Item 1. Business
ITEM 1. BUSINESS
The following discussion should be read in conjunction
with our consolidated financial statements and the related notes to the consolidated financial statements that appear elsewhere in this
annual report on Form 10-K.
As used in this annual report on Form 10-K and
unless otherwise indicated, the terms the terms “Zoned Properties”, “Company,” “we,” “us,”
or “our” refer to Zoned Properties, Inc. and its wholly owned subsidiaries as detailed below.
Overview
Zoned Properties, Inc. (“Zoned Properties”
or the “Company”) was incorporated in the State of Nevada on August 25, 2003. In October 2013, the Company changed its name
to Zoned Properties, Inc. and in April 2014, the Company shifted its business model to address commercial real estate in the regulated
cannabis industry.
Zoned Properties is a technology-driven property
investment company focused on acquiring value-add real estate within the regulated cannabis industry in the United States. The Company
aspires to innovate within the real estate development sector, focusing on direct-to-consumer real estate that is leased to the best-in-class
cannabis retailers. Headquartered in Scottsdale, Arizona, Zoned Properties is redefining the approach to commercial real estate investment
through its standardized investment model backed by its proprietary property technology. Zoned Properties has developed a national ecosystem
of real estate services to support its real estate development model, including a commercial real estate brokerage and a real estate
advisory practice.
The Company operates in two organized segments;
(1) the operations, leasing and management of its commercial properties, herein known as the “Property Investment Portfolio”
segment, and (2) the advisory, brokerage and technology services related to commercial properties, herein known as the “Real Estate
Services” segment. The Company targets commercial properties that face unique zoning or development challenges, identifies solutions
that can potentially have a major impact on their commercial value, and then works to acquire the properties while securing long-term,
absolute-net leases. The Company does not grow, harvest, sell or distribute cannabis or any substances regulated under United States
law such as the Controlled Substance Act of 1970, as amended (the “CSA”). Zoned Properties corporate headquarters are located
at 8360 E. Raintree Dr., Suite 230, Scottsdale, Arizona. For more information, call 877-360-8839 or visit www.ZonedProperties.com.
The Company has the following wholly owned subsidiaries:
●
Chino Valley Properties, LLC (“Chino Valley”)
was organized in the State of Arizona on April 15, 2014.
●
Kingman Property Group, LLC (“Kingman”)
was organized in the State of Arizona on April 15, 2014.
●
Green Valley Group, LLC (“Green Valley”)
organized in the State of Arizona on April 15, 2014.
●
Zoned Arizona Properties, LLC (“Zoned Arizona”)
was organized in the State of Arizona on June 2, 2017.
●
Zoned Advisory Services, LLC (“Zoned Advisory”)
was organized in the State of Arizona on July 27, 2018.
●
Zoned Properties Brokerage, LLC (“Arizona Brokerage”)
was organized in the State of Arizona on March 17, 2021.
●
ZP Data Platform 1, LLC (“ZP Data 1”) was
organized in the State of Arizona on April 14, 2021 (inactive).
●
ZP Data Platform 2, LLC (“ZP Data 2”) was
organized in the State of Arizona on June 21, 2022.
●
ZP RE Holdings, LLC (“ZPRE Holdings”) was
organized in the State of Arizona on September 20, 2022.
●
ZP Brokerage MS, LLC (“Mississippi Brokerage”)
was organized in the State of Mississippi on October 4, 2022 (inactive and dissolved on January 13, 2025).
●
ZP Brokerage FL, LLC (“Florida Brokerage”)
was organized in the State of Florida on October 20, 2022.
●
ZP Brokerage AL, LLC (“Alabama Brokerage”)
was organized in the State of Alabama on October 20, 2022 (inactive and dissolved on January 9, 2025).
●
ZP RE MI Woodward, LLC (“ZP Woodward”)
was organized in the State of Michigan on November 22, 2022
●
ZP Brokerage MO, LLC (“Missouri Brokerage”)
was organized in the State of Missouri on November 30, 2022 (inactive and dissolved on January 13, 2025).
●
ZP RE IL Ashland, LLC (“ZP Ashland”) was
organized in the State of Illinois on February 14, 2024.
●
ZP RE AZ DYSART. LLC (“ZP Dysart”) was
organized in the State of Arizona on May 24, 2024.
The Company also maintains a 50% equity interest in two joint ventures
(see Note 5).
1
Our Business
We believe in the value of building long-term
relationships with our tenants, clients and the local communities in which our properties are located in order to position the Company
for short-term success and long-term growth backed by sophisticated, safe, and sustainable assets.
The core of our business operations involves
identifying, securing, acquiring, and leasing commercial properties that intend to operate within highly regulated industries, including
the legalized cannabis industry. Within highly regulated industries, local municipalities typically develop strict regulations, including
zoning and permitting requirements related to commercial real estate, that dictate the specific locations and parameters under which
regulated properties can operate, including cannabis properties. We often refer to these requirements as cannabis approvals. These regulations
often include complex permitting processes that require longer development timelines than traditional commercial real estate and can
include non-standard codes governing each location; for example, restricting a regulated property or facility from operating within a
certain distance of any parks, schools, churches, or residential districts, or restricting a regulated property from operating outside
a defined set of hours of operation. When an organization can collaborate with local representatives, a proactive set of rules and regulations
can be established and followed to meet the needs of both the regulated operators and the local community.
Due to the complex nature of the Company’s
core business operations and target investment properties, the Company may secure dozens of potential property candidates for acquisition
and prospective tenant candidates for leasing at any given time, all in the normal course of business. The process of securing a potential
property candidate may include completing contractual agreements such as an option agreement or a purchase agreement, which may include
various contingencies and conditions precedent related to the ultimate consummation of the acquisition, investment, or transaction. Simultaneously
with the securing of potential property candidates, the Company will advertise and market a property to prospective tenant candidates
for a long-term, absolute-net lease agreement, which may include various contingencies and conditions precedent related to the ultimate
commencement of the lease and tenancy. In order to deliver a successful investment property transaction, the Company must collectively
receive all cannabis approvals from state and local governing authorities that may be required at a given property, secure a qualified
tenant to lease and operate the property, and complete the acquisition of the property.
The Company’s current investment properties
are located in Arizona, Illinois, and Michigan with 100% occupancy and a weighted average lease term over 10 years. Each of the Company’s
leased properties is occupied by a commercial cannabis tenant.
Zoned Properties maintains a portfolio of properties
that it owns, develops and leases. As of March 2025, the Company leases land and/or building space at the seven properties in its portfolio
to licensed and regulated cannabis tenants in areas with established cannabis regulations and zoning procedures. Four of the leased properties
are zoned and permitted as regulated cannabis retail dispensaries, two of the leased properties are zoned and permitted as regulated
cannabis cultivation and processing facilities, and one property is land leased currently under development to for a regulated cannabis
retail dispensary. The Company considers the two cultivation sites in its portfolio as legacy properties and may consider selling or
leveraging those properties to unlock equity and create capital availability in the future. The Zoned Properties investment thesis has
evolved over the years as the cannabis industry has emerged, and is currently focused on investing capital into direct-to-consumer properties,
located in state-markets with robust cannabis consumer demand in the industry.
Our primary focus is on investing in the acquisition
and development of new properties to grow the equity value of our real estate portfolio, and as such we may consider refinancing and/or
selling an asset when the circumstances and opportunity present a value opportunity for the Company.
Zoned Properties is in pursuit of property acquisitions
that can be characterized as consumer-facing, retail dispensary properties that are positioned to be leased to regulated cannabis retail
dispensary tenants under net leasing structures. As of March 2025, the Company has additional agreements in place contractually securing
the rights to acquire prospective investment properties with prospective regulated cannabis tenants located in Delaware, Kentucky, Illinois,
and Ohio. In the coming quarters and years, the Company plans to initiate and target its investment activity in additional potential
state-markets with robust cannabis consumer demand.
Over the past few years, the Company has completed
a strategic shift in focus towards direct-to-consumer real estate that is leased to the best-in-class cannabis retailers in the industry.
The Company will continue to utilize its proprietary property technology as a competitive edge when identifying investment properties.
There are significant challenges that take place
when zoning, permitting, and developing real estate with facilities that intend to operate within a regulated industry, including the
legalized cannabis industry. Each state and local jurisdiction may adopt specific zoning and permitting regulations that may be unique
compared to alternative jurisdictions. The Company has gained valuable knowledge and developed best practices in this area by successfully
completing projects for third party clients across the country in multiple states, as well as our own projects located in Arizona, Illinois,
and Michigan, each highly regulated markets for the legalized cannabis industry. The Company intends to replicate this business model
across the nation as markets mature and rules and regulations are established.
The process for obtaining zoning authorizations
and permitting for a regulated cannabis facility can take months or sometimes years to complete. The process primarily involves working
directly with the local government representatives following state-level legalization. Notwithstanding proper zoning and permitted use,
we may work with local zoning authorities in order to revise zoning codes and regulations. The Company has been involved with local representatives
on behalf of our own properties held in our portfolio and on behalf of third-party clients across the nation. For example, the Company
worked directly with local representatives in Tempe, Arizona to update the local zoning code that regulates licensed cannabis facilities.
The successfully adoption of these code amendments can directly impact the continued development of any licensed cannabis facilities
that operate within municipal limits.
2
In the event a property is not currently zoned
correctly or does not currently allow permitted use as a regulated cannabis facility, we may work with local authorities to rezone the
property or seek changes to existing zoning codes or permitted uses. Our efforts may not be successful. In the event that local zoning,
permitting or any other required cannabis approvals are not received, a prospective investment property opportunity may fail, in which
case the Company would move to terminate any agreements in place with prospective property sellers and prospective tenants at the property.
While the Company intends to include contingencies and conditions precedent in its agreements with property sellers and prospective tenants,
it may be possible that these risk mitigants fail, causing the Company to incur fess and/or lose escrow deposits.
The Company has established a network of experts
in various fields of real estate: title and escrow, property insurance, property lending, property technology, commercial banking, commercial
brokerage, property design and construction, property management and operations, and property security in order to provide tenants and
clients with a full-spectrum of real estate solutions to best meet their needs. We require our prospective tenants and clients to go
through due diligence in order to meet the Company’s standards.
As of March 2025, we are the sole member of 13
limited liability companies: Chino Valley, Green Valley, Kingman, Zoned Arizona, Zoned Advisory, ZP Data 1, ZP Data 2, Arizona Brokerage,
Florida Brokerage, ZPRE Holdings, ZP Woodward, ZP Dysart, and ZP Ashland. Seven of these entities—Zoned Arizona, Green Valley,
Kingman, Chino Valley, ZPRE Holdings, ZP Woodward, and ZP Dysart have acquired land and/or real property and own our properties.
Many of the best-known, state-licensed cannabis
operators from across the United States have approached Zoned Properties for strategic partnership related to the acquisition and leasing
of retail dispensary properties and/or real estate services related to cannabis real estate projects. We are continuously evaluating
these opportunities as we expand our investment property pipeline. Zoned Properties has built an active cannabis real estate investment
and services ecosystem in which we are exploring various development partnerships, preferred service provider arrangements, and partnerships
with capital funding sources.
As it relates to the regulated cannabis industry,
we are strictly a non-plant touching organization. We believe that we are well positioned to benefit from ancillary development opportunities
that the regulated cannabis industry presents without having to deal with the risk of directly cultivating, distributing, or dispensing
the product, which is still illegal under federal law.
Our initial real estate services and property
acquisition targets have been in Arizona. Recently, we have expanded real estate services, namely advisory services and brokerage services,
across multiple state markets, and we have acquired properties in Michigan and Illinois. We believe that Arizona, Michigan and Illinois
have established state-regulated cannabis programs with robust regulatory frameworks for licensing and operating within their respective
regulatory marketplaces (i.e. the business environment in which our clients and tenants operate) and have strong consumer demand to support
the business operators in their respective state marketplaces (i.e. the consumers that support our clients’ and tenants’
business operations). The Company expects to target expansion into new state marketplaces for both its real estate services and its acquisition
of properties into its property investment portfolio that have strong growth trends in both regulatory frameworks and consumer demand.
The Company believes these are two of the most important market factors that have influence related to the value of real estate development
and property investment potential.
Recent Corporate History and Transactions
Our property located in Chino Valley, AZ is leased
by Broken Arrow Herbal Center, Inc. (“Broken Arrow”), doing business as Hana Dispensaries.
Our property located in Green Valley, AZ is leased
by Broken Arrow, doing business as Hana Dispensaries.
Our property located in Kingman, AZ is leased
by CJK, Inc. (“CJK”).
Our property located in Tempe, AZ is leased by
VSM, LLC (“VSM”), doing business as Green Dot Labs.
Our property located in Pleasant Ridge, MI is
leased by Rapid Fish, LLC (“Rapid Fish”), doing business as NOXX Cannabis.
Our property located in Chicago, IL is leased
by JG IL LLC (“Justice Grown”), doing business as Justice Cannabis Co.
Our land located in Surprise, AZ is leased by
The Pharm, LLC (“Sunday Goods”). doing business as Sunday Goods.
Chino Valley, Arizona
On May 29, 2020, Chino Valley and Broken Arrow
entered into a Second Amendment to the 2018 Chino Valley Lease, as amended (the “2020 Chino Valley Amendment”), effective
May 31, 2020 (“Effective Date”). Pursuant to the terms of the 2020 Chino Valley Amendment, among other things, the base rent
was adjusted to $32,800 per month. Any increase in the rentable area of the leased premises will result in an increase in all amounts
calculated based on the same, including, without limitation, base rent. Pursuant to the terms of the 2020 Chino Valley Amendment, the
parties agreed that if there is any change in laws such that the dispensing, sale or cultivation of marijuana upon the premises is prohibited
or materially and adversely affected as mutually and reasonably determined by Chino Valley and Broken Arrow, Broken Arrow may terminate
the 2018 Chino Valley Lease, as amended, by delivering written notice to Chino Valley, together with a termination payment which shall
be the sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the
balance of the term. In addition, the parties agreed that from the period from the Effective Date to June 30, 2022 (the “Improvement
Period”), Broken Arrow will and/or Broken Arrow will cause its affiliate, CJK, to invest a combined total of at least $8,000,000
of improvements (“Investment by Tenants”) in and to the property that is the subject of the Chino Valley Lease and the property
that is the subject of the Tempe Lease (discussed below, and collectively referred to as the “Facilities”). The Company’s
Significant Tenants have completed the Investment by Tenants to the Facilities totaling in excess of $8,000,000 and have satisfied the
contractual obligations related to the same.
3
On August 23, 2021, Chino Valley and Broken Arrow
entered into the Third Amendment (the “Third Chino Valley Amendment”) to the 2018 Chino Valley Lease, as amended (the “Chino
Valley Lease”), effective September 1, 2021. The parties previously agreed that the base rental payments under the Chino Valley
Lease would increase commensurate to any and all expanded and operational square footage on the premises by calculating the fixed rate
of $0.82 per square foot per month by the new operational square footage. Accordingly, in the Third Chino Valley Amendment, the parties
agreed that, as of September 1, 2021, the rental payment is increased to $55,195 per month base rental payment, plus additional rental
payments, as a result of the increase in the square footage to 67,312 square feet of operational space. This lease modification qualifies
as a separate contract as the modification grants the tenant additional right of use not included in the original lease, as amended,
and the increase in monthly rent payments is commensurate with the standalone price for the additional square footage being leased.
On January 24, 2022 and effective on March 1,
2022, Chino Valley and Broken Arrow entered into the Fourth Amendment (the “Fourth Chino Valley Amendment”) to the Chino
Valley Lease, as amended. Pursuant to the terms of the Fourth Chino Valley Amendment, the parties acknowledge that an additional 30,000
square feet have become operational, increasing the premises to a total of 97,312 square feet of operational space. In connection with
the Fourth Chino Valley Amendment, the Company paid $500,000 to Tenant as a tenant improvement allowance or lease incentive for investment
into the premises, which was capitalized as a lease incentive receivable and is recognized on a straight-line basis over the remaining
lease term as a reduction to the lease income. Pursuant to the terms of the Fourth Chino Valley Amendment, effective March 1, 2022, the
monthly base rent was increased to $87,581, representing an increase from $0.82 per square foot to $0.90 per square foot, for all current
and future operational square footage that may be developed as the premises continues to expand.
Green Valley, Arizona
On May 29, 2020, Green Valley and Broken Arrow
entered into the First Amendment (the “Green Valley Amendment”) to the Green Valley Lease, effective May 31, 2020. Pursuant
to the terms of the Green Valley Amendment, among other things, the parties agreed to abate the fixed base rent of $3,500 from June 1,
2020 to July 31, 2020. In addition, the Green Valley Amendment provides that any increase in the rentable area of the leases premises
will result in an increase in all amounts calculated based on the same, including, without limitation, base rent. The parties also agreed
that if there is any change in laws such that the dispensing, sale or cultivation of marijuana upon the premises is prohibited or materially
and adversely affected as mutually and reasonably determined by Green Valley and Broken Arrow, Broken Arrow may terminate the Green Valley
Lease by delivering written notice to Green Valley, together with a termination payment which shall be the sum of (i) any unpaid rent
and interest, plus (ii) 5% of the base rent which would have been earned after termination for the balance of the term.
Tempe, Arizona
On May 29, 2020, Zoned Arizona and CJK entered
into the First Amendment (the “Tempe Amendment”) to the Tempe Lease, effective May 31, 2020. Pursuant to the terms of the
Tempe Amendment, among other things, the base rent was increased to $49,200 per month. Any increase in the rentable area of the leased
premises will result in an increase in all amounts calculated based on the same, including, without limitation, base rent. Pursuant to
the terms of the Tempe Amendment, the parties agreed that if there is any change in laws such that the dispensing, sale or cultivation
of marijuana upon the premises is prohibited or materially and adversely affected as mutually and reasonably determined by Zoned Arizona
and CJK, CJK may terminate the Tempe Lease by delivering written notice to Zoned Arizona, together with a termination payment which shall
be the sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been earned after termination for the
balance of the term.
In addition, under the Tempe Amendment the parties
agreed to an Investment by Tenant (as defined above in the subheading Chino Valley ) to the property that is the subject of the
Chino Valley Lease and the property that is the subject of the Tempe Lease. If Broken Arrow and/or CJK fails to deliver to the Company
receipted bills for hard and soft costs of improvements to the Facilities totaling at least $8,000,000 on or before June 30, 2022, Broken
Arrow and CJK will be in default under the Chino Valley Lease and Tempe Lease, as amended. The Company’s Significant Tenants have
completed the Investment by Tenants to the Facilities totaling in excess of $8,000,000 and have satisfied the contractual obligations
related to the same.
In connection with a promissory note, on July
11, 2022 and reaffirmed on December 7, 2022, the Company entered into a Deed of Trust Agreement that secures the Company’s performance
under the promissory note. The Deed of Trust Agreement transfers and assigns to the lender the right to sell the assets of Tempe and
rights to rental income in case of default under the promissory note.
On November 30, 2022, Zoned Arizona, CJK, and
VSM entered into that Second Amendment (the “Tempe Second Amendment”) to the Tempe Lease, as amended. Concurrently with the
execution of the Tempe Second Amendment: (i) CJK assigned all its interest in the Tempe Lease to VSM (the “Assignment”),
and (ii) VSM subleased a portion of the Premises (as defined in the Tempe Lease), pursuant to that certain Sublease dated November 30,
2022 between VSM, as sublessor, and CJK, as sublessee.
Pursuant to the terms of the Tempe Second Amendment,
among other things, and in consideration of Zoned Arizona’s agreement to enter into the Tempe Second Amendment: (i) VSM paid Zoned
Arizona $300,000 (the “Assignment Price”), (ii) VSM agreed to commit at least $3,000,000 to be spent toward capital improvements
to the Premises within two years after the effective date of the Tempe Second Amendment (the “Capital Commitment”), (iii)
VSM agreed to deposit an additional security deposit (the “Additional Security Deposit”) of $147,600 to be held by Zoned
Arizona per the terms of the Tempe Lease, and (iv) VSM agreed to cause its affiliate, GDL Inc. (doing business as Green Dot Labs) (“GDL”)
to execute and deliver to Zoned Arizona that Guaranty of Payment and Performance dated on the same date as the Tempe Amendment, which
Guaranty of Payment and Performance requires GDL to guarantee and be liable for VSM’s compliance with and performance under the
Tempe Lease. The Guaranty of Payment and Performance was entered into on November 30, 2022. If VSM fails to deliver to Zoned Arizona
invoices or other documentation acceptable to Zoned Arizona showing the Capital Commitment has been satisfied in a timely manner, VSM
will be in default under the Tempe Lease. No other terms of the Tempe Lease were modified.
4
Pursuant to the Financial Accounting Standards
Board’s (“FASB”) Accounting Standards Codification (“ASC”) 842-10-25, the lease modification was not accounted
for as a separate contract and the Company shall account for the modification as if it were a termination of the existing lease and the
creation of a new lease that commenced on the effective date of the modification. Accordingly, the Company recorded the $300,000 as a
contract liability and will amortize the $300,000 Assignment Fees into rental revenue on a straight-line basis over the remaining term
of the lease through April 2040. On December 31, 2024 and 2023, contract liability related to this lease modification amounted to $264,115
and $281,340, respectively, which has been included in contract liabilities on the accompanying consolidated balance sheets.
Additionally, on the Tempe property, the Company
leases parking lot space for an antenna location to a third party.
Kingman, Arizona
On May 29, 2020, Kingman and CJK entered into
the First Amendment (the “Kingman Amendment”) to the Kingman Lease, effective May 31, 2020. Pursuant to the terms of the
Kingman Amendment, among other things, the parties agreed to abate the $4,000 base rent from June 1, 2020 to July 31, 2020. In addition,
the Kingman Amendment provides that any increase in the rentable area of the leases premises will result in an increase in all amounts
calculated based on the same, including, without limitation, base rent. The parties also agreed that if there is any change in laws such
that the dispensing, sale or cultivation of cannabis upon the premises is prohibited or materially and adversely affected as mutually
and reasonably determined by Kingman and CJK, CJK may terminate the Kingman Lease by delivering written notice to Kingman, together with
a termination payment which shall be the sum of (i) any unpaid rent and interest, plus (ii) 5% of the base rent which would have been
earned after termination for the balance of the term. On November 30, 2022, Kingman and CJK entered into the Second Amendment (the “Kingman
Second Amendment”) to the Licensed Medical Marijuana Facility Triple Net (NNN) Lease Agreement dated May 1, 2018 between Kingman
and CJK. Pursuant to the terms of the Kingman Second Amendment, CJK agreed to grant Kingman a right to terminate the Kingman Lease upon
15 days’ prior written notice in Kingman’s sole discretion, without any obligation to do so, provided that Kingman may not
exercise this right to terminate if CJK is operating its business as a going concern at the premises which is the subject of the Kingman
Lease.
On August 2, 2023, the Company entered into a
Sublease Agreement (the “Sublease”) with CJK and a subtenant in connection with the Company’s Kingman property. Pursuant
to the Sublease, the Sublease shall be effective on August 2, 2023 and end on the one year anniversary, or (ii) the last day of the Term
of the Master Lease (whether due to expiration or termination thereof by the Company, whichever is earlier (the “Sublease Expiration
Date”), such period being referred to herein as the “Sublease Term”, unless terminated earlier pursuant to the terms
of this Sublease or otherwise by consent of the Company, CJK and Subtenant.
The subtenant shall have two options to extend
the Sublease Term by one year periods each (each a “Sublease Term Extension” and collectively the “Sublease Term Extensions”),
which shall be exercisable by Subtenant no later than 90 days prior to the expiration of the Sublease Term, as may be extended.
Pursuant to the Kingman Lease, if pursuant to
any assignment or sublease, CJK receives rent, either initially or over the Term of the assignment or sublease, in excess of the Rent
called for hereunder, or in the case of this sublease of a portion of the Premises in excess of such Rent fairly allocable to such portion,
after appropriate adjustments to assure that all other payments called for hereunder are appropriately taken into account, CJK shall
pay to the Company, as Additional Rent hereunder, 50% of the excess of each such payment of rent received by CJK. Accordingly, the Company
shall receive additional rent of $3,500 per month during the term of the sublease.
Additionally, the subtenant paid a security deposit
of $22,000 per the terms of the sublease. The Company and CJK agreed to split the Security Deposit at 68% (the Company received $14,960
of the $22,000 Security Deposit), of which $14,960 was included in security deposits payable on the accompanying consolidated balance
sheet as of December 31, 2023. Upon expiration of the Sublease, the Security Deposit of $14,960 was refunded to the subtenant.
Pleasant Ridge, Michigan
On November 29, 2022, ZP Woodward, as landlord,
entered into a Licensed Cannabis Facility Absolute Net Lease Agreement (the “Woodward Lease”) with Rapid Fish 2 LLC, as tenant
(“Woodward Tenant”), whereby ZP Woodward leased the Woodward Property located in Pleasant Ridge. Michigan to the Woodward
Tenant. The Woodward Lease commenced on December 1, 2022 and has a term of 14 years and 4 months through March 1, 2037, with two 5-year
options to extend the term, exercisable by the Woodward Tenant pursuant to the terms and conditions of the Woodward Lease. The Woodward
Lease contains customary obligations of the Woodward Tenant consistent with an absolute triple net lease agreement, including (i) the
payment of real property taxes, personal property taxes, privilege, sales, rental, excise, use and/or other taxes (excluding income or
estate taxes), (ii) payment of insurance premiums and operating costs of ZP Woodward related to the operation of the Woodward Property,
and (iii) maintenance and repair obligations to maintain the Woodward Property in first-class retail condition. The Woodward Lease includes
a Guaranty of Payment and Performance by Ammar Kattoula and Thomas Nafso. The Woodward Lease contains an abatement of the full or partial
rent that would otherwise have been due for the months from December 2022 to March 2023. Subsequent to the abatement period. the Woodward
Lease provides for payment by the tenant of monthly base rent beginning at $40,319 per month and increasing by 3% per year over the term
of the lease, as well as real property taxes, personal property taxes, privilege, sales, rental, excise, use and/or other taxes (excluding
income or estate taxes) levied upon or assessed against the Company. In addition, pursuant to the terms of the Woodward Lease, the Woodward
Tenant agreed to maintain insurance in full force during the term of the Woodward Lease and any other period of occupancy of the premises
by the tenant. The tenant shall have the option, exercisable by written notice to ZP Woodward given not later than 180 days prior to
the expiration of the then current term, to extend the term for two further terms of five years each on the same terms and conditions
as provided in this Lease.
5
On May 1, 2024, ZP Woodward and Rapid Fish, LLC
(the “Parties”), with individual Guarantors, Thomas Nafso and Ammar Kattoula (the “Guarantors”), entered into
a First Amendment to the Absolute Net Lease Agreement (the “First Amendment”) pertaining to premises located at 23600-23634
Woodward Ave, Pleasant Ridge MI 48069. The Parties also agreed to a fully executed Reaffirmation of Guaranty from the Guarantors.
According to the terms of the First Amendment,
the following changes have been agreed to by the Parties:
Amended Rental Payment Schedule
The First Amendment provides that as long as the
Company’s Conditions, as outlined in this First Amendment, are satisfied including a Renovation Completion Commitment, the Rental
Payment Schedule of the Lease will be amended to the schedule set forth in the First Amendment.
Capital Commitment
The First Amendment provides for the inclusion
of the Capital Commitment as follows: Tenant shall cause a total of at least $850,000 to be spent toward capital improvements to the Premises
(the “Commitment Improvements” and/or the “Capital Commitment”). Any such Commitment Improvements shall be made
in accordance with the Lease as amended. Commitment Improvements to be counted toward satisfying the Capital Commitment shall include
capital improvements to the Premises and any part thereof, as well as other improvements approved in advance in writing by the Company,
and shall exclude soft costs, permit, design, architectural and engineering fees, and legal fees. Tenant acknowledges that the Capital
Commitment is material to the Company and the Company would not have agreed to enter into this First Amendment but for Tenant’s
obligations in this paragraph. If the Capital Commitment is not completed in the prescribed time period, as evidenced by invoices or similar
documentation reasonably acceptable to the Company, Tenant’s failure shall constitute an Event of Default under the Lease.
Renovation Completion Commitment
The First Amendment provides for the inclusion
of the Renovation Completion Commitment as follows: Tenant shall cause its Capital Commitment at the Premises (the “Renovation Completion
Commitment”) to be completed within three (3) months after the First Amendment Effective Date (the “Renovation Completion
Commitment Date”). In order to satisfy the Renovation Completion Commitment, Tenant must satisfy the following prior to the Renovation
Completion Commitment Date (i) deliver to the Company the appropriate deliverables evidencing renovation completion (the “Renovation
Completion Deliverables”) (as defined below) (ii) open for business to the public for its intended Use of the Premises (the “Store
Opening”), (iii) and complete its first bona fide sale to the public. The Renovation Completion Deliverables include the following:
(x) Tenant has furnished to the Company a copy of a commercially reasonably detailed final cost breakdown for Tenant’s Work and
the Company has inspected the Premises to confirm that Tenant’s Work has been completed in a good and workmanlike manner according
to the Tenant’s Approved Plans; (y) Tenant has furnished to the Company commercially reasonable final affidavits and final lien
releases from Tenant’s general contractor, if any, all subcontractors and all material suppliers for all labor and materials performed
or supplied as part of Tenant’s Work (whether or not the Allowance is applicable thereto); (z) a copy of the certificate of occupancy
from the governmental authority having jurisdiction has been delivered to the Company. Tenant acknowledges that the Renovation Completion
Commitment is material to the Company and the Company would not have agreed to enter into this First Amendment but for Tenant’s
obligations in this paragraph. If the Renovation Completion Commitment is not completed in the prescribed time period, Tenant’s
failure shall constitute an Event of Default under the Lease. the Company shall grant Tenant up to two (2) additional 30-day extension
upon request, so long as at the time of the extension the site is conducting inspections toward certificate of occupancy.
North Lot
The First Amendment also provides that if within
18 months of the date of this First Amendment, Tenant is able to complete all of the following related to 23634 Woodward Ave, Pleasant
Ridge MI 48069 with an APN of 25-27-181-003 (the “North Lot”): (i) obtain authorization from all required jurisdictions (including
the City of Pleasant Ridge) that the use of the North Lot parking spaces is no longer required and releases the Company from all obligations
related to the North Lot under the Declaration of Restrictions and Parking Easement (the “Parking Agreement”), and (ii) confirm
that the Tenant is able to continue to use the lot for purposes of ingress and egress, and (iii) Tenant is able to arrange a deal with
the seller of the North Lot, which is currently under a Land Contract with outstanding installment payments, that (x) provides the Company
with indemnity from Tenant that completely releases the Company of any operational obligations or liabilities related to the North Lot,
(y) provides the Company with indemnity from Tenant that completely release the Company of any financial obligations or liabilities related
to the North Lot, and (z) does not cause any encumbrance or legal liability to the remaining properties at the Premises; then within 30
days of the Company’s receipt of written confirmation from all appropriate parties that all requirements noted above have been satisfied,
at the Company sole discretion, the Company agrees that the parties shall enter into a Lease Amendment acknowledging the same and modifying
Tenant’s lease base rental rate to be reduced by $3,846 for the Lease.
Reaffirmation of Guarantee
In consideration of the First Amendment, the Guarantors
executed and delivered a Reaffirmation of Guaranty (the “Reaffirmation of Guaranty”) effective as of the First Amendment Effective
Date, May 3, 2024. Related to the Guaranty and the Original Guarantors, the Company agreed, that so long as there are no uncured Events
of Default and Tenant remains in good standing under the Lease, then the Original Guarantors shall be released of their guarantees following
the original lease term of fourteen and a half (14.5) years. The Company also agreed that, provided the Company has given written approval,
at its discretion, which shall not be unreasonably withheld, then the Original Guarantors may be permitted to transfer the obligations
under their Guarantees in the event of a Permitted Transfer, on to a new Guarantor(s) that are of at least equal or greater credit than
the Original Guarantors, to be determined by the Company in its discretion, which shall not be unreasonably withheld.
6
Chicago, Illinois
On December 15, 2023, ZPRE Holdings entered into
an Agreement Regarding Purchase and Sale Contract (the “Agreement”), effective as of December 15, 2023, by and between Keystone,
as assignor, and ZPRE Holdings as assignee. Pursuant to the terms of the Agreement, Keystone agreed to assign to ZPRE Holdings its right,
title and interest in that certain Purchase and Sale Agreement dated May 5, 2022, by and between the Seller and Keystone, as amended
(the “Original PSA”). Pursuant to the terms of the Original PSA, the Seller agreed to sell to Keystone certain real property
located at 3499, 3451, and 3455 South Ashland Avenue, Chicago, Illinois, 60608 (the “Ashland Avenue Property”) in exchange
for a purchase price of $1,250,000, to be paid by Keystone (the “Purchase Price”). Pursuant to the terms of the Agreement,
ZPRE Holdings agreed to deposit the following amounts into escrow: (i) $40,000, representing reimbursement to Keystone or its designee
for the earnest money deposit paid under the terms of the Original PSA, (ii) assignment fees of $185,000, and (iii) $1,210,000, representing
the Purchase Price less the $40,000 earnest money payment. On January 19, 2024, the Company paid these funds in the aggregate amount
$1,435,000.
On January 19, 2024, ZPRE Holdings and Keystone
entered into that certain Assignment and Assumption Agreement, dated as of January 19, 2024, by and between Keystone and ZP Holdings
(the “Assignment Agreement”). Pursuant to the terms of the Assignment Agreement, Keystone assigned to ZP Holdings all of
Keystone’s right, title and interest in and to the Original PSA to purchase the Ashland Avenue Property. On January 19, 2024, the
transactions contemplated by the Agreement and Assignment and Assumption Agreement closed and ZPE Holdings completed the acquisition
of the Ashland Avenue Property under the Original PSA, as assigned. The completed transactions were subject to closing costs, commissions,
and fees customary to the acquisition of real estate, including a $65,000 commission payable and a $79,634 sponsor fee payable.
On January 18, 2024, ZPRE Holdings entered into
a Licensed Cannabis Facility Absolute Net Lease Agreement (the “Justice Grown Lease”), with a commencement date of January
19, 2024, by and between ZPRE Holdings, as landlord, and JG IL LLC (“Justice Grown”), as tenant. Pursuant to the terms of
the Lease, ZPRE Holdings agreed to lease the Ashland Avenue Property to Justice Grown for use as a licensed recreational adult-use (and,
if permitted, medical) cannabis dispensary in accordance with Illinois law. The Justice Grown Lease has a term of 15 years, with four
five-year renewal terms.
Surprise, AZ
On January 2, 2024, ZPRE Holdings entered into
a contingent Licensed Cannabis Facility Absolute Net Ground Lease Agreement (the “Sunday Goods Lease”), with a commencement
date contingent upon the satisfaction of various contingencies to the Sunday Goods Lease, by and between ZPRE Holdings, as landlord,
and Sunday Goods, as tenant. Pursuant to the terms of the Sunday Goods Lease, ZPRE Holdings agreed to lease the Surprise Property to
Sunday Goods for use as a licensed medical and adult use marijuana retail dispensary in accordance with the laws of Arizona. The Sunday
Goods Lease has a term of 15 years, with four five-year renewal terms. Pursuant to the Sunday Goods Lease, ZPRE Holdings has agreed to
provide a tenant improvement allowance for up to $1,000,000 to Sunday Goods to be reimbursed in tranches following completion of tenant’s
work. Pursuant to the terms of the Contingent Lease, on February 27, 2024, Sunday Goods executed a guaranty (the “Guaranty”)
in favor of ZP Holdings, guaranteeing the prompt and complete payment and performance of all of Sunday Goods’ obligations to ZPRE
Holdings arising under the Contingent Lease. As of July 8, 2024, all contingencies were satisfied and the Contingent Lease commenced
on July 13, 2024. Pursuant to the Sunday Goods Lease, beginning in July 2025, Sunday Goods shall pay monthly base rent of $25,000
through June 2026, with an annual increase of 3% per annum through June 2040.
On March 3, 2025, ZP Dysart entered into a First
Amendment with its tenant related to the Sunday Goods Lease at the Surprise Property. The First Amendment clarifies and defines the process
by which the tenant improvement Allowance for the Tenant Work at the Surprise Property would be completed. Subject to the terms and conditions
of the Sunday Goods Lease, and so long as there is no default ongoing beyond any notice and/or cure period, partial payments of the Allowance
(the “Allowance Payments”) provided by Landlord shall be made to Tenant as follows: (#1) $300,000 to be paid upon the full
execution of the First Amendment to the Lease; (#2) $150,000 to be paid on April 01, 2025 (#3) $150,000 to be paid on May 01, 2025, and
(#4) the remaining $400,000 of the Allowance shall be withheld by Landlord until completion of the Tenant’s Work on the Property;
provided however, Landlord’s obligation to disburse the final $400,000 (Payment #4 of the Allowance Payments) is expressly conditioned
upon Landlord’s receipt of the following “Allowance Deliverables”: (i) Tenant has furnished to Landlord a copy of a
commercially reasonably detailed final cost breakdown for Tenant’s Work and Landlord has inspected the Premises to confirm that
Tenant’s Work has been completed in a good and workmanlike manner according to the Tenant’s Approved Plans; (ii) Tenant has
furnished to Landlord commercially reasonable final affidavits and final lien releases from Tenant’s general contractor, and if
any, all subcontractors and all material suppliers for all labor and materials performed or supplied as part of Tenant’s Work (whether
or not the Allowance is applicable thereto); and (iii) a copy of the certificate of occupancy from the governmental authority having jurisdiction
has been delivered to Landlord. Throughout the project, Tenant shall be required to provide Landlord with ongoing accounting reflecting
a commercially reasonable breakdown of the Tenant’s Work paid for with the Allowance Payments, and also a current Form W-9, Request
for Taxpayer Identification Number and Certification, executed by Tenant.
Property Investment Portfolio
The Company considers tenants whose annual base
rent exceeds over 10% of the Company’s annual rental income to be a Significant Tenant.
The Tempe Lease, Chino Valley Lease, and the
Woodward Lease are considered significant and the tenants are referred to as the Significant Tenants.
During the years ended December 31, 2024 and
2023, all of the Company’s real estate properties are leased under triple-net and absolute-net leases to tenants that are controlled
by Significant Tenants. For the years ended December 31, 2024 and 2023, revenues associated with Significant Tenant leases described
above are summarized as follows:
For the Year
Ended
December 31,
2024
% of
Total
Revenues
For the Year
Ended
December 31,
2023
% of
Total
Revenues
Broken Arrow
$ 1,120,431
29.5 %
$ 1,120,431
38.8 %
VSM *
656,736
17.3 %
656,736
22.7 %
Woodward lease *
589,478
15.6 %
616,862
21.4 %
Total
$ 2,366,645
62.4 %
$ 2,394,029
82.9 %
7
As of December 31, 2024 and 2023, the Company
had an asset concentration related to the Significant Tenants. As of December 31, 2024 and 2023, the Significant Tenants collectively
leased approximately 55.4% and 69.4% of the Company’s total assets, respectively. Additionally, the Company had an asset concentration
related its Surprise, AZ property, which leased approximately 10.6% of the Company’s total assets of the Company. Through December
31, 2024, all rental payments have been made on a timely basis.
Future minimum lease payments to be received,
on all leased properties, for each of the five succeeding calendar years and thereafter as of December 31, 2024, consists of the following:
Future annual base rent:
Amount
2025
$ 2,563,226
2026
2,725,617
2027
2,746,432
2028
2,776,883
2029
2,808,247
Thereafter
31,338,074
Total
$ 44,958,479
Investment in Joint Ventures and Equity Investments
On December 31, 2024 and 2023, the Company held
investments with aggregate carrying values of $4,923. The entities listed below are partially owned by the Company. The Company accounts
for these investments under the equity method of accounting as the Company exercises significant influence but does not exercise financial
and operating control over these entities. Investments are reviewed for changes in circumstance or the occurrence of events that suggest
an other than temporary event where the Company’s investment may not be recoverable.
On May 1, 2021, the Company entered into a Limited
Liability Company Operating Agreement (the “Zoneomics Green Operating Agreement”) with a non-affiliated joint venture partner
in connection with the formation of Zoneomics Green, LLC (“Zoneomics Green”), a Delaware limited liability company formed
on May 1, 2021. Zoneomics Green’s goal is to utilize advanced property technology to provide solutions for property identification
in regulated industries such as regulated cannabis. Pursuant to the Zoneomics Green Operating Agreement, the Company purchased 50 units
of Zoneomics Green for a capital contribution of $90,000, which represents 50% of the membership interests of Zoneomics Green and the
other joint venture partner received 50% of the membership interests for the contribution of its intellectual property and a number of
non-monetary contributions. identified in the Zoneomics Green Operation Agreement but provided no capital contributions. Each unit represents,
with respect to any member, such member’s: (i) interest in Zoneomics Green’s capital, (ii) share of Zoneomics Green’s
net profits and net losses (and specially allocated items of income, gain, and deduction), and the right to receive distributions of
net cash flow from Zoneomics Green, (iii) right to inspect Zoneomics Green’s books and records, and (iv) right to participate in
the management of and vote on matters coming before the members as provided in the Zoneomics Green Operating Agreement. The transactions
discussed above resulted in a joint venture, in accordance with ASC 323-10 – Investments- Equity and Joint Ventures, between
the Company and the non-affiliated party. Each of the entities has 50% equity ownership and voting rights, and joint control in Zoneomics
Green. In June 2021, the Company contributed $90,000 to Zoneomics Green. Currently, the Zoneomics Green team has completed the creation
of the foundational design, technology platform, and market positioning for Zoneomics Green to launch in the cannabis industry. However,
in order to successfully launch, the technology platform relies upon a required merchant banking component. While Company management
knew this risk was a major factor going into the investment, it was not foreseen exactly when an appropriate merchant banking solution
would be available given the federal status of regulated cannabis and specifically the federal banking status as it relates to regulated
cannabis, even for ancillary services such as Zoneomics Green. The regulatory status related to cannabis banking reform and regulation
at the federal level, which the Zoneomics platform relies upon, is uncertain and the Company believes it is appropriate to cause an impairment
of the Zoneomics Green investment at this time, while also understanding that Company believes Zoneomics Green may still create material
value for the Company in the future. Additionally, the Company is using the Zoneomics Green technology within its own business to generate
leads for new projects. The Company has no further financial or investment obligations at this time. Accordingly, on December 31, 2023,
the Company recorded an other-than-temporary impairment loss of $45,000 because it was determined that the fair value of its equity method
investment in Zoneomics was less than its carrying value. Based on management’s evaluation, it was determined that due to market
and regulatory conditions, implementing the Company’s business model was at risk and that the Company’s ability to recover
the carrying amount of the investment in Zoneomics was impaired.
On June 24, 2022, the Company’s wholly-owned
subsidiary, ZP Data Platform 2 LLC, purchased 875 shares of Series A convertible preferred stock of Anami Technology, Inc., a California
corporation, for $50,000, or $57.14 per share. The Company’s ownership percentage is less than 20% and it does not have the ability
to exercise significant influence as described in ASC 323-10-15-6. This equity instrument does not have a readily determinable fair value.
Accordingly, the Company elected to measure this equity security at its cost minus impairment, if any. If the Company identifies observable
price changes in orderly transactions for the identical or a similar investment of the same issuer, the Company shall measure the equity
security at fair value as of the date that the observable transaction occurred. If the Company subsequently elects to measure this equity
security at fair value, the Company shall measure all identical or similar investments of the same issuer, including future purchases
of identical or similar investments of the same issuer, at fair value. The election to measure this equity security at fair value shall
be irrevocable. Any resulting gains or losses on the securities for which that election is made shall be recorded in earnings at the
time of the election. On December 31, 2024 and 2023, investment in equity securities amounted to $50,000.
8
Tenants and Clients
We target tenants for our Property Investment
Portfolio activity and clients for our Real Estate Services activity who require assistance with the identification and development of
regulated cannabis properties. Our ideal prospective tenants and/or clients will have a commitment to operating their business and real
estate projects with an emphasis on sophistication, safety, sustainability, and stewardship to the local community in which they operate.
We complete significant due diligence on prospective
tenants and prospective clients. Credit-worthiness, character, and capital are all important variables that contribute to a target tenant
and/or client for the Company.
Marketing
Currently, the Company uses general industry
marketing to communicate its Property Investment Portfolio and Real Estate Services to industry operators and prospective clients. These
include an industry newsletter that the Company distributes, as well as electronic and physical mailers directed to cannabis industry
operators and property owners. Industry reputation, word-of-mouth, and networking are the primary tools the Company has used to complete
the marketing of our services. We have previously and may in the future engaged with marketing, design, and public relations firms to
assist with our industry branding and to help maintain an updated website, shareholder presentation, and profile outlining the Company’s
services. These tools are created for transparency of operations and activities. Our executive management believes the reputation of
having integrity is an essential tool for marketing and business development.
Competition
The commercial real estate market is highly competitive.
We believe finding properties that are zoned an/or approved for the specific use of allowing regulated cannabis operations may be limited
as more competitors enter the market. More competitors continue to enter the marketplace. We face significant competition from a diverse
mix of market participants, including but not limited to, other public companies with similar business models, independent investors,
hedge funds and other real estate investors, hard money lenders, as well as would be clients, regulated cannabis operators themselves,
all of whom, may compete against us in our efforts to secure and acquire real estate zoned and/or approved for cannabis operations. In
some instances, we will be competing to acquire real estate with persons who have no interest in the regulated cannabis business but
have identified alternative value in a piece of real estate that we may be interested in acquiring.
Government Regulation
Real Estate & General Business Regulations
We are subject to applicable provisions of federal
and state securities laws and to regulations specifically governing the real estate industry, including those governing fair housing
and federally backed mortgage programs. Our operations will also be subject to regulations normally incident to business operations,
such as occupational safety and health acts, workmen’s compensation statutes, unemployment insurance legislation and income tax
and social security related regulations. Although we will use our best efforts to comply with applicable regulations, we can provide
no assurance of our ability to do so, nor can we fully predict the effect of these regulations on our proposed activities.
In addition, zoning commercial properties for
specific purposes, such as regulated cannabis dispensaries or cultivation facilities, is subject to specific regulations to the zoning
requirements for the city, county and state related to any regulated cannabis facility. We expect regulations to get tighter as time
goes on.
Federal and State Regulation of Cannabis
Controlled Substances Act and “Cole Memorandum”
The U.S. federal government regulates drugs through
the Controlled Substances Act (21 U.S.C. § 811) (the “CSA”), which places controlled substances, including cannabis,
in a schedule. Cannabis is classified as a Schedule I drug. Under U.S. federal law, a Schedule I drug or substance has a high potential
for abuse, no accepted medical use in the United States, and a lack of accepted safety for the use of the drug under medical supervision.
The United States Food and Drug Administration (the “FDA”) has approved Epidiolex, which contains a purified form of cannabidiol
(“CBD”), a non-psychoactive cannabinoid found in the cannabis plant, for the treatment of seizures associated with two epilepsy
conditions. The FDA has not approved cannabis or cannabis derived compounds as a safe and effective drug for any other indication.
In the United States, cannabis is largely regulated
at the state level. State laws regulating cannabis are in direct conflict with the federal CSA, which makes cannabis use and possession
federally illegal. Although most U.S. states authorize medical or adult-use cannabis production and distribution by licensed or registered
entities, under U.S. federal law, the possession, use, cultivation, and transfer of cannabis and any related drug paraphernalia is illegal,
and any such acts are criminal acts under federal law. The Company faces risks for operating in an industry that is illegal under federal
law, including that third party service providers could suspend or withdraw services. See section entitled “Risk Factors”
herein.
9
Due to the conflicting views between state governments
and the federal government regarding cannabis, cannabis businesses are subject to inconsistent laws and regulations. In response and until
2018, the federal government provided guidance to federal law enforcement agencies and banking institutions through a series of United
States Department of Justice (“DOJ”) memoranda. The most significant of these memoranda was drafted by former Deputy Attorney
General James Cole in 2013 (the “Cole Memo”).
The Cole Memo offered guidance to federal enforcement
agencies as to how to prioritize civil enforcement, criminal investigations and prosecutions regarding marijuana in all states. The Cole
Memo put forth eight prosecution priorities:
●
Preventing
the distribution of marijuana to minors;
●
Preventing
revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;
●
Preventing
the diversion of marijuana from states where it is legal under state law in some form to other states;
●
Preventing
the state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other
illegal activity;
●
Preventing
violence and the use of firearms in the cultivation and distribution of marijuana;
●
Preventing
drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
●
Preventing
the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production
on public lands; and
●
Preventing
marijuana possession or use on federal property.
On January 4, 2018, former United States Attorney
General Jefferson Sessions rescinded the Cole Memo by issuing a new memorandum to all United States Attorneys (the “Sessions Memo”).
Rather than establish national enforcement priorities particular to marijuana-related crimes in jurisdictions where certain marijuana
activity was legal under state law, the Sessions Memo instructs that “[i]n deciding which marijuana activities to prosecute ...
with the DOJ’s finite resources, prosecutors should follow the well-established principles that govern all federal prosecutions.”
Namely, these include the seriousness of the offense, history of criminal activity, deterrent effect of prosecution, the interests of
victims, and other principles.
The former Attorneys Generals who succeeded former Attorney General
Sessions following his resignation have not provided a clear policy directive for the United States as it pertains to state-legal marijuana-related
activities. However, as discussed herein, during his term, President Joseph R. Biden, announced multiple mass pardons and clemency of
persons who had been convicted of simple marijuana possession under federal law and initiated a regulatory process under the CSA to move
cannabis from Schedule I to Schedule III. However, with the recent re-election of President Donald J. Trump, who took office on January
20, 2025, the future of the rescheduling process is uncertain.
2018 Farm Bill
Following the passage of the Agriculture Improvement
Act of 2018 (popularly known as the “2018 Farm Bill”), cannabis with a tetrahydrocannabinol (“THC”) content below
0.3% dry weight volume is classified as hemp and has been removed from the CSA. Hemp and products derived from it that are lawfully cultivated
or manufactured in accordance with the 2018 Farm Bill, U.S. Department of Agriculture regulations and applicable state laws may now be
sold into commerce and transported across state lines. The 2018 Farm Bill explicitly preserves the authority of the FDA to regulate certain
products containing cannabis or cannabis-derived compounds such as CBD under the federal Food, Drug and Cosmetic Act (“FD&C
Act”) and Section 351 of the Public Health Service Act. In conjunction with the enactment of the 2018 Farm Bill, the FDA released
a statement about the regulatory status of CBD, noting the FDA’s position that it is unlawful to introduce food containing added
CBD into interstate commerce, or to market CBD products as, or in, dietary supplements, regardless of whether the substances are hemp-derived.
In January 2023, the FDA issued a statement in connection with its denial of three citizen petitions requesting that the agency engage
in rulemaking to establish regulations under which CBD derived from hemp could be legally marketed as a dietary ingredient in foods and
dietary supplements. The FDA stated that it is seeking assistance from Congress to create a new regulatory pathway that is better designed
to regulate products that contain hemp derived cannabinoids, including CBD. In the interim, the FDA stated that products (including dietary
supplements, conventional foods, and animal foods) on the market are at risk of FDA enforcement as the agency deems “appropriate.”
To date, the FDA’s enforcement actions against companies manufacturing CBD products has primarily been limited to the issuance of
warning letters to companies whose products have made prohibited, misleading, and unapproved drug claims. Various states have also enacted
state-specific laws pertaining to the handling, manufacturing, labeling, and sale of CBD and other hemp consumable products. While some
states explicitly authorize and regulate the production and sale of hemp-derived CBD consumable products or otherwise provide legal protection
for authorized individuals to engage in such activities, other states restrict the sale of CBD products or prohibit such products outright.
The 2018 Farm Bill’s provisions regarding hemp have been extended through congressional appropriations “riders” following
the 2018 Farm Bill’s expiration in 2023. It is uncertain whether Congress will further amend the definition of “hemp”
through subsequent legislation.
10
Financial Institutions and Banking
Due to the CSA categorization of marijuana as
a Schedule I drug, federal law also makes it illegal for financial institutions that depend on the Federal Reserve’s money transfer
system to take any proceeds from marijuana sales as deposits. Banks and other financial institutions could be prosecuted and possibly
convicted of money laundering for providing services to cannabis businesses under the United States Currency and Foreign Transactions
Reporting Act of 1970 (the “Bank Secrecy Act”). Therefore, under the Bank Secrecy Act, banks or other financial institutions
that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be charged
with money laundering or conspiracy.
While there has been no change in U.S. federal
banking laws to accommodate businesses in the large and increasing number of U.S. states that have legalized medical and/or adult-use
marijuana, the Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”), in 2014, issued guidance to prosecutors
of money laundering and other financial crimes (the “FinCEN Guidance”). The FinCEN Guidance advised prosecutors not to focus
their enforcement efforts on banks and other financial institutions that serve marijuana-related businesses so long as that business
is legal in their state and none of the federal enforcement priorities referenced in the Cole Memo are being violated (such as keeping
marijuana away from children and out of the hands of organized crime). The FinCEN Guidance also clarifies how financial institutions
can provide services to marijuana-related businesses consistent with their Bank Secrecy Act obligations, including thorough customer
due diligence, but makes it clear that they are doing so at their own risk. The customer due diligence steps include:
1.
Verifying
with the appropriate state authorities whether the business is duly licensed and registered;
2.
Reviewing
the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related
business;
3.
Requesting
from state licensing and enforcement authorities available information about the business and related parties;
4.
Developing
an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of
customers to be served (e.g., medical versus adult-use customers);
5.
Ongoing
monitoring of publicly available sources for adverse information about the business and related parties;
6.
Ongoing
monitoring for suspicious activity, including for any of the red flags described in this guidance; and
7.
Refreshing
information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.
With respect to information regarding state licensure
obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided
by state licensing authorities, where states make such information available.
Because most banks and other financial institutions
are unwilling to provide any banking or financial services to marijuana businesses, these businesses can be forced into becoming “cash-only”
businesses. While the FinCEN Guidance decreased some risk for banks and financial institutions considering serving the industry, in practice
it has not substantially increased banks’ willingness to provide services to marijuana businesses. This is because, as described
above, the current law does not guarantee banks immunity from prosecution, and it also requires banks and other financial institutions
to undertake time-consuming and costly due diligence on each marijuana business they accept as a customer.
Those state-chartered banks and credit unions
that do have customers in the marijuana industry charge marijuana businesses high fees to pass on the added cost of ensuring compliance
with the FinCEN Guidance. Unlike the Cole Memo, however, the FinCEN Guidance from 2014 has not been rescinded.
As a result, those businesses involved in the
marijuana industry continue to encounter difficulty establishing banking relationships, which may increase over time. Our inability to
maintain our current bank accounts would make it difficult for us to operate our business, increase our operating costs, and pose additional
operational, logistical and security challenges and could result in our inability to implement our business plan.
The inability of our current and potential tenants
to open accounts and continue using the services of banks will limit their ability to enter into triple-net lease arrangements with us
or may result in their default under our lease agreements, either of which could materially harm our business and the trading price of
our securities.
Controlled Substances Act Rescheduling
There have been recent
developments regarding the potential for cannabis to be removed from the most restrictive schedule under the CSA, but with the recent
re-election of President Trump, the regulatory process for this so-called “rescheduling” is uncertain. On October 6, 2022,
President Joe Biden requested that the Secretary of the U.S. Department of Health and Human Services (“HHS”), Xavier Becerra,
and Attorney General Merick Garland initiate a scientific review of the basis for cannabis’ scheduling under the CSA. After approximately
11 months of review, on August 29, 2023, HHS Assistant Secretary of Health, Rachel Levine, sent a letter to Drug Enforcement Administration
(“DEA”) Administrator, Anne Milgram, recommending rescheduling marijuana from Schedule I to Schedule III of the CSA. The recommendation
was based on a scientific and medical review by the FDA with an analysis of the eight factors determinative of control of a substance
under the CSA. The National Institute on Drug Abuse ("NIDA"), a part of the National Institutes of Health ("NIH"),
agreed with the HHS/FDA recommendation to reclassify cannabis.
11
On
May 16, 2024, the DEA issued a Notice of Proposed Rulemaking (“NPRM”) to reclassify marijuana to Schedule III. A formal
adjudicatory proceeding was opened by a DEA Administrative Law Judge (“ALJ”). Following
the introduction of all evidence, testimony, and briefings in the hearings, the ALJ would issue a final determination on the proposed
rescheduling, However, these proceedings have been indefinitely delayed. On
January 13, 2025, the ALJ cancelled a hearing set for January 21, 2025, which effectively pauses the rescheduling process indefinitely
while an interlocutory appeal by two pro-rescheduling participants is considered by the DEA Administrator. There is no clear timeline
for when the hearings will resume.
During the presidential
campaign in 2024, President Trump publicly stated that his administration would support reclassification of cannabis as a Schedule III
substance and would not stop or reverse a Schedule III determination. However, it is uncertain whether President Trump, new Attorney
General Pamela Jo Bondi, or President Trump’s nominee for DEA Administrator, Derek Maltz, will withdraw the NPRM or otherwise end
these rescheduling proceedings.
Internal Revenue Code, Section 280E
An additional challenge to marijuana-related businesses
is that the provisions of the Internal Revenue Code, Section 280E (“Section 280E”), are being applied by the IRS to businesses
operating in the medical and adult-use marijuana industry. Section 280E prohibits marijuana businesses from deducting ordinary and necessary
business expenses, forcing them to pay higher effective federal tax rates than similar companies in other industries. As a result of Section
280E, the effective tax rate for many of the Company’s tenants and clients can be highly variable and depends on how large its ratio
of non-deductible expenses is to its total revenues. Therefore, businesses in the legal cannabis industry may be less profitable than
they would otherwise be. If rescheduling were to occur, it is anticipated that the IRS will provide additional guidance on Section 280E
and its applicability to the Company’s business. That said, legislation has been introduced in the U.S. House of Representatives
and U.S. Senate that would make 280E applicable to any trade or business involved in cannabis even if cannabis is rescheduled to Schedule
III under the CSA. It is not clear whether these bills have a high likelihood of passage.
Federal Protections
Moreover, certain temporary federal legislative
enactments that protect the medical marijuana industries have also been in effect for several years. For instance, certain marijuana
businesses receive a measure of protection from federal prosecution by operation of temporary appropriations measures that have been
enacted into law as amendments (or “riders”) to federal spending bills passed by Congress and signed by the past three presidents.
For instance, in the Appropriations Act of 2015, Congress included a budget “rider” that prohibits the DOJ from expending
any funds to enforce any law that interferes with a state’s implementation of its own medical marijuana laws. The rider is known
as the “Rohrabacher-Farr Amendment” after its original lead sponsors.
Notably, the Rohrabacher-Farr Amendment has applied
only to medical marijuana programs and has not provided the same protections to enforcement against adult-use activities. While the Rohrabacher-Farr
Amendment has been included in successive appropriations legislation or resolutions since 2015, its inclusion or non-inclusion is subject
to political change.
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In sum, there is no guarantee that state laws
legalizing and regulating the sale and use of marijuana will not be repealed or overturned, or that local governmental authorities will
not limit the applicability of state laws within their respective jurisdictions. Unless and until the United States Congress amends the
CSA with respect to marijuana (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk
that federal authorities may enforce current U.S. federal law. Currently, in the absence of uniform federal guidance, as had been established
by the Cole Memo, enforcement priorities are determined by respective United States Attorneys, and notwithstanding public statements to
the contrary, federal law enforcement could enforce the CSA – and its criminal prohibition on commercial cannabis activity.
For these reasons, the Company’s investments in the U.S. cannabis
market may subject the Company to heightened scrutiny by regulators, stock exchanges, clearing agencies and other U.S. authorities. See
section entitled “Risk Factors” herein.
Although the Company’s activities are believed
to be compliant with applicable state and local laws, strict compliance with state and local laws with respect to cannabis may neither
absolve the Company of liability under U.S. federal law, nor may it provide a defense to any federal proceeding which may be brought
against the Company.
We will continue to monitor compliance on an
ongoing basis in accordance with our compliance program and standard operating procedures. For the reasons described above and the risks
further described in “Risk Factors,” there are significant risks associated with our business.
Local, state and federal marijuana laws and regulations
are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance
or alter our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt our business and
result in a material adverse effect on its operations. In addition, it is possible that regulations may be enacted in the future that
will be directly applicable to our proposed business. We cannot predict the nature of any future laws, regulations, interpretations or
applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and
if promulgated, could have on our business.
Employees
As of December 31, 2024, we had seven full-time
and part-time employees, including our chief executive officer and chief operating officer. We have established a national network of
external partners, contractors, and consultants to which we outsource various operational tasks in an effort to minimize administrative
overhead and maximize efficiency.
We believe that a diverse workforce is important
to our success. We will continue to focus on the hiring the best-qualified individuals for our various workforce needs, with an emphasis
on retention and advancement of women and underrepresented populations, and to cultivate an inclusive and diverse corporate culture.
In the future, we intend to continue to evaluate our use of human capital measures or objectives in managing our business such as the
factors we employ or seek to employ in the development, attraction and retention of personnel and maintenance of diversity in our workforce.
The success of our business is fundamentally
connected to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees. We provide
our employees and their families with access to a variety of innovative, flexible and convenient health and wellness programs, including
benefits that provide protection and security so they can have peace of mind concerning events that may require time away from work or
that impact their financial well-being; that support their physical and mental health by providing tools and resources to help them improve
or maintain their health status and encourage engagement in healthy behaviors; and that offer choice where possible so they can customize
their benefits to meet their needs and the needs of their families.
We also provide robust compensation and benefits
programs to help meet the needs of our employees. We believe that we maintain a strong working relationship with our employees and have
not experienced any labor disputes.
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