-Party PA
Agreement, which are filed as exhibits to this report and incorporated herein by reference.