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.
As
of December 31, 2023, 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).
●
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).
●
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.
The
Company also maintains a 50% equity interest in two joint ventures.
1
During
2023 and 2022, the Company dissolved the following wholly owned subsidiaries:
●
Gilbert Property Management,
LLC (“Gilbert”) was organized in the State of Arizona on February 10, 2014. This subsidiary was dissolved on July 5,
2022.
●
Zoned Colorado Properties,
LLC (“Zoned Colorado”) was organized in the State of Colorado on September 17, 2015. This subsidiary was dissolved on
July 22, 2022.
●
Zoned Oregon Properties,
LLC (“Zoned Oregon”) was organized in the State of Oregon on June 16, 2015. This subsidiary was dissolved on December
13, 2022.
●
Zoned Illinois Properties,
LLC was organized in the State of Illinois on July 15, 2015. This subsidiary was dissolved on November 4, 2022.
●
ZP RE AZ Stone, LLC (“ZP
Stone”) was organized in the State of Arizona on October 19, 2022. This subsidiary was dissolved on March 28, 2023.
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 2024, the Company leases land and/or building
space at the six 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, and two of the
leased properties are zoned and permitted as regulated cannabis cultivation and processing facilities. 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.
While
our primary focus is on investing in the acquisition of new properties to grow our portfolio, we may occasionally sell 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 retail dispensary cannabis tenants under net leasing structures. As of March 2024, the Company has agreements
in place to acquire prospective investment properties with prospective cannabis tenants located in Arizona, Missouri, and Illinois. In
the coming quarters and years, the Company plans to initiate and target its investment activity in Delaware, Maryland, Minnesota, Ohio,
and other 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.
2
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.
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.
We
are the sole member of 14 limited liability companies: Chino Valley, Green Valley, Kingman, Zoned Arizona, Zoned Advisory, ZP Data 1,
ZP Data 2, Arizona Brokerage, Mississippi Brokerage, Florida Brokerage, Alabama Brokerage, Missouri Brokerage, ZPRE Holdings, and ZP
Woodward. Six of these entities—Zoned Arizona, Green Valley, Kingman, Chino Valley, ZPRE Holdings, and ZP Woodward—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 is leased by Broken Arrow Herbal Center, Inc. (“Broken Arrow”), doing business as Hana Dispensaries.
Our
property located in Green Valley is leased by Broken Arrow, doing business as Hana Dispensaries.
Our
property located in Kingman is leased by CJK, Inc. (“CJK”), and subleased by Helping Camo LLC, doing business as Story Cannabis.
Our
property located in Tempe is leased by VSM, LLC (“VSM”), doing business as Green Dot Labs.
Our
property located in Pleasant Ridge is leased by Rapid Fish, LLC (“Rapid Fish”), doing business as NOXX Cannabis.
Our
property located in Chicago is leased by JG IL LLC (“Justice Grown”), doing business as Justice Cannabis Co.
3
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, and the base rent was abated from June 1, 2020 to July
31, 2020. 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.
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.
In
March 2024, the Company announced its plan to list its property in Chino Valley, Arizona (the “Chino Valley Property”) for
sale at a purchase price of $16 million. This potential transaction marks a significant development in the Company’s strategic
real estate portfolio optimization. The Chino Valley Property has been a valuable non-core asset within the Company’s property
investment portfolio and this potential sale is part of a strategic shift to streamline the Company’s portfolio and concentrate efforts
on a direct-to-consumer real estate strategy.
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, and
the base rent was abated from June 1, 2020 to July 31, 2020. 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.
4
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.
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, 2023 and 2022, contract liability related to this lease
modification amounted to $281,340 and $298,565, 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 will pay a security deposit of $22,000 per the terms of the sublease. The Company and CJK have agreed to split the Security
Deposit at 68% (the Company received $14,960 of the $22,000 Security Deposit).
5
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.
On
May 14, 2023, ZP Woodward entered into an Assignment and Assumption of Lease (“Assignment”) whereby the Woodward Lease was
assigned from Rapid Fish 2 LLC (“Old Tenant”) to Rapid Fish LLC (“New Tenant”). Old Tenant and New Tenant share
common ownership. The assignment of the Woodward Lease is conditioned upon issuance by the City of Pleasant Ridge, Michigan of a final
cannabis business license to New Tenant and ZP Woodward’s receipt of a fully executed Reaffirmation of Guaranty from the guarantors
of the Woodward Lease. The Assignment contains other terms as are customary for a document of this type.
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.
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.
6
During
the years ended December 31, 2023 and 2022, 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, 2023 and 2022, revenues associated with
Significant Tenant leases described above are summarized as follows:
For the Year
Ended
December 31,
2023
% of
Total
Revenues
For the Year
Ended
December 31,
2022
% of
Total
Revenues
CJK*
$ 68,039
2.4 %
$ 638,789
24.0 %
Broken Arrow
1,120,431
38.8 %
1,034,470
38.9 %
VSM *
656,736
22.7 %
54,728
2.1 %
Woodward lease *
616,862
21.4 %
48,297
1.8 %
Total
$ 2,462,068
85.3 %
$ 1,776,284
66.8 %
* Revenues
from these Significant Tenants transitioned from CJK to VSM in December 2022.
As
of December 31, 2023 and 2022, the Company had an asset concentration related to the Significant Tenants. As of December 31, 2023 and
2022, the Significant Tenants collectively leased approximately 69.4% and 59.8% of the Company’s total assets, respectively. Through
December 31, 2023, 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
the period ended December 31, 2023, consist of the following:
Future annual base rent:
2024
$ 2,245,735
2025
2,260,576
2026
2,264,399
2027
2,271,955
2028
2,288,173
Thereafter
24,899,631
Total
$ 36,230,469
Investment
in Joint Ventures and Equity Investments
On
December 31, 2023 and 2022, the Company held investments with aggregate carrying values of $4,923 and $58,293, respectively. 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
April 22, 2021, ZP Data 1 entered into a Limited Liability Company Operating Agreement (the “Beakon Operating Agreement”)
with a non-affiliated joint venture partner in connection with the formation of Beakon, LLC (“Beakon”), a Delaware limited
liability company formed on April 16, 2021. Pursuant to the Beakon Operating Agreement, ZP Data 1 purchased 50 units of Beakon for $50,
which represents 50% of the membership interests of Beakon. Each unit represents, with respect to any member, such member’s: (i)
interest in Beakon’s capital, (ii) share of Beakon’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 Beakon, (iii) right to inspect Beakon’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 Beakon
Operating Agreement. The transactions discussed above resulted in a joint venture, in accordance with ASC 323-10 – Investments-
Equity and Joint Ventures, between ZP Data 1 and the non-affiliated party. Each of the entities has 50% equity ownership and voting
rights, and joint control in Beakon. ZP Data 1 accounts for its investment in Beakon under the equity method of accounting in accordance
with ASC 323. During the year ended December 31, 2021, the Company contributed $86,000 to Beakon. On December 31, 2021, the Company recorded
an other-than-temporary impairment loss of $73,970, its remaining net carrying value, because it was determined that the fair value of
its equity method investment in Beakon 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 Beakon was impaired. Beacon is currently inactive.
7
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, 2023 and December 31, 2022, investment in equity securities
amounted to $50,000.
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, and 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.
8
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 certain 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 Supremacy Clause of the United States Constitution establishes that the United States Constitution
and federal laws made pursuant to it are paramount and, in case of direct conflict between federal and state law, the federal law shall
apply. 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.
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”).
9
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. It is still not yet known whether the DOJ under President
Biden and Attorney General Merrick Garland will re-adopt the Cole Memo or announce a substantive marijuana enforcement policy. Attorney
General Garland stated at a confirmation hearing in 2021 before the United States Senate that “It does not seem to me a useful
use of limited resources that we have, to be pursuing prosecutions in states that have legalized and that are regulating the use of marijuana,
either medically or otherwise. I don’t think that’s a useful use.” Recently, in testimony in February of 2023 before
the Senate Judiciary Committee, Attorney General Garland said the DOJ is “still working on a marijuana policy” and that policy
– when issued – “will be very close to what was done in the Cole Memorandum.” [1]
Nonetheless,
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.
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.
[1] John
Schroyer, (2021 February 22) Attorney general nominee Garland signals friendlier marijuana
stance, available at https://mjbizdaily.com/attorney-general-nominee-merrick-garland-signals-friendlie r-marijuana-stance/
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.
11
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. 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.
As a result, the DEA can now initiate a formal rule-making process
that would potentially reschedule marijuana from its current Schedule I classification. The DEA is bound by the HHS recommendation in
regard to the scientific and medical matters but can ultimately make a different scheduling decision. The DEA may also account for the
United States’ treaty obligations, including the United Nations Single Convention on Narcotics. The DEA will consider several factors
that include: (1) marijuana’s actual or relative potential for abuse, (2) scientific evidence of its pharmacological effect, (3)
the state of current scientific knowledge; (4) history and current pattern of abuse, (5) scope, duration, and significance of abuse, (6)
risks to public health, (7) psychic or psychological dependence liability, and (8) whether marijuana is an immediate precursor of a substance
already controlled under the CSA. The DEA has not yet started a formal rule-making process, which would require a public hearing on the
record with an administrative law judge(s) making the final decision whether to adopt the new regulation. The regulation would be subject
to challenges and judicial review. The DEA is not under a required timeline to initiate and complete this process and has not yet initiated
the process.
On September 13, 2023, the Congressional Research Service (“CRS”)
published a report stating that the DEA is “likely” to reschedule marijuana according to the HHS recommendation. According
to the CRS report, this would have “broad implications for federal policy” and potentially impact state medical and recreational
programs. If rescheduling occurs, various federal agencies such as the DOJ, FDA, FinCEN, and the Internal Revenue Service (“IRS”)
may issue additional memoranda providing further regulatory, tax, and enforcement priority instruction as it relates to marijuana that
would replace the previous guidance.
As of December 31, 2023, 37 states, the District of Columbia, Guam,
Puerto Rico, the Northern Mariana Islands and the U.S. Virgin Islands have passed laws broadly legalizing marijuana for medicinal use
by eligible patients. In the District of Columbia, the Northern Mariana Islands, Guam and 24 of these states –Alaska, Arizona, California,
Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Jersey,
New Mexico, New York, Ohio, Oregon, Rhode Island, Vermont, Virginia and Washington – marijuana is legal for adult-use regardless
of medical condition, although not all of those jurisdictions have fully implemented their legalization programs.
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.
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.
12
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.
There is a growing consensus among marijuana businesses and numerous
congressmen and congresswomen that guidance and temporary legislation are an inappropriate way to protect cannabis businesses. Numerous
bills have been introduced in Congress in recent years to decriminalize aspects of state-legal marijuana trades. This has led to a bipartisan
Congressional Marijuana Working Group in Congress. In December 2022, the U.S. House of Representatives and Senate passed, and President
Biden signed into law, the Medical Marijuana and Cannabidiol Research Expansion Act, which provides for significantly broader opportunities
to study cannabis. Other important measures have received successful votes in congressional committees or passage in the U.S. House of
Representatives. For instance, the SAFE Banking Act, which had more than 200 cosponsors and would prevent federal banking regulators from
taking adverse actions against financial institutions solely due to an institution’s provision of financial services to state-legal
marijuana businesses, passed the U.S. House of Representatives with strong bipartisan support in 2019 and 2021, and again passed the House
as an amendment to the America COMPETES Act in 2022. However, the SAFE Banking Act has failed to pass the U.S. Senate.
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, 2023, we had nine 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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