What changed in this filing

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Item 9A. Controls and Procedures

2024-02-27 compared with 2023-02-28 · 294 added, 264 removed, 886 unchanged (39% of the section changed)

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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, 2023.

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.

Based on that evaluation, our principal executive and financial officers concluded that our disclosure controls and procedures were effective as of December 31, 2023 (the end of the period covered by this Annual Report).

Management’s Report on Internal Control over Financial Reporting

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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.

Based on that evaluation, our principal executive officer and principal financial officer concluded that our internal controls, as of December 31, 2023, were effective.

BDO USA, P.C.

has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, which appears in this Annual Report on Form 10-K.

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 previously determined that we did not design and maintain effective internal control over financial reporting related to management’s review and approval of requests for funding disbursements for improvements at the Company’s properties.

In response, 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;

Our remediation efforts also included (1) enhancing the design of existing procedures and controls over the review and approval of funding requests for 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.

Management believes that significant progress has been made in enhancing internal controls as of December 31, 2023 and has concluded that the enhanced controls are operating effectively.

The material weakness described in Part II, Item 9A, “Controls and Procedures” in our Annual Report on Form 10-K for the year ended December 31, 2022 has been fully remediated.

Changes in 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

Other than remediation of the material weakness as discussed above, there have been no changes in our system of internal control over financial reporting during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Controls

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We have audited Innovative Industrial Properties, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2023, 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 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.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, 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, 2023 and 2022, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedule, and our report dated February 27, 2024 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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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ BDO USA, LLP

/s/ BDO USA, P.C.

San Diego, California

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OTHER INFORMATION

Not applicable.

(b) Rule 10b5-1 Trading Plans

During the three months ended December 31, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement,” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSEPCTIONS

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Indenture, dated as of February 21, 2019, among IIP Operating Partnership, LP, as issuer, Innovative Industrial Properties, Inc.

and the subsidiaries of IIP Operating Partnership, LP, as guarantors, 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), including the Form of Note representing IIP Operating Partnership, LP’s 3.75% Exchangeable Senior Notes due 2024.(5)

Indenture, dated as of May 25, 2021, among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP, the Subsidiary Guarantors set forth on the signature page thereto, 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), including the form of 5.50% Senior Note due 2026.(6)

and the subsidiaries of IIP Operating Partnership, LP, as guarantors, Argent Institutional Trust Company, as trustee (as successor-in-interest to GLAS Trust Company LLC), and Securities Transfer Corporation, as registrar (as successor-in-interest to GLAS Trust Company LLC), including the Form of Note representing IIP Operating Partnership, LP’s 3.75% Exchangeable Senior Notes due 2024.(5)

Indenture, dated as of May 25, 2021, among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP, the Subsidiary Guarantors set forth on the signature page thereto, Argent Institutional Trust Company, as trustee (as successor-in-interest to GLAS Trust Company LLC), and Securities Transfer Corporation, as registrar (as successor-in-interest to GLAS Trust Company LLC), including the form of 5.50% Senior Note due 2026.(6)

Innovative Industrial Properties, Inc.

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Severance and Change of Control Agreement dated as of June 7, 2017 among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and Catherine Hastings.(14)

Severance and Change of Control Agreement dated as of March 29, 2023 among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and David Smith.(15)

Director Compensation Policy.(11)

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List of Subsidiary Guarantors.(17)

Consent of BDO USA, LLP.

Consent of Independent Registered Public Accounting Firm.

Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Innovative Industrial Properties, Inc.

Compensation Recovery Policy.

XBRL Instance Document.

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(14) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on June 8, 2017.

(15) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on March 30, 2023.

(16) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on November 18, 2019.

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(Principal Executive Officer)

/s/ Catherine Hastings

Catherine Hastings

/s/ David Smith

Chief Financial Officer and Treasurer

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(a) Financial Statements:

Report of Independent Registered Public Accounting Firm ( BDO USA, LLP ;

Report of Independent Registered Public Accounting Firm ( BDO USA, P.C.

San Diego, California ;

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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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 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.

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, 2023, 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 27, 2024 expressed an unqualified opinion thereon.

Basis for Opinion

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Real Estate Acquisitions - Fair Value of Assets Acquired

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 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.

As described in Notes 2 and 6 to the consolidated financial statements, the Company’s consolidated real estate property acquisitions totaled approximately $35.2 million for the year ended December 31, 2023.

The two 2023 property acquisitions involved significant judgments in estimating the fair values used in the allocation between the land and buildings and improvements acquired.

We identified the estimation of the fair values used in the allocation of the land and buildings and improvements acquired for the two 2023 property acquisitions as a critical audit matter.

The principal considerations for our determination included significant judgments used to evaluate certain assumptions used in the fair values of land and buildings and improvements acquired, including the comparable sales of land, current replacement cost of the buildings and improvements, and certain other assumptions for the two real estate asset acquisitions.

Auditing these elements involved a high degree of auditor judgment and subjectivity due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included:

● 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

● Utilizing personnel with specialized knowledge and skills in valuation to assist in the evaluation of the reasonableness of the comparable sales of land, the current replacement cost of the buildings and improvements, and certain other assumptions used in the estimation of the allocation of fair values of land and buildings and improvements acquired, including the comparison of these assumptions to market data.

/s/ BDO USA, P.C.

We have served as the Company’s auditor since 2016.

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Buildings and improvements

Tenant improvements

Construction in progress

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Notes due 2026, net

Tenant improvements and construction funding payable

Building improvements and construction funding payable

Accounts payable and accrued expenses

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Interest expense

Loss on exchange of Exchangeable Senior Notes

Gain (loss) on exchange of Exchangeable Senior Notes

Preferred stock dividends

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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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Balance, December 31, 2022

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

Exchange of Exchangeable Senior Notes

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Cash flows from operating activities

Adjustments to reconcile net income to net cash provided by operating activities

Adjustments to reconcile net income to net cash provided by (used in) operating activities

Depreciation and amortization

Loss on exchange of Exchangeable Senior Notes

Loss (gain) on exchange of Exchangeable Senior Notes

Gain on sale of real estate

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Stock-based compensation

Amortization of discounts on short-term investments

Amortization of discounts on investments

Amortization of debt discount and issuance costs

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Rent received in advance and tenant security deposits

Net cash provided by operating activities

Net cash provided by (used in) operating activities

Cash flows from investing activities

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Proceeds from sale of real estate asset

Funding of draws for tenant improvements and construction

Funding of draws for improvements and construction

Funding of construction loan and other investments

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Purchases of short-term investments

( 1,077,867 )

Maturities of short-term investments

Net cash used in investing activities

( 1,027,115 )

Net cash provided by (used in) investing activities

Cash flows from financing activities

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Gross proceeds from issuance of Notes due 2026

Payment of deferred financing costs from issuance of Notes due 2026

Payment of deferred financing costs

Payment of inducement and transaction costs relating to inducement of the Exchangeable Senior Notes

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Taxes paid related to net share settlement of equity awards

Net cash provided by financing activities

Net cash provided by (used in) financing activities

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

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Supplemental disclosure of cash flow information:

Cash paid during the period for interest

Cash paid during the year for interest, net of interest capitalized

Supplemental disclosure of non-cash investing and financing activities:

Accrual for draws for tenant improvements and construction funding

Accrual for current-year additions to real estate

Deposits applied for acquisitions

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generally accepted accounting principles.

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.

Reclassification .

We have combined $ 705.3 million of “Tenant improvements” as of December 31, 2022, which represented building improvements in which we are considered to be the accounting owner, with “Building and improvements” in our consolidated balance sheets to conform to the current period presentation as of December 31, 2023.

There was no change to “Total real estate, at cost”.

Federal Income Taxes.

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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.

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 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.

The financial information disclosed herein represents all of the financial information related to our one reportable segment.

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We estimate the fair value of land by reviewing comparable sales within the same submarket and/or region.

We estimate the fair value of buildings and improvements and tenant improvements as if the property was vacant, taking into consideration current replacement costs and other relevant market rate information and may engage third-party valuation specialists.

We estimate the fair value of buildings and improvements as if the property was vacant utilizing a direct capitalization approach and take into consideration current replacement costs and other relevant market rate information and may engage third-party valuation specialists.

Acquisition costs are capitalized as incurred.

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The amount recorded for one above-market operating lease is included in other assets, net on the consolidated balance sheets and is amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable lease.

Certain acquisitions of real estate did not satisfy the requirements for sale-leaseback accounting and therefore as of December 31, 2023 and 2022, acquisitions of approximately $ 20.0 million and approximately $ 20.1 million, respectively, have been recognized as notes receivable and are included in other assets, net on our consolidated balance sheets.

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.

When a real estate asset is sold, we evaluate the provisions of Accounting Standards Codification (“ASC”) 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”) to determine whether the asset is within the scope of ASC 610-20, including an evaluation of whether the asset being sold is a nonfinancial asset and whether the buyer has gained control of an asset within the scope of ASC 610-20.

In assessing whether the buyer has gained control of the asset, we must determine whether the contract criteria in ASC 606, Revenue from Contracts with Customers (Topic 606) have been met, including 1) the parties to the contract have approved the contract and the contract has commercial substance, 2) we can identify each party’s rights regarding the asset to be transferred, 3) we can identify the payment terms for the asset to be transferred, and 4) it is probable that we will collect substantially all of the consideration to which we will be entitled in exchange for the asset to be transferred.

If all of the contract criteria have been met, the carrying amount of the applicable asset is derecognized with a corresponding gain or loss from the sale recognized in our consolidated statements of income.

If the contract criteria are not all met, the asset transferred is not derecognized and we continue to report the asset in our consolidated balance sheet.

See Note 6 “Investments in Real Estate - Property Dispositions” for further information.

Cost Capitalization and Depreciation.

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

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

The development and redevelopment activities may be funded by us pursuant to the lease.

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Typically, such improvements include, but are not limited to, ground up development, and enhanced HVAC, plumbing, electrical and other building systems.

Amounts capitalized are depreciated over estimated useful lives determined by management.

We depreciate buildings and improvements and tenant improvements based on our evaluation of the estimated useful life of each specific asset, not to exceed 40 years .

Amounts capitalized are depreciated on a straight-line basis over the estimated useful lives determined by management.

We depreciate buildings and improvements based on our evaluation of the estimated useful life of each specific asset, not to exceed 40 years .

For the years ended December 31, 2023, 2022 and 2021, we recognized depreciation expense of approximately $ 66.3 million, $ 60.5 million and $ 41.7 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 seven years .

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

We depreciate office equipment and

furniture and fixtures on a straight-line basis over the estimated useful lives ranging from three to seven years .

We depreciate the leasehold improvements at our corporate office on a straight-line basis over the shorter of the estimated useful lives or the remaining lease term.

Depreciation expense relating to our corporate assets is included in general and administrative expense in our consolidated statements of income.

Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment.

Project costs that are clearly associated with the acquisition and

development or redevelopment of a real estate project, for which we are the accounting owner, are capitalized as a cost of that project.

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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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”).

When existing properties are determined to be redevelopment properties, the net carrying value of the buildings and improvements are transferred to construction in progress while the redevelopment activities are in process.

Costs capitalized to construction in progress related to redevelopment properties are transferred to buildings and improvements at historical cost of the properties as the redevelopment project or phases of projects are placed in service.

During the year ended December 31, 2023, we reclassified the net carrying value of the buildings and improvements totaling approximately $ 56.8 million to construction in progress relating to two existing properties that were placed into redevelopment.

Provision for Impairment.

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Contractually obligated real estate taxes that are paid directly by the tenant to the tax authorities are not reflected in our consolidated financial statements.

For the year ended December 31, 2023, rental revenue recognized included the application of approximately $ 3.1 million of security deposits for rent with two tenants who were in default under their respective lease agreements and approximately $ 5.7 million of security deposits for rent with three tenants in connection with lease amendments.

Construction Loan.

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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.

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.

In February 2023, we amended the construction loan 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 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 continued to accrue through March 31, 2023, with monthly payments of interest contractually required commencing April 1, 2023.

In December 2023, we further amended to construction loan to extend the loan term to June 30, 2024, with an option for the borrower to extend the loan term to December 31, 2024 upon satisfaction of certain conditions and payment of an extension fee.

As of December 31, 2023 and 2022, we had funded approximately $ 22.0 million and $ 18.0 million, respectively, of the construction loan.

Interest income on the construction loan is recognized on a cash basis.

Cash and Cash Equivalents .

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

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.

We consider all highly-liquid investments with original maturities of three months or less to be cash equivalents, which is comprised of short-term money market funds, obligations of the U.S.

government and certificates of deposit with an original maturity at the time of purchase of less than or equal to three months.

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Investments .

Investments consist of obligations of the U.S.

Investments consist of short-term obligations of the U.S.

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

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Exchangeable Notes.

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 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):

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Deferred Financing Costs.

The deferred financing costs that are included as a reduction in the net book value of the related liability on our consolidated balance sheets reflect issuance and other costs related to our debt obligations.

The deferred financing costs relating to our Exchangeable Senior Notes and Notes due 2026 are included as a reduction in the net book value of the related liability on our consolidated balance sheets reflect.

These costs are amortized as non-cash interest expense using the effective interest method over the life of the related obligations.

Deferred financing costs relating to our Revolving Credit Facility are included in other assets, net on our consolidated balance sheets.

These costs are being amortized on a straight-line basis and recognized as non-cash interest expense over the term of the Revolving Credit Facility.

Stock-Based Compensation.

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Lease Accounting.

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 account for our leases under ASC 842, Leases , and have elected the practical expedient not to separate certain non-lease components from the lease component if the timing and pattern of transfer are the same for the non-lease component and associated lease component, and the lease component would be classified as an operating lease if accounted for separately.

We also elected the short-term lease exception for lessees for leases that are less than 12 months.

As lessee, we recognized a liability to account for our future obligations and a corresponding right-of-use asset related to our corporate office lease.

As lessee, we recognized a liability to account for our future obligations and a corresponding right-of-use asset related to our corporate office lease, which contains annual escalations.

The lease liability was initially measured based on the present value of the future lease payments discounted using the estimated incremental borrowing rate of 7.25 % , 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.

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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 November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures .

The amendments in ASU 2023-07 improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, measures

of segment profit and loss, and disclosures of how the chief operating decision maker uses the reported measure(s) of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources.

The amendments are effective for all public entities that are required to report segment information for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024.

The ASU also requires a public entity that has a single reportable segment to provide all the disclosures required by the amendments in this ASU and all existing segment disclosures in Topic 280.

Early adoption is permitted.

The amendments should be applied retrospectively to all prior periods presented.

The Company is currently evaluating the potential impact that this standard will have on its consolidated financial statements and related disclosures .

Concentration of Credit Risk .

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PharmaCann Inc.

("PharmaCann")

SH Parent, Inc.

("Parallel") (1)

("PharmaCann")

Ascend Wellness Holdings, Inc.

("Ascend")

Green Thumb Industries, Inc.

("Green Thumb")

Trulieve Cannabis Corp.

("Trulieve")

("Green Thumb")

SH Parent, Inc.

("Parallel") (1)

Curaleaf Holdings, Inc.

For the Year Ended

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Percentage of

Cresco Labs Inc.

("Cresco")

Kings Garden (2)

Trulieve Cannabis Corp.

For the Year Ended

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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.

Cresco Labs Inc.

Kings Garden (2)

(1) Commencing in November 2022, Parallel defaulted on its obligations to pay rent at one of our Pennsylvania properties, and we regained possession of that property in October 2023.

In February 2023, Parallel defaulted on its obligations to pay rent at one of our Texas properties, and we regained possession of that property in March 2023.

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

terminated the leases for two properties and regained possession of those properties, which continued to be in development or redevelopment as of December 31, 2023.

Kings Garden paid the stipulated rent during its period of occupancy for the remaining four properties through September 20, 2023, and we regained possession of those properties in September 2023.

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

In each of the tables above, these leases include leases with affiliates of each entity, for which the entity has provided a corporate guaranty.

As of December 31, 2023, our largest property was located in New York and accounted for approximately 5.4 % of our net real estate held for investment.

No other properties accounted for more than 5 % of our net real estate held for investment as of December 31, 2023.

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

We have deposited cash with a financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $ 250,000 .

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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.

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 (the “ATM Program”) up to $ 500.0 million in shares of our common stock.

During the year ended December 31, 2023, we sold 101,061 shares of our common stock under the ATM Program for net proceeds of approximately $ 9.6 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.

During the year ended December 31, 2023, we issued 32,200 shares of our common stock upon exchange by holders of $ 2.0 million of outstanding principal amount of our Exchangeable Senior Notes.

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”).

As of December 31, 2023, 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 (the “Series A Preferred Stock”).

The Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $ 25.00 per share, plus all accrued and unpaid dividends on such Series A Preferred Stock up to, but excluding the redemption date.

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The Company made the following acquisitions during the year ended December 31, 2023 (dollars in thousands):

Everett Street

Massachusetts

January 28, 2022

Munsonhurst Road

Susquehanna Street

February 15, 2023

South 17th Street

March 23, 2022

Boltonfield Street

March 3, 2023

Western Maryland Parkway

April 13, 2022

East Cherry Street

April 27, 2022

Mozzone Boulevard

Massachusetts

June 14, 2022

Worcester Road

Massachusetts

September 1, 2022

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

(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.

(2) The tenant is expected to complete improvements at the property, for which we agreed to provide funding of up to $ 21.9 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.

(3) Approximately $ 2.6 million was allocated to land and approximately $ 32.6 million was allocated to building and improvements.

Acquired In-Place Lease Intangible Assets

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For the years ended December 31, 2023, 2022 and 2021, the amortization of the above-market lease was approximately $ 92,000 , $ 91,000 and $ 4,000 , respectively.

As of December 31, 2023, the amortization for each of the next five years is approximately $ 92,000 and approximately $ 407,000 thereafter.

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.

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.

We also amended each of our leases with Ascend to include cross-default provisions applicable to each lease.

In February 2023, we amended our lease and development agreement with PharmaCann at one of our New York properties, increasing the construction funding 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.

We also amended each of our leases with PharmaCann to include cross-default provisions applicable to each lease.

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

(“Goodness Growth”) 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.

We also amended each of our leases with Goodness Growth to include cross-default provisions applicable to each lease.

In October 2023, we amended our lease with a subsidiary of Goodness Growth at one of our New York properties, increasing the improvement allowance under the lease by $ 14.0 million to a total of approximately $ 67.4 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In connection with the lease amendment, the tenant prepaid rent for the three month period commencing on November 1, 2023 and ending January 31, 2024.

Lease Amendments

In January 2023 , we entered into lease amendments with Holistic Industries Inc.

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.

In March 2023, we executed a lease amendment with Temescal Wellness of Massachusetts, LLC at our Massachusetts property, which (1) provided for temporary reduced base rent from April 2023 through January 2024 to be partially paid through application of security deposits, with pro rata payback of those security deposits over twelve months starting in February 2024;

(2) extended the lease term;

and (3) increased base rent for the remainder of the term of the lease.

In July 2023, we amended our lease with a subsidiary of 4Front Ventures Corp.

(“4Front”) at one of our Illinois properties, pursuant to which, among other things, we agreed to apply a portion of the security deposit that we hold under the lease to pay one-half of the monthly installments of base rent due from the tenant, commencing on August 1, 2023 and continuing through November 30, 2023, which the tenant is then required to repay over a 12 -month period commencing on January 1, 2024.

In June 2023, we executed a new long-term lease with a tenant at our property located at 68860 Perez Road in Cathedral City, California that was previously leased to Kings Garden, which is under construction as of December 31, 2023.

In December 2023, we executed a new lease with a tenant at our property located at 9410 Davis Highway in Dimondale, Michigan that was previously leased to Green Peak, which is under construction as of December 31, 2023.

Capitalized Costs

Including all of our properties, during the year ended December 31, 2023, we capitalized costs of approximately $ 130.7 million and funded approximately $ 150.1 million relating to improvements and construction activities at our properties.

Property Dispositions

In November 2022, we sold one of our Pennsylvania properties that was leased to a subsidiary 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.

In March 2023, we sold the portfolio of four properties in California previously leased to affiliates of Medical Investor Holdings, LLC (“Vertical”) for $ 16.2 million (excluding transaction costs) and provided a secured loan for $ 16.1 million to the buyer of the properties.

The loan matures on February 29, 2028 with two options to extend the maturity for twelve months , conditional in each instance on the payment of an extension fee and at least $ 500,000 of the principal balance.

The loan is interest only and payments are payable monthly in advance.

The transaction did not qualify for recognition as a completed sale under GAAP since not all of the criteria were met.

Accordingly, we have not derecognized the assets transferred on our consolidated balance sheets.

All consideration received, as well as any future payments, from the buyer will be recognized as a deposit liability and will be included in other liabilities on our consolidated balance sheet until such time the criteria for recognition as a sale have been met.

As of December 31, 2023, we received interest payments of approximately $ 1.3 million.

In addition, as we have not met all of the held-for-sale criteria, land and building and improvements with gross carrying values of approximately $ 3.4 million and approximately $ 13.9 million, respectively, and accumulated depreciation of approximately $ 1.6 million as of December 31, 2023, remain on the consolidated balance sheet, and the buildings and improvements continue to be depreciated.

Future Contractual Minimum Rent

Future contractual minimum rent (including base rent and property management fees) under the operating leases as of December 31, 2023 for future periods is summarized as follows (in thousands):

Contractual Minimum Rent

Property Disposition

Exchangeable Senior Notes

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The exchange rate for the Exchangeable Senior Notes at December 31, 2023 was 17.30699 shares of our common stock per $ 1,000 principal amount of the Exchangeable Senior Notes and the exchange price at December 31, 2023 was approximately $ 57.78 per share of our common stock.

At December 31, 2023, there were 76,774 shares potentially issuable upon conversion of the Exchangeable Senior Notes.

The exchange rate and exchange price are subject to adjustment in certain circumstances.

The Exchangeable Senior Notes will pay interest semiannually at a rate of 3.75 % per annum and will mature on February 21, 2024, unless earlier exchanged or repurchased in accordance with their terms.

The Exchangeable Senior Notes will pay interest semiannually at a rate of 3.75 % per annum and will mature on February 21, 2024, unless earlier exchanged or repurchased in accordance with their

The effective interest rate including amortization of issuance costs is 4.53 %.

Our Operating Partnership will not have the right to redeem the Exchangeable Senior Notes prior to maturity, but may be required to repurchase the Exchangeable Senior Notes from holders under certain circumstances.

At December 31, 2023, the if-exchanged value of the Exchangeable Senior Notes exceeded the principal amount by approximately $ 3.3 million.

In connection with the issuance of the Exchangeable Senior Notes in February 2019, we recorded an approximately $ 5.8 million discount based on the implied value of the exchange option and an assumed effective interest rate of 4.65 %, as well as approximately $ 5.2 million of initial issuance costs, of which approximately $ 5.0 million and $ 200,000 were allocated to the liability and equity components, respectively, based on their relative fair values.

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.

See Note 12 “Subsequent Events” for more information.

During the year ended December 31, 2023, we issued 32,200 shares of our common stock upon exchanges by holders of $ 2.0 million of outstanding principal amount of our Exchangeable Senior Notes.

For the year ended December 31, 2023, we recognized a gain on the exchange totaling approximately $ 22,000 , resulting from the difference between the fair value and carrying value of the debt as of the date of the exchange.

The issuance of the shares pursuant to the exchanges resulted in a net non-cash increase to our additional paid-in capital account of approximately $ 2.0 million for the year ended December 31, 2023.

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.

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Amortization of issuance cost

Capitalized interest

Total interest expense

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Principal amount

Unamortized discount

Unamortized issuance cost

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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.

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 Notes due 2026 will pay interest semiannually at a rate of 5.50 % per year and will mature on May 25, 2026.

The terms of the Notes due 2026 are governed by an indenture, dated May 25, 2021, among the Operating Partnership, as issuer, the Company and the Operating Partnership’s subsidiaries, as guarantors, Argent Institutional Trust Company, as trustee (as successor-in-interest to GLAS Trust Company LLC), and Securities Transfer Corporation, as registrar (as successor-in-interest to GLAS Trust Company LLC).

The terms of the indenture provide that if the debt rating on the Notes due 2026 is downgraded or withdrawn entirely, interest on the Notes due 2026 will increase to a range of 6.0 % to 6.5 % based on such debt rating.

In connection with the issuance of the Notes due 2026, we recorded approximately $ 6.8 million of issuance costs, which are being amortized using the effective interest method and recognized as non-cash interest expense over the term of the Notes due 2026.

The effective interest rate including amortization of issuance costs is 6.03 %.

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

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Amortization of issuance cost

Capitalized interest

Total interest expense

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Accrued interest payable for the Notes due 2026 as of December 31, 2023 and 2022 was approximately $ 2.1 million and is included in accounts payable and accrued expenses on our consolidated balance sheets.

Revolving Credit Facility

On October 23, 2023, our Operating Partnership entered into a loan and security agreement (the “Loan Agreement”) with a federally regulated commercial bank, as lender and as agent for lenders that become party thereto from time to time.

The Loan Agreement matures on October 23, 2026, and provides $ 30.0 million in aggregate commitments for secured revolving loans (the “Revolving Credit Facility”), the availability of which is based on a borrowing base

consisting of real properties owned by subsidiaries (the “Subsidiary Guarantors”) of the Operating Partnership that satisfy eligibility criteria set forth in the Loan Agreement.

The obligations of the Operating Partnership under the Loan Agreement are guaranteed by the Company and the Subsidiary Guarantors, and are secured by (i) operating accounts of the Operating Partnership into which lease payments under the real property included in the borrowing base are paid, (ii) the equity interest of the Subsidiary Guarantors, (iii) the real estate included in the borrowing base and the leases and rents thereunder, and (iv) all personal property of the Subsidiary Guarantors.

Borrowings under the Revolving Credit Facility bear interest at a variable rate based on the greater of the prime rate and an applicable margin based on deposits with the participating bank(s) and a stipulated interest rate.

The Revolving Credit Facility is subject to an unused line of credit fee, calculated in accordance with the Loan Agreement.

The Loan Agreement is subject to certain liquidity and operating covenants and includes customary representations and warranties, affirmative and negative covenants and events of default.

The Loan Agreement also allows the Operating Partnership, subject to the satisfaction of certain conditions, to request additional revolving loan commitments up to a specified amount.

There were no amounts outstanding under the Revolving Credit Facility as of December 31, 2023.

In connection with the Revolving Credit Facility, we recorded approximately $ 561,000 of issuance costs, which are being amortized on a straight-line basis and recognized as non-cash interest expense over the term of the Revolving Credit Facility.

For the year ended December 31, 2023, we recognized approximately $ 41,000 of non-cash interest expense related to the Revolving Credit Facility.

The following table summarizes the principal payments on our outstanding indebtedness as of December 31, 2023 (in thousands):

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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 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.

The 81,169 shares, 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, 2023, 2022 and 2021, respectively, and were included in the computation of diluted earnings per share.

For the years ended December 31, 2023 and 2022, the performance share units (“PSUs”) granted to certain employees were not included in dilutive securities as the performance thresholds for the vesting of the PSUs were not

met as measured as of the respective dates.

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).

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Investments (1)

Investments as cash equivalents (2)

Exchangeable Senior Notes (3)

Notes due 2026 (3)

(1) Investments consisting of obligations of the U.S.

government with an original maturity at the time of purchase of greater than three months are classified as held-to-maturity and valued using Level 1 inputs.

Construction Loan (4)

(1) Investments consisting of short-term obligations of the U.S.

government with an original maturity at the time of purchase of greater than three months and less than one year are classified as held-to-maturity and valued using Level 1 inputs.

At December 31, 2023, the unrecognized gain was approximately $ 78,000 .

(2) Investments as cash equivalents consisting of obligations of the U.S.

government with an original maturity at the time of purchase of less than or equal to three months are classified as held-to-maturity and valued using Level 1 inputs.

(3) The fair value is determined based upon Level 2 inputs as the Exchangeable Senior Notes and Notes due 2026 were trading in the private market.

As of December 31, 2022 and 2021, cash equivalent instruments consisted of approximately $ 78.0 million and $ 72.0 million, respectively, in short-term money market funds that were measured using the net asset value per share that have not been classified using the fair value hierarchy.

The fund invests primarily in short-term U.S.

Treasury and government securities.

Short-term investments consisting of certificate of deposits and obligations of the U.S.

government are stated at amortized cost, which approximates their fair values due to the short-term maturities and market rates of interest of these instruments.

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 fair values due to the short-term maturities and market rates of interest of these instruments.

(4) The construction loan receivable is categorized as Level 3 and was valued using a yield analysis, which is typically performed for non-credit impaired loans.

To determine fair value using a yield analysis, a current price is imputed for the loan based upon an assessment of the expected market yield for a similarly structured loan with a similar level of risk.

In the yield analysis, the Company considers the current contractual interest rate, the maturity and other terms of the loan relative to risk of the company and the specific loan.

At December 31, 2023 and 2022, the expected market yields used to determine fair value were 16.25 % and 25 % , respectively.

Changes in market yields may change the fair value of the construction loan.

Generally, an increase in market yields may result in a decrease in the fair value of the construction loan.

Due to the inherent uncertainty of determining the fair value of a loan that does not have a readily available market value, the fair value of the construction loan may fluctuate from period to period.

Additionally, the fair value of the construction loan may differ significantly from the value that would have been used had a readily available market existed for such loan and may differ materially from the value that the Company may ultimately realize.

The carrying amounts of cash equivalents, accounts payable, accrued expenses and other liabilities approximate fair values.

Common Stock Incentive Plan

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Nonvested balance at December 31, 2023

(1) All of these shares were forfeited to cover the employees’ tax withholding obligation upon vesting.

(1) Shares that were forfeited to cover the employees’ tax withholding obligation upon vesting or employees’ cessation of employment.

The remaining unrecognized compensation cost of approximately $ 4.3 million for restricted stock awards is expected to be recognized over a weighted-average amortization period of approximately 1.6 years as of December 31, 2023.

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

Nonqualified Deferred Compensation Plan (the “Deferred Compensation Plan”), which allows a select group of management and our non-employee directors to defer receiving certain of their cash and equity-based compensation.

Nonqualified Deferred Compensation Plan (the “Deferred

Compensation Plan”), which allows a select group of management and our non-employee directors to defer receiving certain of their cash and equity-based compensation.

RSUs are subject to vesting conditions of the Deferred Compensation Plan and have the same economic rights as shares of restricted stock under the 2016 Plan:

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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.

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.

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.

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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.

For the years ended December 31, 2023, 2022 and 2021, we recognized stock-based compensation expense of approximately $ 10.7 million, $ 10.7 million and $ 4.0 million respectively, relating to the PSU awards.

As of December 31, 2023, the remaining unrecognized compensation cost of approximately $ 6.7 million relating to the PSUs granted in January 2022 is expected to be recognized over the remaining Performance Period of 1.0 year.

As measured as of December 31, 2023, the performance thresholds for the vesting of the PSUs were not met for any of the applicable awards, and the PSUs granted in January 2021 were forfeited in their entirety pursuant to the terms of the agreements.

Commitments and Contingencies

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As of December 31, 2023, we had approximately $ 18.7 million of commitments related to improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease.

Construction Commitments.

As of December 31, 2023, we had approximately $ 11.8 million of commitments related to contracts with vendors for improvements at our properties.

Construction Loan.

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.

As of December 31, 2023, we had $ 1.0 million of commitments related to our construction loan for the development of a regulated cannabis cultivation and processing facility in California.

Environmental Matters .

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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.

Gold and Benjamin C.

Regin, and asserting causes of action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

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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.

On September 19, 2023, the court granted defendants’ motion to dismiss the Amended Class Action Complaint without prejudice.

On October 19, 2023, a Second Amended Class Action Complaint was filed under the same Case Number, and asserted causes of action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

According to the Second Amended Class Action Complaint, the plaintiff is seeking an undetermined amount of damages, interest, attorneys’ fees and costs and other relief on behalf of the putative classes of all persons who acquired shares of the Company’s common stock between August 7, 2020 and August 4, 2022.

On December 18, 2023, defendants moved to dismiss the Second Amended Class Action Complaint.

On February 1, 2024, plaintiff responded with their opposition to defendants’ motion to dismiss the Second Amended Class Action Complaint.

Defendants’ reply in support of the motion to dismiss is due March 1, 2024.

It is possible that similar lawsuits may yet be filed in the same or other courts that name the same or additional defendants.

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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.

The case was named Karen Draper, 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.

On April 17, 2023, a third derivative action lawsuit was filed against the Company and certain of its officers and directors.

The case was named Ross Weintraub, derivatively on behalf of Innovative Industrial Properties, Inc.

Alan Gold, Paul Smithers, Catherine Hastings, Ben Regin, Andy Bui, Tracie Hager, Gary Kreitzer, David Stecher, Scott Shoemaker, Mary Curran, and Innovative Industrial Properties, Inc., Case Number 1:23-cv-00737-GLR, and filed in the United States District Court for the District of Maryland.

The lawsuit asserts putative derivative claims for breach of fiduciary duty and violations of Section 14(a) of the Exchange Act, and seeks an undetermined amount of damages, equitable relief, and attorneys’ fees and costs.

Defendants in this action filed a Consent Motion to Stay the Proceeding, which was granted on April 17, 2023.

On June 5, 2023, a fourth derivative action lawsuit was filed against the Company and certain of its officers and directors.

The case was named Franco DeBlasio, on behalf of Gerich Melenth Nin (GMN) LP, derivatively on behalf of Innovative Industrial Properties, Inc.

Paul Smithers, Catherine Hastings, Alan D.

Gold, Tracie J.

Hager, Benjamin C.

Regin, Andy Bui, Gary A.

Kreitzer, David Stecher, Scott Shoemaker, Mary Curran, and Innovative Industrial Properties, Inc., Case Number 1:23-cv-01513-GLR, and filed in the United States District Court for the District of Maryland.

On July 19, 2023, the United States Court for the District of Maryland consolidated Case Nos.

1:23-cv-00737-GLR and 1:23-cv-01513-GLR with case number 1:23-cv-00737-GLR as the lead case, and kept the stay in place.

The Company intends to vigorously defend each of these lawsuits.

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

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.

On July 25, 2022, IIP-CA 2 LP filed a lawsuit against Kings Garden, a former tenant at six properties.

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.

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 two projects 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)) (“RICO Act”).

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.

Pursuant to the conditional settlement agreement, as of December 31, 2023, the Company has received a total of approximately $ 19.8 million in partial settlement payments from Kings Garden, which has been accounted for as a reduction to net real estate held for investment on our consolidated balance sheets.

During the year ended December 31, 2023, we received approximately $ 4.4 million in additional payments from Kings Garden (reflected in the total amount above).

On August 4, 2023, the Company accepted an offer of judgment extended by Kings Garden under California Code of Civil Procedure Section 998, pursuant to which Kings Garden (i) vacated the remaining four properties it previously occupied in September 2023, paying the stipulated rent during its period of occupancy through September 20, 2023, and (ii) agreed to pay the Company damages and attorneys’ fees totaling approximately $ 6.0 million, including interest on the then-outstanding amount, on a fully amortizing schedule of approximately $ 193,000 per month over a three-year period.

The offer of judgment included a mutual release.

During November and December 2023, we received an aggregate of approximately $ 386,000 from Kings Garden pursuant to the terms of the offer of judgement, which is primarily reported as rental revenues for the year ended December 31, 2023.

On August 16, 2023, we filed suit against Orr Builders, the general contractor for certain amounts on one construction project undertaken by Kings Garden, and filed a first amended complaint on January 24, 2024, named IIP-CA 2 LP v.

Orr Builders and Does 1-20 , asserting claims for fraud, negligent misrepresentation, negligence, breach of contract, breach of covenant of good faith and fair dealing, violation of California unfair competition law, money had and received, and unjust enrichment.

Enviro Air Lawsuit

On January 29, 2024, we filed suit against Enviro Air Systems Inc., Haik Akiopyan and Desert Construction Services, LLC, regarding certain amounts for one construction project undertaken by Kings Garden, named IIP-CA 2 LP vs.

Enviro Air Systems Inc., Haik Akopyan and Desert Construction Services, LLC , asserting claims for fraud, negligent misrepresentation, conspiracy, violation of California unfair competition law, money had and received, unjust enrichment, conversion, theft by false pretenses and violations of the RICO Act.

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.

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.

On October 25, 2023, a consent order was executed by the Court which awarded possession of the property to IIP-PA 8 LLC on October 31, 2023 and damages in favor of IIP-PA 8 LLC in the amount of approximately $ 15.5 million.

2023, IIP-PA 8 LLC received approximately $ 1.7 million from Goodblend Pennsylvania LLC as a partial payment of the judgment, which is reported as rental revenues for the year ended December 31, 2023.

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 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.

In March 2023, a judgment for possession was entered in favor of IIP-TX 1 LLC, as well as monthly rental amounts due, and we regained possession of the property.

On March 13, 2023, IIP-TX 1 LLC filed a subsequent lawsuit against Surterra San Marcos, LLC, Parallel and Sunstream Opportunities LP (“SAF Entity 1”) in the District Court of Hays County, Texas, regarding the same lease, asserting claims against Surterra San Marcos, LLC, Parallel and SAF Entity 1 for breach of contract, tortious interference with contract, unjust enrichment, fraud and fraudulent inducement, intentional failure to disclose and misrepresentations and conversion, and also requested the granting of a temporary injunction and the appointment of a receiver over the license(s) pertaining to the property’s operations as a regulated cannabis facility.

The parties exchanged initial disclosures in September 2023, and are in the discovery phase.

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.

On February 22, 2023, IIP-MI 1 LLC filed a lawsuit against Green Peak and Tropics LP (“SAF Entity 2”) in the Circuit Court of Eaton County, Michigan, regarding a lease for one of the Company’s properties located in Michigan, asserting claims against Green Peak for breach of contract, unjust enrichment, and innocent misrepresentation, against SAF Entity 2 for tortious interference with contract, and against both Green Peak and SAF Entity 2 for civil conspiracy (the “Circuit Court Action”).

On March 3, 2023, a receiver was appointed over substantially all of Green Peak’s assets in the Circuit Court of Ingham County, Michigan (the “Receivership Case”), pursuant to which the Company subsequently re-gained possession of one of the Company’s cultivation and processing properties, which is under redevelopment as December 31, 2023, and three retail properties.

As a result of the Receivership Case, the claims asserted against Green Peak in the Circuit Court Action were stayed by order of the court and the claims against SAF Entity 2 were suspended by agreement of the parties pending the outcome of the Receivership Case.

On October 3, 2023, the court approved the sale of substantially all of Green Peak’s remaining assets in receivership to an affiliate of Green Peak’s senior secured lender.

The receiver informed the Company that it intends to vacate the remaining operational cannabis cultivation and processing facility occupied by the receiver by February 29, 2024.

The leases for the remaining three retail properties are expected to be assumed by the purchaser in connection with the closing of the sale.

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

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Subsequent Events

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.

Exchange of Remaining Outstanding Principal Amount Exchangeable Senior Notes

Subsequent to year-end, we issued 28,408 shares of our common stock and paid approximately $ 4.3 million in cash upon exchange by holders of approximately $ 4.3 million principal amount of Exchangeable Senior Notes and paid off the remaining $ 100,000 principal amount at maturity, in accordance with terms of the indenture for the Exchangeable Senior Notes.

Lease Amendments

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;

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.

In January 2024, we entered into lease amendments with subsidiaries of 4Front Ventures Corp.

(“4Front”) at the four properties we lease to them in Illinois, Massachusetts and Washington, extending the term of each lease.

The Illinois property, which is under development, has experienced significant delays in construction, primarily relating to completion of required utilities enhancements, which has resulted in an extended delay of the estimated completion of the project.

As a result, we amended the Illinois lease to reduce base rent owing for the nine months ending September 30, 2024, defer the payback of the security deposit applicable to the lease (with the security deposit subject to future pro-rata monthly payback), and increase the base rent for the remainder of the term commencing November 1, 2024.

In February 2024, we amended our lease and development agreement with PharmaCann at one of our New York properties, increasing the construction funding by $ 16.0 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

We also amended the lease to extend the term.

In January 2024, we executed a new lease with a tenant at one of our retail properties in Michigan that was previously leased to Green Peak.

Amendment to Loan Agreement to Increase Commitments Under Revolving Credit Facility

In February 2024, our Operating Partnership entered into an amendment to the Loan Agreement, pursuant to which the aggregate commitments under the Revolving Credit Facility were increased from $ 30.0 million to $ 45.0 million.

INNOVATIVE INDUSTRIAL PROPERTIES, INC.

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Built/Renovated

Improvements (6)

Year Acquired

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West Greenhouse Drive

Perez Road (5)

64125 19th Avenue

McLane Street

Inland Center Drive (5)

Industrial (4)

63795 19th Avenue (5)

North Anza Road

Industrial (4)

North Anza Road & Del Sol Road

Industrial (4)

1804 Needles Highway (3)

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Executive Drive

Initial Costs

Subsequent to

Property Type (1)

Built/Renovated

Year Acquired

77th Street Northeast

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1954 / 1986 / 2020

Boltonfield Street

Scott Technology Park

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Rosanna Avenue

Susquehanna Street

Decatur Street

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24th Street East

Initial Costs

Subsequent to

Property Type (1)

Built/Renovated

Year Acquired

Highway 2 East

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Industrial/Retail

Leah Avenue (5)

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, 2023, 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.

(3) These four properties were sold in March 2023 but the transaction did not qualify for recognition as a completed sale under GAAP.

As such, the properties remain on the consolidated balance sheet.

Refer to Note 6 “Investments in Real Estate” for more information.

(4) As of December 31, 2023, we were evaluating alternative non-cannabis uses for the property, due in part to changes in the zoning of the property that no longer allow for regulated cannabis cultivation and processing.

(5) As of December 31, 2023, these properties were vacant and excluded from our operating portfolio.

(6) Building and improvements balance includes Construction in progress.

As of December 31, 2023, the aggregate gross cost of the properties included above for federal income tax purposes was approximately $ 2.4 billion, which excludes the four properties that were sold in March 2023 that did not qualify for recognition as a completed sale under GAAP but is recognized as a sale for tax purposes.

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

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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