What changed in this filing

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Item 9A. Controls and Procedures

2023-02-28 compared with 2022-02-24 · 460 added, 251 removed, 690 unchanged (51% of the section changed)

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Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our principal executive and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such information is accumulated and communicated to our company’s management, as appropriate, to allow timely decisions regarding required disclosure.

Based on such evaluation, our principal executive and principal financial officers have concluded that such disclosure controls and procedures were effective as of December 31, 2021 (the end of the period covered by this Annual Report).

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, 2022.

Based on that evaluation, our principal executive

and financial officers concluded that our disclosure controls and procedures were not effective as of December 31, 2022 because of a material weakness in our internal control over financial reporting as described below.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Notwithstanding this material weakness, the Company has concluded that no material misstatements exist in the consolidated financial statements included in this Annual Report on Form 10-K and such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and the results of its operations and its cash flows for the year then ended, in conformity with GAAP.

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.

We have determined that we did not design and maintain effective internal control over financial reporting as of December 31, 2022 related to management’s review and approval of requests for funding disbursements for tenant improvements at the Company’s properties.

Specifically, management’s controls are not designed at an appropriate level of precision to prevent or detect a material misstatement in a timely manner.

Our internal control over financial reporting has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in their report appearing below, which expresses an adverse opinion on the effectiveness of our internal control over financial reporting as of December 31, 2022.

Remediation of Material Weakness

We are committed to the continuous improvement of our internal controls over financial reporting.

We immediately commenced measures to remediate the identified material weakness.

We have provided additional training to personnel regarding policies and procedures around construction projects and the necessary approvals of requests for funding disbursements in connection with qualifying property improvements at our properties.

Our remediation efforts also include (1) enhancing the design of existing procedures and controls over the review and approval of funding requests for tenant improvements;

(2) providing additional training and developing tools to implement and monitor our policies and procedures;

and (3) supplementing existing resources with the engagement of third-party construction consultants.

While we believe that the efforts taken to date for remediation are appropriate and reasonable steps to remediate the material weakness, the material weakness will not be remediated until the enhanced controls have been implemented for a sufficient period of time and management has concluded, through testing and monitoring, that the new and enhanced controls are designed and operating effectively.

We may conclude that additional measures, including resources, are necessary to remediate the material weakness in our internal control over financial reporting, which may necessitate additional evaluation and implementation time.

We may also modify certain of the remediation efforts described above.

Changes in Internal Control Over Financial Reporting

There were no changes during the quarter ended December 31, 2021 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Other than the material weakness and remediation efforts discussed above, there have been no changes in our system of internal control over financial reporting during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting

Limitations on Controls

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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.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)).

Our management, including our principal executive officer and principal financial officer, evaluated, as of December 31, 2021, the effectiveness of our internal control over financial reporting using the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on that evaluation, our principal executive officer and financial officer concluded that our internal controls, as of December 31, 2021, were effective.

BDO USA, LLP 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.

Report of Independent Registered Public Accounting Firm

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We have audited Innovative Industrial Properties, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2022, 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, 2021, 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, 2021 and 2020, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule, and our report dated February 24, 2022 expressed an unqualified opinion thereon.

In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria .

We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.

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, 2022 and 2021, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule (collectively referred to as the “financial statements”), and our report dated February 28, 2023 expressed an unqualified opinion thereon.

Basis for Opinion

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We believe that our audit provides a reasonable basis for our opinion.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

A material weakness regarding management’s failure to design and maintain controls over the review and approval of requests for funding disbursements for tenant improvements at the Company’s properties has been identified and described in management’s assessment.

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2022 financial statements, and this report does not affect our report dated February 28, 2023, on those financial statements.

Definition and Limitations of Internal Control over Financial Reporting

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OTHER INFORMATION

On February 23, 2022, JMP Securities LLC delivered notice to the Company terminating the equity distribution agreement with JMP Securities, dated November 6, 2020 (the “JMP Equity Distribution Agreement”), effective as of February 23, 2022.

The JMP Equity Distribution Agreement permitted the Company to offer and sell, from time to time, up to $500,000,000 in aggregate offering price of shares of the Company’s Common Stock through JMP Securities.

As a result of the termination of the JMP Equity Distribution Agreement, no further offers or sales of the Company’s Common Stock will be made through JMP Securities pursuant to the Company’s ATM Program.

The Company’s separate equity distribution agreements with each of BTIG, LLC, Roth Capital Partners, LLC, Compass Point Research & Trading, LLC, Ladenburg Thalmann & Co.

and Piper Sandler & Co., dated as of November 6, 2020, remain in full force and effect.

Not applicable.

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSEPCTIONS

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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 2023 Annual Meeting of Stockholders and is incorporated herein by reference.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

EXHIBIT AND FINANCIAL STATEMENT SCHEDULE

(a)(1) and (2) Financial Statements and Schedule:

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Description of Exhibit

Form of Equity Distribution Agreement, dated as of November 6, 2020, between Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and each sales agent.(1)

Form of Equity Distribution Agreement, dated as of January 20, 2023, between Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and each sales agent.(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).(2)

Second Amended and Restated Bylaws of Innovative Industrial Properties, Inc.(3)

Third Amended and Restated Bylaws of Innovative Industrial Properties, Inc.(3)

Form of Certificate for Common Stock.(4)

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+ Indicates management contract or compensatory plan.

(1) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on November 6, 2020.

(1) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 23, 2023.

(2) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2020.

(3) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on June 4, 2020.

(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.

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(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 Registration Statement on Form S-3 (File No.

333-262320) filed with the SEC on January 24, 2022.

(16) Incorporated by reference to Innovative Industrial Properties, Inc.’s Quarterly Report on Form 10-Q filed with the SEC on August 4, 2022.

FORM 10-K SUMMARY

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In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 202 2 and 202 1 , and the results of its operations and its cash flows for each of the three years in the period ended December 31, 202 2 , 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, 2021, 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 24, 2022 expressed an unqualified opinion thereon.

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, 2022, 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 28, 2023 expressed an adverse opinion thereon.

Basis for Opinion

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As described in Note 6 to the consolidated financial statements, the Company’s consolidated real estate property acquisitions totaled approximately $166.6 million for the year ended December 31, 2022.

Certain of the 2021 property acquisitions involved significant judgments in estimating the allocation of the fair values between the land and buildings acquired for which management obtained assistance from third-party valuation specialists.

We identified the estimation of the allocation of the fair values of the land and buildings acquired for certain of the 2021 property acquisitions as a critical audit matter due to the limited number of recent comparable transactions.

Auditing these acquisitions involved a high degree of auditor judgment and subjectivity in performing procedures and evaluating the reasonableness of the key valuation inputs and assumptions relating to the fair value estimates for land and buildings acquired, including the extent of specialized skill or knowledge needed.

Certain of the 2022 property acquisitions involved significant judgments in estimating the fair values used in the allocation between the land and buildings acquired for which management obtained assistance from third-party valuation specialists.

We identified the estimation of the fair values used in the allocation of land and buildings acquired for certain of the 2022 property acquisitions as a critical audit matter.

The principal considerations for our determination included the limited number of recent comparable transactions.

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:

● Testing the design and operating effectiveness of controls to address key valuation inputs and assumptions within the estimate of fair values of land and buildings acquired.

● Evaluating the reasonableness of the key valuation inputs and assumptions used by the Company in the estimation of the allocation of fair values of land and buildings acquired as compared to relevant market data.

● Utilizing personnel with specialized knowledge and skills in valuation to assist in the evaluation of the inputs and assumptions used in the estimation of the allocation of fair values of land and buildings acquired including the comparison to available market data.

● Agreeing pertinent terms and conditions from executed agreements to amounts used in the valuation prepared by third-party valuation specialists for certain of the 2022 property acquisitions.

● Utilizing personnel with specialized knowledge and skills in valuation to assist in the evaluation of the reasonableness of the key valuation inputs and assumptions used in the estimation of the allocation of fair values of land and buildings acquired including the comparison to available market data.

/s/ BDO USA, LLP

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Tenant improvements

Construction in progress

Total real estate, at cost

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Dividends payable

Other liabilities

Rent received in advance and tenant security deposits

Other liabilities

Total liabilities

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Total expenses

Gain on sale of real estate

Income from operations

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Interest expense

Loss on induced exchange of Exchangeable Senior Notes

Loss on exchange of Exchangeable Senior Notes

Preferred stock dividends

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Consolidated Statements of Stockholders’ Equity

(In thousands, except share and per share amounts)

(In thousands, except share amounts)

Stockholders'

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Balance, December 31, 2019

Equity component of Exchangeable Senior Notes

Exchange of Exchangeable Senior Notes

Net proceeds from sale of common stock

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Balance, December 31, 2020

Exchange of Exchangeable Senior Notes

Net proceeds from sale of common stock

Issuance of common stock in conjunction with inducement of Exchangeable Senior Notes, net

Preferred stock dividend

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Balance, December 31, 2021

Issuance of common stock in conjunction with inducement of Exchangeable Senior Notes, net

Adjustment to opening balance upon adoption of ASU 2020-06 (Note 2)

Exchange of Exchangeable Senior Notes

Net proceeds from sale of common stock

Preferred stock dividend

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Depreciation and amortization

Loss on induced exchange of Exchangeable Senior Notes

Loss on exchange of Exchangeable Senior Notes

Gain on sale of real estate

Other non-cash adjustments

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Purchases of investments in real estate

Reimbursements of tenant improvements and construction funding

Proceeds from sale of real estate asset

Funding of draws for tenant improvements and construction

Funding of construction loan and other investments

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Issuance of common stock, net of offering costs

Net proceeds from issuance of Exchangeable Senior Notes

Gross proceeds from issuance of Notes due 2026

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Net cash provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash, beginning of year

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Supplemental disclosure of cash flow information:

Cash paid during the year for interest

Cash paid during the period for interest

Supplemental disclosure of non-cash investing and financing activities:

Accrual for reimbursements of improvements and construction funding

Accrual for draws for tenant improvements and construction funding

Deposits applied for acquisitions

Accrual for common and preferred stock dividends declared

Accrual for stock issuance costs

Exchange of Exchangeable Senior Notes for common stock

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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, presented in accordance with U.S.

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.

The Company considered the impact of COVID-19 on its assumptions and estimates used and determined that there were no material adverse impacts on the Company's results of operations for the years ended December 31, 2021 and 2020 and financial position at December 31, 2021 and 2020.

A prolonged outbreak or resurgence of COVID-19 could have a material adverse impact on the financial results and business operations of the Company.

Variable Interest Entities.

From time to time, the Company may acquire properties utilizing a reverse like-kind exchange under Section 1031 of the Internal Revenue Code (“Reverse 1031 Exchange”) in order to defer taxable gains on the subsequent sale of real estate properties.

During the year ended December 31, 2022, the Company acquired four properties for a total purchase price of approximately $ 82.3 million, excluding transaction costs, as part of Reverse 1031 Exchanges.

The acquired properties were in the possession of limited liability companies whose legal equity interests were owned by a qualified intermediary engaged to execute the Reverse 1031 Exchanges until the Reverse 1031 Exchanges were completed or terminated.

The limited liability companies were deemed to be variable interest entities (“VIEs”) for which the Company was deemed to be the primary beneficiary as the Company had the ability to direct the activities of the entity that most significantly impact its economic performance and the Company had all of the risks and rewards of ownership.

As such, the VIEs, including the acquired properties, were included in the Company’s consolidated financial statements as a consolidated VIE until legal title were transferred to the Company upon the completion of the Reverse 1031 Exchanges.

All VIEs relating to the four Reverse 1031 Exchanges were terminated as of December 31, 2022 and legal title to the four properties was transferred to the Company.

Federal Income Taxes.

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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 and disclosures in the consolidated financial statements.

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, fair value of acquisition of real estate properties and valuation of stock-based compensation.

Reportable Segment .

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Our properties are similar in that they are leased to the state-licensed operators on a long-term triple-net basis, consist of improvements that are reusable and have similar economic characteristics.

Our chief operating decision makers review financial information for our entire consolidated operations when making decisions related to assessing our operating performance.

Our chief operating decision maker reviews financial information for our entire consolidated operations when making decisions related to assessing our operating performance.

We have aggregated the 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.

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All of our acquisitions to date were recorded as asset acquisitions.

In December 2021, we acquired a portfolio of properties that included in-place leases.

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 balance sheet 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 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 balance sheet and is amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable 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.

Sale of Real Estate.

When real estate is sold, 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, pursuant to provisions of ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets.

Cost Capitalization and Depreciation.

We capitalize costs associated with development and redevelopment activities and improvements when we are considered to be the accounting owner of the resulting assets.

We capitalize costs associated with development and redevelopment activities and tenant 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.

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For the years ended December 31, 2022, 2021 and 2020, we recognized depreciation expense of approximately $ 60.5 million, $ 41.7 million and $ 28.0 million, respectively, which are included in depreciation and amortization expense in our consolidated statements of income.

We depreciate office equipment and furniture and fixtures over estimated useful lives ranging from three to six years .

We depreciate the leasehold improvements at our corporate office over the shorter of the estimated useful lives or the initial lease term.

We depreciate office equipment and furniture and fixtures over estimated useful lives ranging from three to seven years .

We depreciate the leasehold improvements at our corporate office over the shorter of the estimated useful lives or the remaining lease term.

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.

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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● 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 and tenant 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 and tenant improvements at historical cost of the properties as the redevelopment project or phases of projects are placed in service.

During the year ended December 31, 2022, we reclassified the net carrying value of buildings and improvements and tenant improvements totaling approximately $ 54.1 million to construction in progress in connection with the default by Kings Garden Inc.

(“Kings Garden”) and the related litigation (see Note 11 “Commitments and Contingencies — Litigation — Kings Garden Lawsuit”).

Provision for Impairment.

We review current activities and changes in the business conditions of all of our properties 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, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration.

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.

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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.

The developer is required to complete construction by June 2022, subject to extension in certain circumstances.

Interest on the construction loan is payable at maturity, which is December 25, 2022.

As of December 31, 2022, we had funded approximately $ 18.0 million of the construction loan.

Interest on the construction loan was payable at the initial maturity on December 25, 2022.

In December 2022, the maturity date was extended to January 25, 2023 and subsequently to December 31, 2023.

See Note 12 “Subsequent Events” for more information.

Cash and Cash Equivalents .

We consider all highly-liquid investments with original maturities of three months or less to be cash equivalents.

As of December 31, 2021 and 2020, $ 72.0 million and $ 98.3 million, respectively, were invested in short-term money market funds, obligations of the U.S.

As of December 31, 2022 and 2021, approximately $ 78.0 million and $ 72.0 million,

respectively, were invested in 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 three months.

Restricted Cash.

Restricted cash relates to cash held in escrow accounts for the reimbursement of tenant improvements for tenants in accordance with certain lease agreements.

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 obligations of the U.S.

government and certificates of deposit with an original maturity at the time of purchase of greater than three months but less than one year.

government and certificates of deposit with an original maturity at the time of purchase of greater than three months.

Investments are classified as held-to-maturity and stated at amortized cost.

Exchangeable Notes.

The liability and equity components of exchangeable debt instruments that may be settled in cash upon exchange, including partial cash settlement, are required to be separately accounted for in a manner that reflects the issuer’s nonexchangeable debt borrowing rate.

The liability and equity components of exchangeable debt instruments that may be settled in cash upon exchange, including partial cash settlement, were previously required to be separately accounted for in a manner that reflects the issuer’s nonexchangeable debt borrowing rate.

The initial proceeds from the sale of our Exchangeable Senior Notes (as defined below) were allocated between a liability component and an equity component in a manner that reflects interest expense at the rate of similar nonexchangeable debt that could have been issued at such time.

The equity component represents the excess initial proceeds received over the fair value of the liability component of the Exchangeable Senior Notes as of the date of issuance.

We measured the estimated fair value of the debt component of our Exchangeable Senior Notes as of the respective issuance dates based on our estimated nonexchangeable debt borrowing rate with the assistance of a third-party valuation specialist as we do not have a history of borrowing arrangements and there is limited empirical data available related to the Company’s industry due to the regulatory uncertainty of the cannabis market in which the Company’s tenants operate.

The equity component of our Exchangeable Senior Notes is reflected within additional paid-in capital on our consolidated balance sheets, and the resulting debt discount is amortized over the period during which the Exchangeable Senior Notes are expected to be outstanding (through the maturity date) as additional non-cash interest expense.

The additional non-cash interest expense attributable to our Exchangeable Senior Notes will increase in subsequent periods through the maturity date as the Exchangeable Senior Notes accrete to the par value over the same period.

We measured the estimated fair value of the debt component of our Exchangeable Senior Notes as of the date of issuance based on our estimated nonexchangeable debt borrowing rate with the assistance of a third-party valuation specialist as we did not have a history of borrowing arrangements and there was limited empirical data available related to the Company’s industry due to the regulatory uncertainty of the cannabis market in which the Company’s tenants operate.

The equity component of our Exchangeable Senior Notes was reflected within additional paid-in capital on our consolidated balance sheets, and the resulting debt discount was amortized over the period during which the Exchangeable Senior Notes were expected to be outstanding (through the maturity date) as additional non-cash interest expense.

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.

Deferred Financing Costs.

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Lease Accounting.

We adopted Topic 842 effective as of January 1, 2019 using the effective date method and elected the package of practical expedients that allows an entity not to reassess upon adoption (i) whether an expired or existing contract contains a lease, (ii) whether a lease classification related to expired or existing lease arrangements, and (iii) whether costs incurred on expired or existing leases qualify as initial direct costs, and as a lessor, the practical expedient not to separate certain non-lease components, such as common area maintenance, 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 lessor practical expedient, allowing us to continue to amortize previously capitalized initial direct leasing costs incurred prior to the adoption of Topic 842.

We 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.

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In November 2021, we amended the lease to extend the term from April 2025 to January 2027 in connection with an expansion of the leased space which did not commence until February 2022.

As a result of the lease modification on the existing leased space, we re-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 rate of 5.5 %, which was the interest rate that we estimate we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments.

As a result of the lease amendment, we re-measured the lease liability relating to the existing lease space and measured the lease liability to the expansion space based on the present value of the respective future lease payments (excluding the extension option that we are not reasonably certain to exercise), discounted using the estimated incremental borrowing rate of 5.5 % , which was the interest rate that we estimate we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments.

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.

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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.

Our leases continued to be classified as operating leases and we continue to record revenue for each of our properties on a cash basis.

reimbursable revenue and property expenses continue to be presented on a gross basis as rental revenue and as property expenses, respectively, on our consolidated statements of income.

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.

In 2020, we undertook in-depth discussions with each of our tenants as they navigated the COVID-19 pandemic and associated severe economic disruption.

In light of those discussions, in 2020, we granted temporary base rent and property management fee deferrals to three affected tenants.

In connection with these deferrals, we entered into lease amendments with the three affected tenants to apply a portion of the security deposits that we hold under the leases to pay a portion of the March 2020 rent (for one tenant), pay April 2020 rent in full, defer rent for May and June 2020 in full, and provide for the pro rata repayment of the security deposit and deferred rent over an 18 month time period starting July 1, 2020.

Pursuant to these amendments, a total of approximately $ 940,000 of security deposits were applied to the payment of base rent, property management fees and associated lease penalties for March and April 2020, including approximately $ 185,000 related to the partial payment of the March 2020 base rent and property management fees for one of the tenants;

and a total of approximately $ 1.5 million in rent was deferred for May and June 2020.

As of December 31, 2021, we have not executed deferrals for any other tenants, other than the deferrals for the three tenants discussed above.

The FASB issued additional guidance for companies to account for any COVID-19 related rent concessions in the form of FASB staff and board members’ remarks at the April 8, 2020 public meeting and the FASB staff question-and-answer document issued on April 10, 2020.

We have elected the practical expedient which allows us to not have to evaluate whether concessions provided in response to COVID-19 pandemic are lease modifications.

This relief is subject to certain conditions being met, including ensuring the total remaining lease payments are substantially the same or less as compared to the original lease payments prior to the concession being granted.

Lease amendments that are not associated with the COVID-19 pandemic 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.

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.

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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.

Recent Accounting Pronouncements .

In August 2020, the FASB issued 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.

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.

ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, and is to be adopted through a cumulative-effect adjustment to the opening balance of retained earnings either at the date of adoption or in the first comparative period presented.

Early adoption is permitted but only as of the beginning of the fiscal year.

Upon adoption of ASU 2020-06, convertible debt proceeds, unless issued with a substantial premium or an embedded conversion feature, will no longer be allocated between debt and equity components.

Upon our adoption, it will reduce the issue discount of our Exchangeable Senior Notes and will result in less non-cash interest expense in our condensed consolidated financial statements.

Additionally, ASU 2020-06 will result in the reporting of diluted earnings per share, if the effect is dilutive, in our condensed consolidated financial statements, regardless of our settlement intent for the Exchangeable Senior Notes.

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 relating to the outstanding principal balance of our Exchangeable Senior Notes at the date of adoption.

Concentration of Credit Risk .

As of December 31, 2021, we owned 103 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Texas, Virginia, and Washington.

The ability of any of our tenants to honor the terms of its lease is dependent upon the economic, regulatory, competition, natural and social factors affecting the community in which that tenant operates.

Two of our tenants, PharmaCann Inc.

(“PharmaCann”) (at five of our properties) and SH Parent Inc.

(“Parallel”) (at four of our properties), represented approximately 12 % and 10 %, respectively, of our rental revenue (including tenant reimbursements) for the year ended December 31, 2021.

Three of our tenants, PharmaCann (at five of our properties), Ascend Wellness Holdings, Inc.

(“Ascend”) (at three of our properties), and Cresco Labs Inc.

(“Cresco”) (at five of our properties), represented approximately 18 %, 10 %, and 10 %, respectively, of our rental revenues (including tenant reimbursements) for the year ended December 31, 2020.

Two of our tenants, PharmaCann (at five of our properties) and Ascend (at two of our properties), represented approximately 26 % and 12 %, respectively, of our rental revenues (including tenant reimbursements) for the year ended December 31, 2019.

As of December 31, 2022, we owned 110 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, 2022, 2021 and 2020, including tenant reimbursements:

For the Year Ended

December 31, 2022

Percentage of

PharmaCann Inc.

("PharmaCann")

SH Parent, Inc.

("Parallel") (1)

Ascend Wellness Holdings, Inc.

("Ascend")

Green Thumb Industries, Inc.

("Green Thumb")

Trulieve Cannabis Corp.

("Trulieve")

For the Year Ended

December 31, 2021

Percentage of

Cresco Labs Inc.

("Cresco")

Kings Garden (2)

For the Year Ended

December 31, 2020

Percentage of

Curaleaf Holdings, Inc.

("Curaleaf")

Holistic Industries Inc.

("Holistic")

(1) Commencing in November 2022, Parallel defaulted on its obligations to pay rent at one of our Pennsylvania properties.

See Note 11 “Commitments and Contingencies — Litigation” to our consolidated financial statements for more information.

(2) In July 2022, 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, 2022 and regained possession of those properties.

We have recovered approximately $ 15.4 million of funds paid to Kings Garden.

See Note 11 “Commitments and Contingencies — Litigation” to our consolidated financial statements for more information.

At December 31, 2022 and 2021, none of our properties individually represented more than 5 % of our net real estate held for investment.

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As of December 31, 2022, the Company was authorized to issue up to 50,000,000 shares of common stock, par value $ 0.001 per share, and there were 27,972,830 shares of common stock issued and outstanding.

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 sold 117,023 shares of our common stock pursuant to an “at-the-market” offering program (the “Prior ATM Program”) for net proceeds of approximately $ 21.1 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.

In January 2023, 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, or ATM Program, up to $ 500.0 million in shares of our common stock.

As of February 28, 2023, we had no t sold any shares of common stock under the ATM Program.

Preferred Stock

As of December 31, 2022, 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 600,000 shares of 9.00 % Series A Cumulative Redeemable Preferred Stock, $ 0.001 par value per share (the “Series A Preferred Stock”).

Generally, the Company is not permitted to redeem the Series A Preferred Stock prior to October 19, 2022, except in limited circumstances relating to the Company’s ability to qualify as a REIT and in certain other circumstances related to a change of control/delisting (as defined in the articles supplementary for the Series A Preferred Stock).

On or after October 19, 2022, 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.

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.

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The Company made the following acquisitions during the year ended December 31, 2022 (dollars in thousands):

Everett Street

Massachusetts

January 28, 2022

King's Garden CA

Munsonhurst Road

February 10, 2022

South 17th Street

March 23, 2022

GPI MI Davis Hwy

March 25, 2022

Western Maryland Parkway

April 13, 2022

East Cherry Street

April 27, 2022

Mozzone Boulevard

Massachusetts

August 3, 2021

August 13, 2021

September 17, 2021

June 14, 2022

Worcester Road

Massachusetts

September 1, 2022

Gold Flora CA

October 15, 2021

December 9, 2021

CO/PA/ND Portfolio

December 14, 2021

(1) Includes expected rentable square feet at completion of construction of certain properties.

(2) Trulieve acquired Harvest in 2021.

The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to approximately $ 10.8 million.

In June 2021, we amended the lease, which increased the improvement allowance by $ 7.1 million to a total of approximately $ 17.9 million, which also resulted in a corresponding adjustment to base rent for the lease at the property.

(3) The purchase price related to the acquisition of additional land adjacent to one of our existing properties.

In connection with the acquisition, we entered into a lease amendment for the existing property, which provided an improvement allowance that resulted in a corresponding adjustment to the base rent for the lease at the property.

The tenant is expected to complete construction of two new buildings at the property comprising approximately 180,000 square feet in the aggregate, for which we agreed to provide reimbursement of up to approximately $ 51.4 million.

(4) The tenant is expected to construct three buildings at the property, for which we agreed to provide reimbursement of up to $ 24.0 million.

(5) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to approximately $ 14.5 million.

In September 2021, we amended the lease, which increased the improvement allowance by $ 15.0 million to a total of approximately $ 29.5 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

(6) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to $ 26.0 million.

(7) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to approximately $ 5.7 million.

(8) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to $ 15.0 million.

In November 2021, we amended the lease, which increased the improvement allowance by $ 8.7 million to total of $ 23.7 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

(9) The tenant is expected to construct a 250,000 square foot industrial facility, for which we agreed to provide reimbursement of up to approximately $ 43.8 million.

The purchase price excludes approximately $ 3.2 million attributable to a portion of the property that is not part of any of the planned construction and which did not satisfy the requirements for sale-leaseback accounting;

therefore, this portion of the property is recognized as a notes receivable and is included in other assets, net on our consolidated balance sheet.

(10) Trulieve acquired Harvest in 2021.

The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to $ 12.9 million.

(11) The tenant is expected to construct an 83,000 square foot industrial facility, for which we agreed to provide reimbursement of up to approximately $ 26.7 million.

(12) The amounts related to the acquisition of additional land adjacent to an existing property and a lease amendment which provided an allowance to fund construction of a new building and resulted in a corresponding adjustment to the base rent for the lease at the property.

The tenant is expected to construct approximately 324,000 square feet of industrial space, for which we agreed to provide reimbursement of up to approximately $ 46.1 million.

(13) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to $ 9.0 million.

(14) We acquired the central utility plant facilities from the tenant at the property, which increased the total rentable square feet at the property to 205,000 square feet, provided reimbursements to the tenant for certain other improvements made at the property, and amended the lease to increase the improvement allowance for future improvements by $ 550,000 , all of which resulted in a corresponding adjustment to the base rent for the property.

(15) We acquired a portfolio of 27 properties leased to multiple tenants with 24 properties located in Colorado, two properties located in North Dakota, and one property located in Pennsylvania .

The tenants at three of the properties are expected to complete improvements at the properties for which we are obligated to provide reimbursement of up to a total of approximately $ 1.1 million.

(16) Approximately $ 46.7 million was allocated to land, approximately $ 231.0 million was allocated to building and improvements, approximately $ 9.1 million was allocated to in-place leases and approximately $ 1.1 million was allocated to one above-market lease.

(17) Excludes an additional approximately 110,000 rentable square feet relating to expansions at properties acquired prior to 2021.

(2) The acquisition of the property did not satisfy the requirements for sale-leaseback accounting and therefore, the transaction is recognized as a note receivable and is included in other assets, net on our consolidated balance sheet.

(3) The tenant is expected to complete improvements at the property, for which we agreed to provide funding of up to $ 4.6 million.

(4) The purchase price includes $ 1.8 million holdback held in an escrow account, which is subject to distribution to the seller upon seller’s completion of certain improvements at the property.

As of December 31, 2022, we have distributed approximately $ 1.4 million of the holdback.

The remaining approximately $ 400,000 is included in restricted cash on our consolidated balance sheet.

(5) The tenant is expected to complete improvements at the property, for which we agreed to provide funding of up to approximately $ 10.0 million.

The purchase price includes approximately $ 908,000 attributable to the property which did not satisfy the requirements for sale-leaseback accounting;

therefore, this amount is recognized as a note receivable and is included in other assets, net on our consolidated balance sheet.

(6) The purchase price includes approximately $ 1.0 million held in an escrow account, which is subject to distribution to the seller upon seller’s completion of certain improvements at the property and is included in restricted cash on our consolidated balance sheet.

(7) Approximately $ 16.9 million of financing note receivables were included in other assets;

$ 2.8 million was included in restricted cash;

approximately $ 14.5 million was allocated to land;

approximately $ 131.5 million was allocated to building and improvements;

and approximately $ 798,000 was allocated to in-place leases.

Acquired In-Place Lease Intangible Assets

In-place lease intangible assets and related accumulated amortization as of December 31, 2021 is as follows (in thousands):

At December 31, 2021

In-place lease intangible assets and related accumulated amortization as of December 31, 2022 and 2021 is as follows (in thousands):

December 31, 2022

December 31, 2021

In-place lease intangible assets

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In-place lease intangible assets, net

Amortization of in-place lease intangible assets classified in depreciation and amortization expense in our consolidated statements of income was approximately $ 33,000 for the year ended December 31, 2021.

The weighted-average amortization period of the value of acquired in-place leases was approximately 11.7 years, and the estimated annual amortization of the value of the acquired in-place leases as of December 31, 2021 is as follows (in thousands):

Amortization of in-place lease intangible assets classified in depreciation and amortization expense in our consolidated statements of income was approximately $ 841,000 and $ 33,000 for the years ended December 31, 2022 and 2021, respectively.

The remaining weighted-average amortization period of the value of acquired in-place leases was approximately 10.6 years, and the estimated annual amortization of the value of the acquired in-place leases as of December 31, 2022 is as follows (in thousands):

Above-Market Lease

At December 31, 2021, we had one above-market lease acquired on December 14, 2021 with an initial value of approximately $ 1.1 million and an amortization period of approximately 11.5 years.

New Lease and Lease Amendments

In January 2021, we executed a new lease at our Los Angeles, California property with a subsidiary of Holistic Industries Inc.

(“Holistic”), pursuant to which we agreed to make available up to $ 11.0 million in funding for future improvements at the property.

In February 2021, we amended our lease with a subsidiary of LivWell Holdings, Inc.

at one of our Michigan properties, increasing the improvement allowance under the lease by approximately $ 6.9 million to a total of approximately $ 29.9 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In February 2021, we amended our lease with PharmaCann Inc.

at one of our New York properties, increasing the improvement allowance under the lease by $ 2.5 million to a total of $ 33.5 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In April 2021, we amended our lease with a subsidiary of Jushi Holdings, Inc.

at one of our Pennsylvania properties, increasing the improvement allowance under the lease by $ 30.0 million to a total of approximately $ 40.0 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

With this additional improvement allowance, the tenant is expected to expand the facility by approximately 40,000 square feet and complete the buildout of the existing 89,000 square foot building.

In June 2021, we amended our lease with a subsidiary of Parallel at one of our Florida properties, increasing the improvement allowance under the lease by $ 8.0 million to a total of $ 16.2 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In August 2021, we amended our lease with Holistic at one of our Maryland properties, increasing the improvement allowance under the lease by $ 8.0 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In September 2021, we amended our lease with a subsidiary of Ascend Wellness Holdings, Inc.

at one of our Illinois properties, increasing the improvement allowance under the lease by $ 20.0 million to a total of $ 52.0 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

The above-market lease and related accumulated amortization included in other assets, net on our consolidated balance sheets as of December 31, 2022 and 2021 is as follows (in thousands):

December 31, 2022

December 31, 2021

Above-market lease

Accumulated amortization

Above-market lease, net

The above-market lease is amortized on a straight-line basis as a reduction to rental revenues over the remaining lease term of approximately 10.3 years.

For the years ended December 31, 2022 and 2021, the amortization of the above-market lease was approximately $ 91,000 and $ 4,000 , respectively.

Additional Improvement Allowances

In February 2022, we amended our lease with Green Peak Industries, Inc.

(“Green Peak”) at one of our Michigan properties, increasing the improvement allowance under the lease by $ 18.0 million to a total of approximately $ 47.5 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In March 2022, we amended our lease with Holistic at one of our Michigan properties, increasing the improvement allowance under the lease by $ 3.5 million to a total of $ 22.3 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In March 2022, we amended our lease with a subsidiary of Ascend at one of our Michigan properties, increasing the improvement allowance under the lease by $ 4.4 million to a total of $ 19.4 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In March 2022, we amended our lease with a subsidiary of Ascend at one of our Massachusetts properties, increasing the improvement allowance under the lease by $ 14.9 million to a total of approximately $ 37.2 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In April 2022, we amended our lease and development agreement with PharmaCann at one of our New York properties, increasing the construction fund by $ 45.0 million to a total of approximately $ 78.5 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In June 2022, we amended our lease with a subsidiary of Curaleaf at one of our Illinois properties, increasing the improvement allowance under the lease by approximately $ 10.9 million to a total of $ 29.5 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In June 2022, we amended our lease with Sozo Health, Inc.

(“Sozo”) at one of our Michigan properties, increasing the improvement allowance by approximately $ 1.2 million to a total of approximately $ 7.0 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In June 2022, we amended our lease with a subsidiary of Curaleaf at one of our Pennsylvania properties, increasing the improvement allowance by $ 35.0 million to a total of approximately $ 47.4 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In June 2022, we amended our lease with a subsidiary of Green Thumb at one of our Pennsylvania properties, increasing the improvement allowance by $ 55.0 million to a total $ 74.3 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In October 2022, we amended our lease with Holistic at one of our Massachusetts properties, increasing the improvement allowance under the lease by $ 2.0 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In November 2022, we amended our lease with a subsidiary of 4Front Ventures Corp.

(“4Front”) at one of our Illinois properties, increasing the improvement allowance under the lease by $ 19.9 million, which resulted in a corresponding adjustment to the base rent for the lease at the property.

In November 2022, we amended our lease with Gold Flora, LLC at one of our California properties, increasing the improvement allowance under the lease by $ 3.5 million, which resulted in a corresponding adjustment to the base rent for the lease at the property.

Including all of our properties, during the year ended December 31, 2022, we capitalized costs of approximately $ 355.6 million and funded approximately $ 373.9 million relating to improvements and construction activities at our properties.

The properties acquired during the year ended December 31, 2021 generated approximately $ 19.2 million of rental revenue (including tenant reimbursements) and approximately $ 15.5 million of net operating income after deducting property and depreciation expenses, during that period.

The properties acquired during the year ended December 31, 2020 generated approximately $ 27.2 million of rental revenue (including tenant reimbursements) and approximately $ 20.7 million net operating income after deducting property and depreciation expenses, during that period.

Future contractual minimum rent (including base rent and property management fees) under the operating leases as of December 31, 2022 for future periods is summarized as follows (in thousands):

Contractual Minimum Rent

Property Disposition

In November 2022, we sold one of our Pennsylvania properties that was leased to a subsidiary of Maitri Holdings, LLC for $ 23.5 million, excluding transaction costs, and recognized a gain on sale of the property of approximately $ 3.6 million.

Exchangeable Senior Notes

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Issuance costs allocated to the liability component as well as the debt discount, are being amortized using the effective interest method and recognized as non-cash interest expense over the expected term of the Exchangeable Senior Notes.

During the year ended December 31, 2022, we issued 413,166 shares of our common stock upon exchanges by holders of approximately $ 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 $ 125,000 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 non-cash increase to our additional paid-in capital account of approximately $ 26.7 million for the year ended December 31, 2022.

In December 2021, our Operating Partnership entered into separate privately-negotiated exchange agreements with certain holders of the Exchangeable Senior Notes, pursuant to which the Operating Partnership delivered and paid an aggregate of (a) 1,684,237 shares of the Company’s common stock and (b) approximately $ 2.3 million in cash (consisting of approximately $ 1.2 million in accrued interest and approximately $ 1.1 million in inducement), collectively, in exchange for approximately $ 110.4 million principal amount of the Exchangeable Senior Notes (the “Exchange Transactions”).

The issuance of the shares pursuant to the Exchange Transactions resulted in a non-cash increase to our additional paid-in capital account of approximately $ 109.0 million, primarily driven by the fair value of the shares issued, partially offset by the amount allocated to the repurchase of the exchange option.

Following the closing of the Exchange Transactions, approximately $ 33.4 million in aggregate principal amount of the Exchangeable Senior Notes remain outstanding with terms unchanged.

In connection with the Exchange Transactions, we recognized a loss on induced exchange of Exchangeable Senior Notes of approximately $ 3.7 million.

The following table details our interest expense related to the Exchangeable Senior Notes (in thousands):

Year Ended December 31,

For the Year Ended December 31,

Amortization of debt discount

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The following table details the carrying value of our Exchangeable Senior Notes (in thousands):

At December 31, 2021

At December 31, 2020

December 31, 2022

December 31, 2021

Principal amount

2 unchanged sentences

Carrying value

Accrued interest payable for the Exchangeable Senior Notes was approximately $ 365,000 and $ 1.6 million as of December 31, 2021 and 2020, respectively, and is included in accounts payable and accrued expenses on our consolidated balance sheets.

Accrued interest payable for the Exchangeable Senior Notes was approximately $ 70,000 and $ 365,000 as of December 31, 2022 and 2021, respectively, and is included in accounts payable and accrued expenses on our consolidated balance sheets.

Notes due 2026

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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.

Interest at a rate of 5.50 % per year is payable on May 15 and November 15 of each year, beginning on November 15, 2021, until the stated maturity date of 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, TMI 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 Notes due 2026 will pay interest semiannually at a rate of 5.50 % per year beginning on November 15, 2021, until the stated maturity date of 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, TMI 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.

1 unchanged sentence

The following table details our interest expense related to the Notes due 2026 (in thousands):

December 31, 2021

For the Year Ended December 31,

Amortization of issuance cost

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The following table details the carrying value of our Notes due 2026 (in thousands):

At December 31, 2021

December 31, 2022

December 31, 2021

Principal amount

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Management believes that it was in compliance with those covenants as of December 31, 2022.

On October 19, 2021, in accordance with the registration rights agreement entered into among the Company, the Operating Partnership, the subsidiaries of the Operating Partnership and the initial purchasers of the Notes due 2026, the Operating Partnership completed its exchange offer to exchange all of the outstanding Notes due 2026 for an equal principal amount of a new issuance of 5.50 % Senior Notes due 2026 pursuant to an effective registration statement on Form S-4 filed with the Securities and Exchange Commission.

A total of $ 300.0 million aggregate principal amount of the original Notes due 2026, representing 100 % of the outstanding principal amount of the original Notes due 2026, was validly tendered and received prior to the expiration of the exchange offer.

The terms of the new Notes due 2026 are substantially identical to the original Notes due 2026, except for transfer restrictions and registration rights relating to the original Notes due 2026.

Accrued interest payable for the Notes due 2026 as of December 31, 2021 was approximately $ 2.1 million, and is included in accounts payable and accrued expenses on our condensed consolidated balance sheets.

Accrued interest payable for the Notes due 2026 as of December 31, 2022 and 2021 was approximately $ 2.1 million and is included in accounts payable and accrued expenses on our consolidated balance sheets.

The following table summarizes the principal payments on our outstanding indebtedness as of December 31, 2022 (in thousands):

7 unchanged sentences

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 2,180,550 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were dilutive for the year ended December 31, 2021, and were included in the computation of diluted earnings per share.

The 2,158,837 and 2,100,307 potentially issuable shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were anti-dilutive for the years ended December 31, 2020 and 2019, respectively, and were excluded from the computation of diluted earnings per share.

For the year ended December 31, 2021, 81,414 shares issuable upon vesting of performance share units (“PSUs”) granted to certain employees in January 2021 were included in dilutive securities, as the performance thresholds for vesting of these PSUs were met as measured as of December 31, 2021 (see Note 10 for further discussion of the PSUs).

The 202,076 shares and 2,180,550 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were dilutive for the years ended December 31, 2022 and 2021, respectively, and were included in the computation of diluted earnings per share.

The 2,158,837 potentially issuable shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were anti-dilutive for the year ended December 31, 2020 and were excluded from the computation of diluted earnings per share.

For the year ended December 31, 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 December 31, 2022.

For the year ended December 31, 2021, 81,414 shares issuable upon vesting of PSUs granted to certain employees in January 2021 were included in dilutive securities, as the performance thresholds for vesting of these PSUs were met as measured as of December 31, 2021 (see Note 10 for further discussion of the PSUs).

Computations of net income per basic and diluted share were as follows (in thousands, except share and per share data):

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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.

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:

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The carrying amounts of financial instruments such as cash equivalents invested in certificates of deposit, obligations of the U.S.

government with an original maturity at the time of purchase of less than or equal to three months, construction loan receivable, accounts payable, accrued expenses and other liabilities approximate their relative fair values due to the short-term maturities and market rates of interest of these instruments.

government with an original maturity at the time of purchase of less than or equal to three months, construction loan receivable, accounts payable, accrued expenses and other liabilities approximate fair values due to the short-term maturities and market rates of interest of these instruments.

Common Stock Incentive Plan

17 unchanged sentences

The following table summarizes our RSU activity for the years ended December 31, 2022, 2021 and 2020.

There was no RSU activity for the year ended December 31, 2019.

RSUs are issued as part of the Innovative Industrial Properties, Inc.

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Balance at December 31, 2021

Balance at December 31, 2022

The remaining unrecognized compensation cost of approximately $ 4.5 million for RSU awards is expected to be recognized over an amortization period of approximately 1.7 years as of December 31, 2022.

In January 2021, we 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.

At the end of the Performance Period, a recipient of PSUs may receive as few as zero Award Shares or as many as 150 % of the number of target PSUs in Award Shares, plus deemed dividends.

PSUs will also be reduced as necessary so the total value at the vesting date does not exceed 800 % of the grant date PSU price, and if the Company’s absolute total stockholder return during the Performance Period is negative, the payout of Award Shares is capped at the target number of PSUs, notwithstanding the Company’s outperformance of comparator groups.

No dividends are paid to the recipient during the Performance Period.

At the end of the Performance Period, if the Company’s total stockholder return is such that the recipient earns Award Shares, the recipient will receive additional

shares of common stock relating to dividends deemed to have been paid and reinvested on the Award Shares.

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.

At the end of the applicable Performance Periods, a recipient of PSUs may receive as few as zero Award Shares or as many as 150 % of the number of target PSUs in Award Shares, plus deemed dividends.

PSUs will also be reduced as necessary so the total value at the vesting date does not exceed 800 % of the grant date PSU price, and if the Company’s absolute total stockholder return during the applicable Performance Period is negative, the payout of Award Shares is capped at the target number of PSUs, notwithstanding the Company’s outperformance of comparator groups.

No dividends are paid to the recipient during the applicable Performance Periods.

At the end of the applicable Performance Periods, if the Company’s total stockholder return is such that the recipient earns Award Shares, the recipient will receive additional shares of common stock relating to dividends deemed to have been paid and reinvested on the Award Shares.

The recipient of the Award Shares may not sell, transfer or otherwise dispose of the Award Shares for a one-year period following the vesting date of the Award Shares.

The grant date fair value of the PSUs granted in January 2021 was $ 12.0 million.

The grant date fair value of the PSUs granted in January 2021 and January 2022 was $ 12.0 million and $ 20.0 million, respectively.

The fair value was calculated using a Monte Carlo simulation pricing model based on the following assumptions:

2021 PSU Award

2022 PSU Award

Fair Value Assumptions

Valuation date

January 6, 2021

January 7, 2022

Fair value per share on valuation date

3 unchanged sentences

Discount for post vesting restriction

The expected share price volatility was based on the historical volatility of our shares of common stock over a period of approximately the Performance Period.

The expected share price volatility was based on the historical volatility of our shares of common stock over a period of approximately the applicable Performance Periods.

The risk-free interest rate was based on the zero-coupon risk-free interest rate derived from the Treasury Constant Maturities yield curve on the valuation date.

The discount for the post vesting restriction was estimated using the Finnerty model.

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 Performance Period.

For the year ended December 31, 2021, we recognized stock-based compensation expense of $ 4.0 million relating to the PSU awards.

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 Periods.

For the years ended December 31, 2022 and 2021, we recognized stock-based compensation expense of approximately $ 10.7 million and $ 4.0 million, respectively, relating to the PSU awards.

As of December 31, 2022, the remaining unrecognized compensation cost of approximately $ 17.3 million relating to PSU awards is expected to be recognized over the remaining Performance Period of approximately 1.8 years.

8 unchanged sentences

Construction Loan.

As of December 31, 2021, we had $ 5.6 million of commitments related to our construction loan for the development of a regulated cannabis cultivation and processing facility in California.

The developer is required to complete construction by June 2022, subject to extension in certain circumstances.

As of December 31, 2022, we had approximately $ 479,000 of commitments related to our construction loan for the development of a regulated cannabis cultivation and processing facility in California.

See Note 12 “Subsequent Events” for more information.

Environmental Matters .

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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.

We may, from time to time, be a party to legal proceedings, which arise in the ordinary course of our business.

We are not aware of any pending or threatened litigation that, if resolved against us, would have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Class Action Lawsuit

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.

Malozzi, 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 p laintiff 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, Tracie J.

Hager, 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 January 25, 2023, plaintiff responded to defendants’ motion to dismiss the Amended Class Action Complaint.

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 Lawsuit

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.

Paul Smithers, Catherine Hastings, Andy Bui, Alan Gold, Gary Kreitzer, Mary Curran, Scott Shoemaker, David Stecher, and Innovative Industrial Properties, Inc., 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 Drover, derivatively on behalf of Innovative Industrial Properties, Inc.

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

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 16, 2022, along with a stay in the lawsuit pending a ruling on the defendants’ motion to dismiss the federal class action lawsuit described above.

The Company intends to vigorously defend these consolidated lawsuits.

However, at this time, the Company cannot predict the probable outcome of this action, and, accordingly, no amounts have been accrued in the Company’s consolidated financial statements.

Kings Garden Lawsuit

In July 2022, one of our tenants, Kings Garden Inc., defaulted on its obligations to pay base rent and property management fees under each of its six leases with our indirect, wholly owned subsidiary, IIP-CA 2 LP, and defaulted on its obligations to reimburse us for certain insurance premiums at the properties incurred by us that are payable by Kings Garden as operating expenses under such leases.

For the year ended December 31, 2022, Kings Garden’s monetary defaults under its leases with us were approximately $ 7.3 million in the aggregate, consisting of approximately $ 6.6 million of contractual base rents and property management fees and approximately $ 671,000 of insurance premiums and property taxes, but excluding applicable late charges and default interest.

Of that total monetary default, approximately $ 4.5 million pertained to the 19 th Avenue lease, which includes both an operational building and construction in progress.

We applied a portion of the security deposits under the leases, totaling approximately $ 2.7 million, as payments for these amounts.

On July 25, 2022, IIP-CA 2 LP filed a lawsuit against Kings Garden.

The case was named IIP-CA 2 LP, a Delaware limited partnership v.

Kings Garden Inc., a Nevada corporation, CK Endeavors, Inc., a California corporation, and JM Endeavors, Inc., a California corporation , and was filed in the Superior Court of the State of California.

The lawsuit asserts claims for breach of contract, declaratory relief, and injunctive relief.

On August 2, 2022, the case was amended to be named IIP-CA 2 LP, a Delaware limited partnership v.

Kings Garden Inc., a Nevada corporation, CK Endeavors, Inc., a California corporation, JM Endeavors, Inc., a California corporation, Michael King, an individual, Gary LaSalle, an individual, Charles Kieley, an individual, and Laurie Kibby, an individual , and to include claims relating to construction at the expansion project and the property that was under redevelopment as of June 30, 2022 for breach of implied covenant of good faith and fair dealing, fraud, negligent misrepresentation, conversion, theft by false pretenses, money had and received, and violations of the Racketeer Influenced and Corrupt Organization Act (18 U.S.C.

Section 1962(c)).

The amount related to these project costs reported in construction in progress as of December 31, 2022 was approximately $ 33.2 million.

The amount related to these project costs reported in buildings and improvements and tenant improvements was approximately $ 11.5 million in the aggregate as of December 31, 2021.

On September 11, 2022, the parties to the lawsuit entered into a confidential, conditional settlement agreement pertaining to matters related to the lawsuit.

Pursuant to the conditional settlement agreement, as of December 31, 2022, the Company received a total of $ 15.4 million in partial settlement payments from Kings Garden, which was accounted for as a reduction to construction in progress on our consolidated balance sheets.

Of the six properties previously leased to Kings Garden, four were operational, with an expansion project at one of those properties, and the other two properties were in development or redevelopment as of December 31, 2022.

In connection with the conditional settlement agreement, the Company terminated leases and regained possession of the two properties that were in development or redevelopment as of December 31, 2022.

Out of the amounts included in construction in progress at December 31, 2022, we are in the process of investigating additional costs paid of approximately $ 9.8 million to determine whether these are potential overpayments.

Although there is at least a reasonable possibility that a loss may have been incurred in connection with the default by Kings Garden and the related construction projects, as of December 31, 2022, we are unable to make such an estimate.

On February 14, 2023, Kings Garden filed an Arbitration Demand related to the interpretation of the confidential, conditional settlement agreement between the parties that concerns certain terms governing (along with the relevant lease) the assignment of one of the Kings Garden leases.

Parallel Pennsylvania Litigation

Subsequent to December 31, 2022, on February 6, 2023, IIP-PA 8 LLC, as landlord and an indirect subsidiary of the Company, filed a lawsuit against Goodblend Pennsylvania LLC, as tenant, and Parallel, as guarantor, in the Court of Common Pleas of Allegheny County, Pennsylvania, regarding the lease and related guaranty for one of the Company’s

properties located in Pennsylvania.

The lawsuit asserts claims for breach of contract by the tenant and guarantor and possession.

Parallel Texas Litigation

Subsequent to December 31, 2022, on February 11, 2023, a subsidiary of Parallel defaulted on its obligations to pay rent under the lease at one of our properties in Texas that is under development.

On February 23, 2023, IIP-TX 1 LLC, as landlord and an indirect subsidiary of the Company, filed a lawsuit against Surterra San Marcos, LLC, as tenant, in the Justice Court of Hays County, Texas, regarding the lease, asserting claim for possession.

Green Peak Michigan Litigation

Subsequent to December 31, 2022, on February 2, 2023, IIP-MI 1 LLC, as landlord and an indirect subsidiary of the Company, filed a lawsuit against Green Peak, as tenant, in 56-A District Court of the State of Michigan, regarding the lease for one of the Company’s properties located in Michigan, asserting claim for possession.

On February 22, 2023, IIP-MI 1 LLC filed a subsequent lawsuit against Green Peak and Tropics LP (“SAF”) in the 56 th Circuit Court of the State of Michigan, regarding the same lease, asserting claims against Green Peak for breach of contract, unjust enrichment, and innocent misrepresentation, against SAF for tortious interference with contract, and against both Green Peak and SAF for civil conspiracy.

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.

3 unchanged sentences

Subsequent Events

Subsequent to December 31, 2021, we acquired the following properties, including commitments to fund improvements and construction, and made the following additional funds available to tenants for improvements at our existing properties (dollars in thousands):

Massachusetts

January 28, 2022

February 4, 2022

February 10, 2022

(1) Includes expected rentable square feet at completion of construction.

(2) Excludes transaction costs.

(3) The amount relates to a lease amendment which increased the improvement allowance under a lease at one of our Michigan properties by $ 18.0 million to a total of approximately $ 47.5 million, and also resulted in a corresponding adjustment to base rent for the lease at the property.

(4) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to $ 4.6 million.

In addition, we acquired additional land adjacent to one of our existing properties in Pennsylvania on February 2, 2022.

In connection with the acquisition, we amended the lease for the existing property to incorporate this land into the leased area and reduced the existing improvement allowance under the lease by an amount equal to the purchase price for the land, which was approximately $ 3.3 million.

In January 2023, we terminated the Prior ATM Program and entered into new equity distribution agreements for the ATM Program, pursuant to which we may offer and sell from time to time up to $ 500.0 million of shares of our common stock.

As of February 28, 2023, we had no t issued any shares of common stock under this ATM Program.

In February 2023, we acquired a 58,000 square foot operational cannabis cultivation facility in Pennsylvania for $ 15.0 million (excluding transaction costs) and executed a lease with a subsidiary of TILT Holdings Inc.

for the entire property.

Lease Amendments

In February 2023, we amended our lease with a subsidiary of Ascend at one of our New Jersey properties, increasing the improvement allowance under the lease by $ 15.0 million to a total of approximately $ 19.6 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In February 2023, we amended our lease and development agreement with PharmaCann at one of our New York properties, increasing the construction fund by $ 15.0 million to a total of approximately $ 93.5 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In February 2023, we amended our lease with a subsidiary of Goodness Growth Holdings Inc.

at one of our New York properties, increasing the improvement allowance under the lease by $ 4.0 million to a total of approximately $ 53.4 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In January 2023 , we entered into lease amendments with Holistic at our properties located in California, Maryland, Massachusetts, Michigan and Pennsylvania, which (1) included cross-default provisions applicable to each lease;

(2) extended the term of each lease;

and (3) provided that 100 % of the base rent shall be applied from the security deposits held by us for (a) the nine months ending September 30, 2023 with respect to the Michigan property and (b) the eight months ending September 30, 2023 with respect to the California property, with pro rata monthly payback of the security deposits over the twelve month period starting January 2024.

In January 2023, we executed a lease amendment with Calyx Peak, Inc.

at our Missouri property, which (1) extended the term of the lease;

and (2) provided for 100 % base rent deferral through March 31, 2023, with pro rata monthly payback of the deferred rent over the twelve month period starting April 2023.

Construction Loan Amendment

In February 2023, we amended the construction loan for the development of a regulated cannabis cultivation and processing facility in California, for which we are the lender, to provide for, among other things:

(1) the additional capital commitment of the borrower into the project of $ 1.0 million;

(2) our agreement to fund an additional $ 4.5 million into the project;

(3) an increase in the interest rate commencing effective April 1, 2023;

(4) an extension of the loan term to December 31, 2023;

and (5) the provision of additional collateral from the borrower for the loan.

Interest on the loan continues to accrue through March 31, 2023 with monthly payment of interest commencing April 1, 2023.

Pending Disposition

In February 2023, we executed definitive agreements to sell the portfolio of properties in California leased to affiliates of Medical Investor Holdings, LLC (“Vertical”) for $ 16.2 million (excluding transaction costs) with a secured loan for that amount with the buyer of the property.

The transaction is subject to continued diligence and customary closing conditions, and there can be no assurance that the transaction will be completed on the terms described above, or at all.

Lease Defaults

In January 2023, we delivered notices of default to Parallel for defaulting on its obligations to pay rent at one of our properties in Pennsylvania, and to Green Peak for defaulting on its obligations to pay rent at one our properties in Michigan.

In February 2023, we delivered a notice of default to Parallel for defaulting on its obligations to pay rent at one of our Texas properties.

See Note 11 “Commitments and Contingencies — Litigation” for more information.

INNOVATIVE INDUSTRIAL PROPERTIES, INC.

4 unchanged sentences

Subsequent to

Property Type (1)

Built/Renovated

Year Acquired

Pharm AZ Retail

Sacramento CA

Kings Garden CA Portfolio

Various (1)(11)

2019/2020/2021

Vertical CA Portfolio

Gold Flora CA

Columbia Care CO

East Cherry Street

West Greenhouse Drive

64125 19th Avenue

McLane Street

63795 19th Avenue

North Anza Road

North Anza Road & Del Sol Road

1804 Needles Highway

West Broadway

3253 Needles Highway

3241 & 3247 Needles Highway

Steele Street

1967 / 1978 / 2018

LivWell CO Retail Portfolio

Trulieve FL Portfolio

Various (4)(11)

Parallel FL Portfolio

Cresco IL Portfolio

PharmaCann IL

PharmaCann MA

Washington Street

West Barberry Place

Hamilton Road

West Lake Drive

NW Highway 441

Ben Bostic Road

East Mazon Avenue

Revolution Road

East 4th Street

Industrial Drive

S US Highway 45 52

Centerpoint Way

Alaking Court

Western Maryland Parkway

Hopping Brook Road

Massachusetts

Chestnut Hill Avenue

Massachusetts

Worcester Road

Massachusetts

Canal Street/7 North Bridge Street

Massachusetts

East Main Street

Massachusetts

Curran Highway

Massachusetts

Green Peak MI

Various (7)(11)

Emerald Growth MI

1940 / 2020 / 2021

Green Peak MI Retail Portfolio

East Hazel Street

1930 / 1972 / 2021

Davis Highway

Executive Drive

Initial Costs

Subsequent to

Property Type (1)

Built/Renovated

Year Acquired

77th Street Northeast

2015 / 2017 / 2019

Columbia Care NJ Portfolio

PharmaCann NY

PharmaCann OH

Industrial Drive

East Cheyenne Avenue

Munsonhurst Road

South Route 73

North West Blvd

Hudson Crossing Drive

County Route 117

98th Ave South

Hunts Landing Road

East Tallmadge Ave.

1954 / 1986 / 2020

Columbia Care PA

PharmaCann PA

CO/PA/ND Portfolio

Columbia Care VA

(1) Portfolio consists of eight properties constructed and renovated between 1969 and 2019.

(2) Portfolio consists of four properties constructed and renovated between 1964 and 2020.

(3) Portfolio consists of two properties constructed in 1998 and 2019.

(4) Portfolio consists of two properties constructed in 1981 and 2019.

One of the properties was renovated in 2020.

(5) Portfolio consists of two properties originally constructed in 1982 and 2014.

Both properties were renovated and expanded in 2020 and 2021.

(6) Portfolio consists of two properties constructed in 2015 and 2016.

Both properties were renovated in 2019.

(7) Portfolio consists of two properties constructed in 1999 and 2018.

(8) Portfolio consists of six properties constructed and renovated between 1957 and 2019.

(9) Portfolio consists of two properties constructed between 1962 and 1974.

Both properties were renovated in 2020.

(10) Portfolio consists of 27 properties with 24 properties located in Colorado, two properties located in North Dakota, and one property located in Pennsylvania, which were constructed and renovated between 1870 and 2020.

(11) As of December 31, 2021, all or a portion of the property was under active development or redevelopment.

Scott Technology Park

New Beaver Avenue

East Market Street

Industrial Street

Rosanna Avenue

Decatur Street

Lathrop Industrial Drive SW

East Glendale Avenue

Dahlia Street

East Colfax Avenue

North 2nd Street

West Railroad Avenue

Wewatta Street

Southgate Place

South Peoria Court

Highway 6 & 24

North College Avenue

East Quincy Avenue

East Montview Boulevard

South Federal Blvd

Santa Fe Trail

Gregory Street

West 20th Avenue

South Federal Blvd.

West 6th Street

Bent Avenue North

South Cedar Street

West Pierson Road

East Front Street

South Mason Drive

24th Street East

Initial Costs

Subsequent to

Property Type (1)

Built/Renovated

Year Acquired

Highway 2 East

South 17th Street

Esperanza Street

Industrial/Retail

US 50 Business and Baxter Road

Industrial/Retail

South Fox Street

Industrial/Retail

Massachusetts

Mozzone Boulevard

Industrial/Retail

Massachusetts

Stephenson Highway

Industrial/Retail

Inland Center Drive

Under Development

63795 19th Avenue Expansion

Under Development

(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, 2022, all or a portion of the property was under development or redevelopment.

As of December 31, 2022, the aggregate gross cost of the properties included above for federal income tax purposes was approximately $ 2.2 billion.

A reconciliation of historical cost and related accumulated depreciation is as follows (in thousands):

3 unchanged sentences

Purchases of investments in real estate

Additions and improvements

Additions and improvements, net

Sale of real estate investments

Balance at end of year

1 unchanged sentence

Balance at beginning of year

Depreciation expense

Depreciation expense, net

Sale of real estate investments

Balance at end of year

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures