As filed with the Securities and Exchange Commission on October 17, 2016
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11
FOR REGISTRATION
UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
INNOVATIVE INDUSTRIAL PROPERTIES, INC.
(Exact Name of Registrant as Specified in its Governing Instruments)
17190 Bernardo Center Drive
San Diego, California 92128
(858) 997-3332
(Address,
Including Zip Code, and Telephone Number,
Including Area Code, of Registrant’s Principal Executive Offices)
Paul E. Smithers
President and
Chief Executive Officer
INNOVATIVE INDUSTRIAL PROPERTIES, INC.
17190 Bernardo Center Drive
San Diego, California 92128
(858) 997-3332
(Name,
Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
With copies to:
Martin Traber, Esq. Carolyn Long, Esq. Curt Creely, Esq.
FOLEY
& LARDNER LLP
|
Kerry
E. Johnson, Esq.
27 th Floor
New
York, New York
|
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer x (Do not check if a smaller reporting company) |
Smaller reporting
company ¨ |
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered |
Proposed Maximum
Aggregate Offering Price (1) (2) |
Amount of
Registration Fee (2) |
||||||
Class A common stock, $0.001 par value per share | $ | 201,250,000 | $ | 23,325 |
(1) | Pursuant to Rule 416 of the Securities Act of 1933, as amended, such number of shares of Class A common stock registered hereby also shall include an indeterminate number of shares of Class A common stock that may be issued in connection with stock splits, stock dividends, recapitalizations or similar events. |
(2) | Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes shares of Class A common stock that may be purchased by the underwriters pursuant to the underwriters' option to purchase additional shares. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale thereof is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 17, 2016
PROSPECTUS
8,750,000 Shares
Class A Common Stock
Innovative Industrial Properties, Inc. is a newly-formed, self-advised Maryland corporation focused on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities.
This is our initial public offering. We are selling 8,750,000 shares of our Class A common stock.
We expect the initial public offering price of our Class A common stock to be $20.00 per share. Prior to this offering, no public market exists for our shares. We have applied to list our shares of Class A common stock on the New York Stock Exchange, or the NYSE, under the symbol “IIPR.”
We have been organized and we intend to elect, and to operate our business so as to qualify and to be taxed as a real estate investment trust for U.S. federal income tax purposes, or REIT, commencing with our taxable year ending December 31, 2016. Shares of our Class A common stock will be subject to restrictions on ownership and transfer that are intended, among other purposes, to assist us in qualifying and maintaining our qualification as a REIT, including, subject to certain exceptions, a 9.8% ownership limit. See “Description of Securities—Restrictions on Ownership and Transfer.”
We are an “emerging growth company” under federal securities laws and will be subject to reduced public company reporting requirements. Investing in our Class A common stock involves a high degree of risk. You should purchase these securities only if you can afford a complete loss of your investment. See “Risk Factors” beginning on page 15 of this prospectus for a discussion of the risks you should consider before buying shares of our Class A common stock. Some of these risks include:
· | We were recently formed and have no operating history and may not be able to operate our business successfully or generate sufficient cash flow to make or sustain distributions to our stockholders. |
· | We do not currently own any properties. We have identified only one property to acquire and have not entered into binding contracts or commitments to acquire any other specific properties or committed a substantial portion of the net proceeds of this offering to any other specific investment in medical-use cannabis facilities. Investors will not be able to evaluate the economic merits of investments we make with a substantial portion of the net proceeds of this offering before purchasing our Class A common stock. |
· | We may be unable to invest the proceeds of this offering on acceptable terms, or at all. |
· | Although the federal government currently has a relaxed enforcement position as it relates to states that have legalized medical-use cannabis, it remains illegal under federal law, and therefore, strict enforcement of federal laws regarding medical-use cannabis would likely result in our inability and the inability of our tenants to execute our respective business plans. |
· | New laws that are adverse to the business of our tenants may be enacted, and current favorable state laws relating to cultivation and production of medical-use cannabis may be modified or eliminated in the future. |
· | We are dependent on our senior management team to select investments and conduct our operations. The loss of their services could have an adverse impact on our business. |
· | Our growth depends on external sources of capital, which may not be available on favorable terms or at all. |
· | Our real estate investments will consist of primarily properties suitable for cultivation and production of medical-use cannabis, which may be difficult to sell or re-lease upon tenant defaults or early lease terminations, either of which would adversely affect returns to stockholders. |
· | Investors participating in this offering will incur immediate and substantial dilution. |
· | Our failure to qualify as a REIT would result in higher taxes and reduced cash available for distribution to our stockholders and may have significant adverse consequences on the market price of our Class A common stock. |
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Per Share | Total | |||||||
Public offering price | $ | $ | ||||||
Underwriting discount (1) | $ | $ | ||||||
Proceeds, before expenses, to us | $ | $ |
(1) | The terms of our arrangements with the underwriters are described under the section entitled “Underwriting.” |
The underwriters may also purchase up to an additional 1,312,500 shares of our Class A common stock from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus solely to cover over-allotments, if any.
The underwriters expect to deliver the Class A common stock on or about , 2016.
Ladenburg Thalmann
The date of this prospectus is , 2016.
TABLE OF CONTENTS
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You should rely only on the information contained in this prospectus, any free writing prospectus prepared by us or information to which we have referred you. We have not, and the underwriters have not, authorized any dealer, salesperson or other person to provide you with different or additional information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell shares of our Class A common stock in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus and any free writing prospectus prepared by us is accurate only as of their respective dates or on the date or dates which are specified in these documents. Our business, financial condition, liquidity, results of operations and prospects may have changed since those dates.
_______________________
Market and Industry Data and Forecasts
In this prospectus, we use market data and industry forecasts and projections derived from cited third party sources, which data and forecasts are publicly available for free or upon payment as part of a subscription service. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers’ experience in the industry and there can be no assurance that any of the forecasts or projections will be achieved. None of such data and forecasts was prepared specifically for us. No third party source that has prepared such information has reviewed or passed upon our use of the information in this prospectus, and no third party source is quoted or summarized in this prospectus as an expert. All statements contained in this prospectus in connection with or related to such data and forecasts are attributed to us, and not to any such third party source or any other person. We believe that the surveys and market research others have performed are reliable, but neither we nor the underwriters have independently investigated or verified this information. Because the cannabis industry is relatively new, such market and industry data may be subject to significant change in a relatively short time period. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and uncertainties as the other forward-looking statements contained in this prospectus.
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This is only a summary and does not contain all of the information that you should consider before investing in shares of our Class A common stock. You should read the entire prospectus, including the section entitled “Risk Factors” and our financial statements and related notes appearing elsewhere in this prospectus, before deciding to invest in shares of our Class A common stock. Except as otherwise indicated, references to “common stock” refer to our Class A common stock.
Unless the context otherwise requires or indicates, references in this prospectus to "we," "us," "our," and "our company" refer to Innovative Industrial Properties, Inc., a Maryland corporation recently organized to qualify as a REIT for U.S. federal income tax purposes, together with its subsidiaries, including IIP Operating Partnership LP , a Delaware limited partnership, or our Operating Partnership, of which we are the sole general partner and through which we will conduct our business . Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters’ over-allotment option is not exercised.
Our Company
We are a newly-formed, self-advised Maryland corporation focused on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities. Initially, we intend to acquire our properties through sale-leaseback transactions and third-party purchases. We expect to lease our properties on a triple-net lease basis, where the tenant is responsible for all aspects of and costs related to the property and its operation during the lease term, including maintenance, taxes and insurance.
Our executive chairman, Alan D. Gold, is a 30-year veteran of the real estate industry, including co-founding two NYSE-listed REITs: BioMed Realty Trust, Inc. (formerly NYSE: BMR), or BioMed Realty, a REIT focused on acquiring, developing, owning, leasing and managing laboratory and office space for the life science industry; and Alexandria Real Estate Equities, Inc. (NYSE: ARE), or Alexandria Real Estate, an urban office REIT focused on collaborative science and technology campuses . Our senior management team has significant experience in all aspects of the real estate industry, including acquisitions, dispositions, construction, development, management, finance and capital markets. We believe the industry experience and relationships of our senior management team will provide us with a competitive advantage in sourcing and negotiating acquisition opportunities for our target properties, including through sale-leaseback transactions.
We plan to finance our growth through the application of the net proceeds of this offering, and, when necessary, through additional equity and debt offerings. We currently anticipate that the average size of our investments will range from $5 million to $30 million and will involve between 25,000 and 150,000 square feet of space.
We are actively seeking and evaluating medical-use cannabis facilities to purchase with the net proceeds of this offering. We have entered into a definitive purchase agreement for the acquisition of one 127,000-square foot industrial property, or our Initial Property, located in New York for a purchase price of approximately $30 million in a sale-leaseback transaction. See the section entitled “—Our Initial Property” below. In addition, our senior management team has identified and is in various stages of reviewing in excess of $88 million of additional potential properties for acquisition, which amount is estimated based on the sellers’ asking prices for the properties, preliminary discussions with sellers, our internal assessment of the values of such properties after taking into account the current and expected annualized lease revenue, operating history, age and condition of the property, and other relevant factors. We have entered into two non-binding letters of intent with respect to approximately $80 million of these potential acquisitions. The acquisition of our Initial Property is subject to ongoing diligence and the satisfaction of closing conditions and the acquisition of any property under a non-binding letter of intent requires the negotiation and execution of a definitive purchase agreement and is subject to diligence and the satisfaction of closing conditions. There can be no assurance that we will consummate the acquisition of any of the properties in our current acquisition pipeline on the terms anticipated, or at all.
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Market Opportunity
The Industrial Real Estate Sub-Market
The industrial real estate sub-market recently has performed well with vacancies in several markets at historical lows. According to Colliers International, or Colliers, the U.S. industrial property vacancy rate declined for the 22 nd consecutive quarter in the first quarter of 2016, declining 10 basis points to 6.3% and down 70 basis points from the first quarter of 2015. Almost 64 million square feet of industrial real estate was absorbed in the first quarter of 2016, an increase of 9.6% year over year, which resulted in increased rental rates for the 18 th consecutive quarter, according to Colliers.
We believe this supply/demand dynamic creates significant opportunity for owners of industrial facilities, particularly those focused on niche categories, as options are limited for tenants requiring specialized buildings. We intend to capitalize on this opportunity by purchasing specialized industrial properties that are mission critical to the medical-use cannabis industry.
The Regulated Medical-Use Cannabis Industry
The regulated medical-use cannabis industry is a rapidly growing industry that we believe presents a unique real estate investment opportunity under current market conditions. In the United States, the development and growth of the industry has generally been driven by state law and regulation, and accordingly, the market varies on a state-by-state basis. State laws that legalize and regulate medical-use cannabis allow patients to consume cannabis for medicinal reasons with a doctor’s recommendation subject to various requirements and limitations. States have authorized numerous medical conditions as qualifying conditions for treatment with medical-use cannabis, including but not limited to treatment for cancer, glaucoma, HIV/AIDs, wasting syndrome, pain, nausea, seizures, muscle spasms, multiple sclerosis, post-traumatic stress disorder (PTSD), migraines, arthritis, Parkinson's disease, Alzheimer's, lupus, residual limb pain, spinal cord injuries, inflammatory bowel disease and terminal illness. As of June 10, 2016, 26 states, plus the District of Columbia, have passed laws allowing their citizens to use medical cannabis.
We believe that the following conditions create a favorable environment for investing in real estate assets that support the regulated medical-use cannabis industry:
● | Significant industry growth in recent years and expected continued growth : According to ArcView Market Research, or ArcView, nationwide sales of legal cannabis grew to $5.4 billion up from $4.6 billion in 2014, of which approximately 92% consisted of medical-use sales. We expect that the size of the medical-use cannabis market will increase as new state markets, including Nevada, Illinois, Massachusetts, and New York, continue to expand. |
● | A shift in public opinion and increasing momentum toward the legalization of cannabis, especially as it relates to medical-use cannabis : The growth of the regulated cannabis industry has been fueled by changing public attitudes in the United States. A poll by Harris found 81% of Americans support the legalization of cannabis for medical-use. Driven in part by this shift in public opinion, it is expected that at least two additional states, Florida and Arkansas, may vote to legalize medical-use cannabis in 2016. While the passage of measures in these states is not guaranteed, and opposition is anticipated, expansion of the market opportunity to these states could nevertheless be significant. |
● | The federal government’s current relaxed enforcement posture toward cannabis-related activities that are legal under state law : Cannabis is classified as a Schedule I controlled substance by the Drug Enforcement Agency, or DEA, and the U.S. Department of Justice. It is illegal to grow, possess and consume cannabis under federal law. However, the U.S. Department of Justice has issued memoranda characterizing enforcement of federal cannabis prohibitions as low priority and instructing federal prosecutors not to take action against individuals complying with state laws. Congress has also enacted an omnibus spending bill including a provision prohibiting the U.S. Department of Justice (which includes the DEA) from using funds appropriated by that bill to prevent states from implementing their medical-use cannabis laws. In addition, members of the U.S. Congress have introduced various pieces of proposed legislation that would declassify cannabis as a Schedule I controlled substance or otherwise remove cannabis from all schedules of controlled substances. Although there is no assurance that any of these proposals will be approved, that the funds prohibition will not be removed or that the U.S. Department of Justice’s enforcement position will not change, we believe that the number and frequency of these proposals, when coupled with changing public attitudes and the prospect of legalization in additional states, indicate that the size and risk profile of the market in which our prospective tenants operate will likely improve. |
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● | Limited access to capital by industry participants : To date, the status of cannabis under federal law has significantly limited the ability of state-licensed industry participants to fully access the U.S. banking system and traditional financing sources. Because of the lack of access to traditional financing sources, we believe that our sale-leaseback solutions will be attractive to state-licensed medical-use cannabis cultivators and producers. |
We believe that the foregoing conditions create an attractive opportunity to invest in industrial real estate assets that are tailored for tenants in the regulated medical-use cannabis industry. We anticipate that future changes in federal and state laws may ultimately open up financing options that have not been available to date in this industry. However, we believe that such changes will take time, thereby creating an opportunity over the next few years to provide our sale-leaseback solutions to state-licensed industry participants.
We plan to take advantage of this market opportunity by purchasing the medical-use cannabis facilities of state-licensed growers with a focus on properties that we believe also have potential for long-term appreciation in value. We believe that our sale-leaseback solutions offer an attractive alternative to licensed cultivators who lack access to traditional financing alternatives. We intend to acquire medical-use cannabis facilities in states that permit medical-use cannabis cultivation, including New York, Illinois, Washington, Oregon, Nevada, California, Arizona, Massachusetts and Maryland. We expect that acquisition opportunities will continue to expand as additional states legalize medical-use cannabis and license new cultivators.
Our Competitive Strengths
We believe that we have the following competitive strengths:
· | The Experience of Our Executive Chairman and Our Senior Management Team . Mr. Gold and our senior management team have substantial experience in all aspects of the real estate industry, including acquisitions, dispositions, construction, development, management, finance and capital markets. In particular, in August 2004, Mr. Gold and Gary A. Kreitzer, a member of our board of directors, founded BioMed Realty (formerly NYSE: BMR), an internally-managed NYSE-listed REIT focused on acquiring, developing, owning, leasing and managing laboratory and office space for the life science industry, an industry they believed to be underserved by commercial property investors and lenders and poised for significant growth. During their tenure at BioMed Realty, Messrs. Gold and Kreitzer oversaw the growth of the company’s portfolio of life science and laboratory real estate from 30 buildings with approximately 2.4 million rentable square feet at the time of the initial public offering in 2004 to 196 buildings with approximately 18.9 million rentable square feet as of January 2016. |
· | Focus on Recurring and Dependable Revenue . Our business strategy will focus on acquiring real estate assets from, and entering into long-term net leasing arrangements with, licensed medical-use cultivators, which we believe will support a recurring and dependable revenue base from our properties. |
· | Focus on Underserved Industry with Less Competition . Our focus on specialized industrial real estate assets leased to tenants in the regulated medical-use cannabis industry may result in significantly less competition from existing REITs and institutional buyers due to the unique nature of the real estate and its tenants. Moreover, we believe the banking industry’s general reluctance to finance owners of these facilities coupled with the owners’ need for capital to fund the growth of their operations will result in significant opportunities for us to acquire specialized industrial properties that provide stable and increasing rental revenue along with the potential for long-term appreciation in value. |
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· | Positive Medical-Use Cannabis Industry Trends. Based on the growth projections for the medical-use cannabis industry, we expect to see significant spending by state-licensed medical-use cannabis cultivators on their existing and new medical-use cannabis facilities. |
Our Business Objectives and Growth Strategies
Our principal business objective is to maximize stockholder returns through a combination of (1) distributions to our stockholders, (2) sustainable long-term growth in cash flows from increased rents, which we hope to pass on to stockholders in the form of increased distributions, and (3) potential long-term appreciation in the value of our properties from capital gains upon future sale. Our primary strategy to achieve our business objective is to acquire and own a portfolio of medical-use cannabis facilities leased to tenants holding the requisite state licenses to operate in the regulated medical-use cannabis industry. This strategy includes the following components:
· | Owning Medical-Use Cannabis Cultivation Properties and Related Real Estate Assets for Income. We primarily intend to acquire medical-use cannabis facilities from licensed growers who will continue their cultivation operations after our acquisition of the property. We expect to hold acquired properties for investment and to generate stable and increasing rental income from leasing these properties to licensed growers. |
· | Owning Medical-Use Cannabis Cultivation Properties and Related Real Estate Assets for Appreciation. We primarily intend to lease our acquired properties under long-term triple-net leases. However, from time to time, we may elect to sell one or more properties if we believe it to be in the best interests of our stockholders. Potential purchasers may include others in the regulated medical-use cannabis industry desiring access to properties having the requisite zoning and regulatory approvals for cultivation and production of medical-use cannabis or financial purchasers seeking to acquire property for investment purposes. Accordingly, we will seek to acquire properties that we believe also have potential for long-term appreciation in value. |
· | Expanding Our Operations as Additional States Permit Medical-Use Cannabis Cultivation and Production. We intend to acquire properties in states that permit cannabis cultivation for medical-use, including New York, Illinois, Washington, Oregon, Nevada, California, Arizona, Massachusetts and Maryland. We expect that our acquisition opportunities will continue to expand as additional states legalize medical-use cannabis and license new cultivators. |
· | Owning Mortgages on Medical-Use Cannabis Cultivation Properties and Related Real Estate Assets. In circumstances where our purchase of medical-use cannabis facilities is not feasible, we may provide the owner of the property with a first lien mortgage loan secured by the property along with an option to sell the property to us in the future at a predetermined price. We do not expect that we will use more than 15% of the net proceeds of this offering for any such loans or that over time our mortgages held will exceed 15% of the fair value of our investment assets. |
Our Target Markets
Generally, we expect to target medical-use cannabis facilities for acquisition, including through sale-leaseback transactions, with tenants that are state-licensed growers under long-term triple-net leases. According to ArcView, nationwide sales of legal cannabis grew to $5.4 billion up from $4.6 billion in 2014, of which approximately 92% consisted of medical-use sales. Demand is expected to remain strong in 2016 with legal markets projected to grow to $6.7 billion according to ArcView, a 24% increase over 2015, as new state medical-use markets, including Nevada, Illinois, Massachusetts and New York, expand. According to ArcView, by 2020, legal market sales are expected to grow to approximately $21.8 billion, of which estimated medical-use sales are expected to be approximately $10.2 billion.
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Jurisdictions with Legal Access to Cannabis
Year (1) | Jurisdiction (1) |
Population
as of
July 1, 2015 (in millions) (2) |
||||
1996 | California | 39.1 | ||||
1998 | Washington | 7.2 | ||||
1998 | Oregon | 4.0 | ||||
1999 | Alaska | 0.7 | ||||
1999 | Maine | 1.3 | ||||
2000 | Hawaii | 1.4 | ||||
2000 | Colorado | 5.5 | ||||
2000 | Nevada | 2.9 | ||||
2004 | Vermont | 0.6 | ||||
2004 | Montana | 1.0 | ||||
2006 | Rhode Island | 1.1 | ||||
2007 | New Mexico | 2.1 | ||||
2008 | Michigan | 9.9 | ||||
2010 | District of Columbia | 0.7 | ||||
2010 | New Jersey | 9.0 | ||||
2010 | Arizona | 6.8 | ||||
2011 | Delaware | 0.9 | ||||
2012 | Massachusetts | 6.8 | ||||
2012 | Connecticut | 3.6 | ||||
2013 | Illinois | 12.9 | ||||
2013 | New Hampshire | 1.3 | ||||
2014 | Maryland | 6.0 | ||||
2014 | Minnesota | 5.5 | ||||
2014 | New York | 19.8 | ||||
2016 | Louisiana | 4.7 | ||||
2016 | Pennsylvania | 12.8 | ||||
2016 | Ohio | 11.6 | ||||
Total | 27 | 179.2 |
(1) | Source: ArcView Market Research |
(2) | Source: U.S. Census Bureau |
It is expected that new states will enter the marketplace in 2016, which would drive industry growth in 2018 and 2019, when cannabis businesses in such states could begin to generate revenues. Experience shows that it generally takes one to two years for a state to establish regulations and for cannabis businesses to begin to generate revenue from operations. ArcView’s projected increase in legal cannabis sales by 2020 is, in part, attributable to this delay between legalization and revenue generation.
As of June 10, 2016, 26 states, plus the District of Columbia, have passed laws allowing their citizens to use medical cannabis. We expect that the medical-use cannabis facilities that we initially acquire will be geographically concentrated in New York, Illinois, Maryland, California, Arizona, Washington, Nevada, Massachusetts and Oregon. Continued development of the regulated medical-use cannabis industry depends upon continued legislative authorization of medical-use cannabis at the state level. Progress in the regulated medical-use cannabis industry, while encouraging, is not assured and any number of factors could slow or halt progress in this area.
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Our Target Properties
We intend to acquire specialized industrial real estate assets operated by state-licensed medical-use cannabis growers through sale-leaseback transactions and third-party purchases. In sale-leaseback transactions, concurrently upon closing of the acquisition, we will lease the properties back to the state-licensed growers under long-term, triple-net lease agreements. We intend to target properties owned by growers that have been among the top candidates in the rigorous state licensing process and have been granted a license to operate multiple facilities. Through this sale-leaseback strategy, we will serve as a source of capital to these licensed medical-use cannabis growers, which will allow them to redeploy their sale proceeds back into their core operations to grow their business and achieve higher returns.
Our Initial Property
We have entered into a definitive purchase agreement for the acquisition of our Initial Property, a 127,000-square foot industrial property located in Montgomery, New York for a purchase price of approximately $30 million. We expect to acquire our Initial Property with the net proceeds of this offering. The acquisition of our Initial Property is subject to ongoing diligence and the satisfaction of closing conditions. There can be no assurance that we will consummate the acquisition of our Initial Property on the terms anticipated, or at all.
Property Description. Our Initial Property consists of approximately 70 acres of land, which includes three buildings comprising approximately 127,000 square feet. Our Initial Property is also expected to support the future development of additional medical-use cannabis cultivation facilities totaling approximately 204,000 additional square feet. The current property owner and future tenant is licensed by the state of New York to operate a medical-use cannabis cultivation and processing facility, and has operated such facility at the property since June 2016, when construction of the facility was substantially completed.
Acquisition Terms. On August 22, 2016, and as amended on September 16, 2016, we entered into a definitive purchase agreement to acquire our Initial Property from PharmaCann LLC in a sale-leaseback transaction for an aggregate purchase price of $30 million. The purchase price for our Initial Property was determined by negotiation with the seller after taking into consideration the expected annualized lease revenue, expected lease, operating history, age and condition of the property, and other relevant factors. We paid a $375,000 deposit upon execution of the purchase agreement that is refundable in the event we do not close an initial public offering of not less than $75.0 million within a specified timeframe. The $375,000 necessary to pay the deposit was paid by IGP Advisers and is to be repaid with the proceeds of this offering. The definitive agreement provides for a due diligence period investment during which we have the right to access and inspect the property and may terminate the agreement if we determine that the property does not meet our criteria. Following the diligence period, we have agreed to purchase the property “as is,” subject to all faults and conditions thereon, which increases the risk that we may have to remedy defects or costs without recourse to the prior owner. The closing of the purchase is subject to the completion of this offering and customary closing conditions. The purchase agreement provides that closing is to occur within 30 days after the expiration of the due diligence period and the agreement is terminable at the option of either party thereafter. We intend to purchase our Initial Property as soon as reasonably practicable after satisfaction of all closing conditions, including the closing of this offering..
Lease Terms. Upon the closing of the acquisition, we will lease 100% of our Initial Property to the seller of the property, PharmaCann LLC, to operate a medical-use cannabis cultivation and processing facility in compliance with applicable state and local law and in compliance with the terms of the tenant’s license from the state of New York. PharmaCann LLC is a start-up business that commenced retail operations in late 2015. PharmaCann secured one of only five licenses granted to date in New York for the cultivation and dispensary of medical-use cannabis. As of the date of this prospectus, PharmaCann LLC operates four registered medical-use cannabis dispensaries in Illinois and one manufacturing facility in New York that currently distributes to three registered dispensaries operated by it in New York. The lease is a triple-net lease with the tenant responsible for paying all operating expenses, insurance and taxes related to the property. The base rent is approximately $319,580 per month, which shall be increased annually at the rate based on the higher of (i) 4% or (ii) 75% of the consumer price index, or CPI. We also receive a property management fee under the lease equal to 1.5% of the then-current base rent throughout the term, and supplemental base rent for the first five years of the term at a rate of $105,477 per month. Together, the annualized initial base rent, property management fee and supplemental base rent equate to approximately 17.2% of the purchase price of our Initial Property. The lease term is 15 years, with two options to extend the term of the lease for two additional five-year periods. As a start-up business, PharmaCann LLC has not been profitable. As a result, at least initially, we expect that PharmaCann LLC will make rent payments to us from proceeds from the sale of the property or cash on hand, and not from funds from operations.
Our Financing Strategy
We intend to meet our long-term liquidity needs through cash flow from operations and the issuance of equity and debt securities, including common stock, preferred stock and long-term notes. Where possible, we also may issue limited partnership interests in our Operating Partnership to acquire properties from existing owners seeking a tax-deferred transaction. We expect to issue equity and debt securities at times when we believe that our stock price is at a level that allows for the reinvestment of offering proceeds in accretive property acquisitions. We may also issue common stock to permanently finance properties that were previously financed by debt securities. However, we cannot assure you that we will have access to the capital markets at times and on terms that are acceptable to us. Our investment guidelines initially provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible assets at the time of any new borrowing, subject to our board of directors’ discretion.
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Risk Management
We estimate that we will purchase approximately 10 to 20 properties with the net proceeds of this offering and will attempt to diversify the investment size and location of our portfolio of properties in order to manage our portfolio-level risk. Over the long term, we intend that no single property will exceed 25% of our total assets and that no single tenant will exceed 30% of our total assets. However, until a sufficient number of properties are acquired, we anticipate that we will have single properties and single tenants in excess of these long-term targets.
We expect that single tenants will occupy our properties pursuant to triple-net lease arrangements in general and, therefore, the success of our investments will be materially dependent on the financial stability of these tenants. We expect to evaluate the credit quality of our tenants and any guarantors on an ongoing basis by reviewing, where available, the publicly filed financial reports, press releases and other publicly available industry information regarding our tenants and any guarantors. In addition, we will monitor the payment history data for all of our tenants and, in some instances, we intend to monitor our tenants by periodically conducting site visits and meeting with the tenants to discuss their operations. In many instances, we will generally not be entitled to financial results or other credit-related data from our tenants. See the section entitled “Risk Factors— Risks Related to Our Business.”
Summary Risk Factors
An investment in shares of our Class A common stock involves various risks. You should consider carefully the risks discussed below and under the section entitled “Risk Factors” beginning on page 15 of this prospectus before purchasing our Class A common stock. If any of the factors enumerated below or in the section entitled “Risk Factors” occurs, our business, financial condition, liquidity, results of operations and prospects could be materially and adversely affected. In that case, the trading price of our Class A common stock could decline, and you may lose some or all of your investment. Some of the more significant risks relating to this offering and an investment in our shares of Class A common stock include:
· | We were recently formed and have no operating history and may not be able to operate our business successfully or generate sufficient cash flow to make or sustain distributions to our stockholders. |
· | We do not currently own any properties. We have identified only one property to acquire and have not entered into binding contracts or commitments to acquire any other specific properties or committed a substantial portion of the net proceeds of this offering to any other specific investment in medical-use cannabis facilities. Investors will not be able to evaluate the economic merits of investments we make with a substantial portion of the net proceeds of this offering before purchasing our Class A common stock. |
· | We may be unable to invest the proceeds of this offering on acceptable terms, or at all. |
· | Although the federal government currently has a relaxed enforcement position as it relates to states that have legalized medical-use cannabis, it remains illegal under federal law, and therefore, strict enforcement of federal laws regarding medical-use cannabis would likely result in our inability and the inability of our tenants to execute our respective business plans. |
· | New laws that are adverse to the business of our tenants may be enacted, and current favorable state laws relating to cultivation and production of medical-use cannabis may be modified or eliminated in the future. |
· | We are dependent on our senior management team to select investments and conduct our operations. The loss of their services could have an adverse impact on our business. |
· | Our growth depends on external sources of capital, which may not be available on favorable terms or at all. |
· | We expect that most of our tenants, including the proposed tenant for our Initial Property, will be start-up businesses and may be unable to pay rent with funds from operations or at all, which could adversely affect our cash available to make distributions to our stockholders or otherwise impair the value of your investment. |
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· | Compliance with environmental laws could materially increase our operating expenses. |
· | Our real estate portfolio will be concentrated in a limited number of properties and locations with a limited number of tenants and such lack of diversification will increase the potential that a single underperforming investment or location could have a material impact on our operations. |
· | Our real estate investments will consist of primarily properties suitable for cultivation and production of medical-use cannabis, which may be difficult to sell or re-lease upon tenant defaults or early lease terminations, either of which would adversely affect returns to stockholders. |
· | As long as we maintain our status as a REIT, we will be subject to numerous limitations and qualifications imposed on us under the Internal Revenue Code of 1986, as amended, or the Code, including that five or fewer individuals, as specially defined for this purpose, generally are prohibited from beneficially owning more than 50% of our outstanding shares (based on value) during the last half of each taxable year. |
· | We may be unable to acquire or experience significant delays in acquiring certain properties that otherwise would be a suitable investment. |
· | Maintenance of our exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act, and our REIT qualification impose significant limits on our operations. |
· | Our board of directors may change our investment objectives and strategies without stockholder consent. |
· | Our failure to qualify as a REIT would result in higher taxes and reduced cash available for distribution to our stockholders and may have significant adverse consequences on the market price of our Class A common stock. We have not requested and do not plan to request a ruling from the Internal Revenue Service, or the Service, that we qualify as a REIT, and the statements in this prospectus are not binding on the Service or any court. |
· | If we are deemed to be subject to Section 280E of the Code because of the business activities of our tenants, the resulting disallowance of tax deductions could cause us to incur U.S. federal income tax and jeopardize our REIT status. |
· | Investors participating in this offering will incur immediate and substantial dilution. |
· | We set the initial public offering price of our shares of Class A common stock arbitrarily and such price may not accurately reflect the value of our assets or our expected operating income. |
· | No public market currently exists and no active market may ever develop for shares of our Class A common stock. |
· | We may be unable to pay or maintain cash dividends or increase dividends over time. |
· | We may borrow money, sell assets or use proceeds of this offering to make distributions to our stockholders, if we are unable to make distributions with respect to our cash flows from operations. |
Our Operating Structure
We were formed as a Maryland corporation on June 15, 2016. We intend to conduct business in an umbrella partnership real estate investment trust, or UPREIT, structure through our Operating Partnership. We are the sole general partner of our Operating Partnership and, upon completion of this offering, we will own, directly or through a subsidiary, 100% of the limited partnership interests in our Operating Partnership. Our board of directors will oversee our business and affairs.
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Our Operating Partnership was formed as a Delaware limited partnership on June 20, 2016 and will commence operations upon the completion of this offering. Following the completion of this offering, substantially all of our assets will be held by, and our operations will be conducted through, our Operating Partnership. We will contribute the net proceeds from this offering to our Operating Partnership in exchange for limited partnership interests. Our interest in our Operating Partnership will generally entitle us to share in cash distributions from, and in the profits and losses of, our Operating Partnership in proportion to our percentage ownership, which is currently 100%. As the sole general partner of our Operating Partnership, we generally will have the exclusive power under the partnership agreement to manage and conduct our Operating Partnership’s business and affairs, subject to certain limited approval and voting rights of the limited partners, which are described in the section entitled “Our Operating Partnership and the Operating Partnership Agreement.” In the future, we may issue limited partnership interests from time to time in connection with property acquisitions, as compensation or otherwise.
IGP Advisers LLC, or IGP Advisers, a company that is owned by Mr. Gold and Paul E. Smithers, our president, chief executive officer and a director nominee, and Gregory J. Fahey, our chief accounting officer and treasurer, is funding certain of our organization, offering and transaction costs. In addition, IGP Advisers funded an earnest money deposit pursuant to the purchase agreement for our Initial Property. IGP Advisers will seek reimbursement from us for these expenses upon completion of this offering and the acquisition of our Initial Property.
The chart below reflects our corporate structure after giving effect to this offering and the issuance of shares of our Class A common stock as described in this prospectus, including (i) 1,312,500 shares of Class A common stock that will be issued to certain executive officers and directors in exchange for outstanding shares of Class B common stock (or 1,509,375 shares if the underwriters’ over-allotment option is fully exercised), (ii) 150,000 shares of Class A common stock that our executive chairman intends to purchase in this offering at the public offering price, and (iii) grants of an aggregate of 27,500 shares of Class A common stock to two of our executive officers under our 2016 Omnibus Incentive Plan, or Incentive Plan, that are expected to be approved at the first meeting of the compensation committee of our board of directors upon the completion of this offering.
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Restrictions on Ownership and Transfer of our Securities
To assist us in complying with the limitations on the concentration of ownership of a REIT imposed by the Code, among other purposes, our charter prohibits, with certain exceptions, any stockholder from beneficially or constructively owning, applying certain attribution rules under the Code, more than 9.8% by value or number of shares, whichever is more restrictive, of the outstanding shares of our Class A common stock, or 9.8% by value or number of shares, whichever is more restrictive, of the outstanding shares of our capital stock. Our board of directors may, in its sole discretion, subject to such conditions as it may determine and the receipt of certain representations and undertakings, waive the 9.8% ownership limit with respect to a particular stockholder if such ownership will not then or in the future jeopardize our qualification as a REIT. Our charter also prohibits any person from, among other things, beneficially or constructively owning shares of our capital stock that would result in our failing the “closely held” test under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise cause us to fail to qualify as a REIT.
Our charter provides that any ownership or purported transfer of our capital stock in violation of the foregoing restrictions will result in the shares so owned or transferred being automatically transferred to a charitable trust for the benefit of a charitable beneficiary, and the purported owner or transferee acquiring no rights in such shares. If a transfer of shares of our capital stock would result in our capital stock being beneficially owned by fewer than 100 persons or the transfer to a charitable trust would be ineffective for any reason to prevent a violation of the other restrictions on ownership and transfer of our capital stock, the transfer resulting in such violation will be void.
Federal Income Tax Status
We intend to elect and qualify to be taxed as a REIT commencing with our tax year ending December 31, 2016. In addition, we may hold certain of our assets through taxable REIT subsidiaries, or TRSs, which are subject to corporate-level income tax at regular rates. Our qualification as a REIT depends on our ability to meet, on a continuing basis, through actual investment and operating results, various complex requirements under the Code, relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our shares of capital stock. We believe that we have been organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT.
So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our REIT taxable income we distribute currently to our stockholders. Under the Code, REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute each year at least 90% of their REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to qualify for taxation as a REIT in any taxable year, and the statutory relief provisions of the Code do not apply, we will be subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we lost our REIT qualification. Distributions to stockholders in any year in which we are not a REIT would not be deductible by us, nor would they be required to be made. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income or property and to U.S. federal income and excise taxes on our undistributed income.
Distribution Policy
To maintain our qualification as a REIT, we intend to make regular distributions to our stockholders. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain (which does not equal net income as calculated in accordance with U.S. generally accepted accounting principles, or GAAP). To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income tax, we intend to make quarterly distributions of all or substantially all of our net income to holders of our common stock out of assets legally available therefor. However, we cannot assure you that distributions will be made or sustained. Any distributions we make will be at the discretion of our board of directors and will depend upon a number of factors, including our actual results of operations, economic conditions, maintenance of REIT qualification and the applicable provisions of the Maryland General Corporation Law, or the MGCL, and such other factors as our board may determine in its sole discretion.
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Lock-Up Agreements
We and each of our executive officers and directors have agreed with the underwriters not to offer, sell or transfer any shares of common stock or any securities convertible into or exercisable or exchangeable for or repayable with common stock (including limited partnership interests in our Operating Partnership) or any rights to acquire common stock for 180 days after the date of this prospectus, without first obtaining the written consent of Ladenburg Thalmann & Co. Inc., the representative of the underwriters.
Implications of Being an “Emerging Growth Company”
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We have not made a decision whether to take advantage of any or all of these exemptions. If we do take advantage of any of these exemptions, we do not know if some investors will find our Class A common stock less attractive as a result. The result may be a less active trading market for our Class A common stock and our stock price may be more volatile. We have elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. This election is irrevocable.
We could remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our Class A common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
Corporate Information
Our principal executive offices are located at 17190 Bernardo Center Drive, San Diego, CA 92128. Our telephone number is (858) 997-3332. Our website is www.innovativeindustrialproperties.com. The information found on, or otherwise accessible through, our website is not incorporated into, and does not form a part of, this prospectus or any other report or document we file with or furnish to the Securities and Exchange Commission, or the SEC.
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Class A common stock offered by us |
8,750,000 shares. (1) |
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Class A common stock to be outstanding after the offering |
10,090,000 shares. (1) (2) |
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Use of proceeds | We estimate that we will receive net proceeds from this offering of approximately $ (or approximately $ if the underwriters’ over-allotment option is exercised in full), after deducting underwriting discounts and commissions, and estimated expenses of the offering, assuming a public offering price of $ per share. We intend to use approximately $30 million of the net proceeds to acquire our Initial Property and the remainder in connection with the acquisition, ownership, and leasing of specialized industrial real estate assets that support the regulated medical-use cannabis industry and for general business purposes. Until appropriate assets can be identified, we may invest the net proceeds of the offering in interest-bearing short-term investments that are consistent with our intention to qualify as a REIT. Any interest-bearing short-term investment we make likely will provide a lower net return than we will seek to achieve from our target assets. See the section entitled “Use of Proceeds.” | |
Dividend Policy | We intend to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gain, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income. | |
Proposed NYSE symbol |
“IIPR.” |
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Ownership and transfer restrictions | To assist us in preserving our REIT qualification, among other purposes, our charter generally prohibits any person from directly or indirectly owning more than 9.8% by value or number of shares, whichever is more restrictive, of the outstanding shares of our Class A common stock, of the outstanding shares of any class or series of our preferred stock and of the outstanding shares of our capital stock. See the section entitled “Description of Securities—Restrictions on Ownership and Transfer.” |
(1) Excludes (i) up to 1,312,500 shares of our Class A common stock that may be issued by us upon exercise of the underwriters’ over-allotment option and (ii) up to 196,875 shares of Class A common stock that may be issued to certain of our executive officers and directors who are holders of Class B common stock in connection with the exercise of the underwriters’ over-allotment option.
(2)
Includes (i)
27,500 shares of Class A common stock that are expected to be issued to two of our executive officers under the Incentive
Plan, upon approval at the first meeting of the compensation committee of the board of directors upon completion of this
offering, and (ii) 1,312,500 shares of our Class A common stock that will be issued to certain executive officers and
directors in exchange for the outstanding shares of Class B common stock (which amount is subject to increase if the
underwriters’ over-allotment option is fully exercised). The shares of our Class B common stock issued and outstanding
immediately prior to the consummation of the offering will automatically convert upon the consummation of the offering
into that number of shares of Class A common stock equal to 15% of the shares of our Class A common issued in this offering
(including shares issued upon exercise of the underwriters’ over-allotment option). See the sections entitled
“Description of Securities” and “Certain Relationships and Related Transactions.” Excludes 972,500
shares of common stock reserved for future issuance under the Incentive Plan.
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An investment in shares of our Class A common stock involves a high degree of risk. Before making an investment decision, you should carefully consider the following risk factors, together with the other information contained in this prospectus. If any of the risks discussed in this prospectus were to occur, our business, prospects, financial condition, liquidity, and results of operations and our ability to make distributions to our stockholders and achieve our goals could be materially and adversely affected, the value of our Class A common stock could decline significantly and you could lose all or a part of your investment. Some statements in this prospectus, including statements in the following risk factors constitute forward-looking statements. Please refer to the section entitled “Forward-Looking Statements.”
Risks Related to Our Business
We have not yet committed a substantial portion of the net proceeds from this offering to any specific property, other than our Initial Property and, therefore, you will not have the opportunity to evaluate the terms of transactions or other economic or financial data concerning our acquisition of properties before purchasing shares of our Class A common stock, which makes an investment in us more speculative.
We currently do not own any properties. We have entered into an agreement to acquire our Initial Property upon the closing of this offering and have identified one other medical-use cannabis facility for potential acquisition, but have not yet committed a substantial portion of the net proceeds of this offering to any other specific medical-use cannabis facilities. Furthermore, our senior management team will have broad discretion in selecting our properties and the tenants of those properties. Accordingly, you will not have the opportunity to evaluate the terms of transactions, the creditworthiness of our tenants or other economic or financial data concerning our acquisition of properties before purchasing shares of our Class A common stock and you have to rely entirely on the ability of our senior management team to select suitable and successful investment opportunities. These factors increase the speculative nature of an investment in our Class A common stock.
We were recently formed and have no operating history and may not be able to operate our business successfully, or generate sufficient revenue to make or sustain distributions to our stockholders.
We were formed on June 15, 2016 and have no operating history. We have nominal assets and will commence operations only upon completion of this offering. We are subject to many of the business risks and uncertainties associated with any new business enterprise. We cannot assure you that we will be able to operate our business successfully or profitably, find suitable investments or implement our operating policies as described in this prospectus. Our ability to provide attractive risk-adjusted returns to our stockholders over the long term is dependent on our ability both to generate sufficient cash flow to pay an attractive dividend and to achieve capital appreciation, and we cannot assure you we will do either. There can be no assurance that we will be able to generate sufficient revenue from operations to pay our operating expenses and make distributions to stockholders. The results of our operations and the implementation of our business plan depend on several factors, including the availability of opportunities for investment, the availability of adequate equity and debt financing, the federal and state regulatory environment relating to the medical-use cannabis industry, conditions in the financial markets and economic conditions.
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We may suffer from delays in locating suitable investment properties, which could adversely affect the return on your investment.
Our ability to achieve our investment objectives and to make distributions to our stockholders depends upon our senior management team’s ability to identify suitable properties for acquisition and then negotiating and consummating the acquisition and triple-net leasing arrangement. The current market for properties that meet our investment objectives may be limited. We intend to conduct due diligence with respect to each investment and suitable investment opportunities may not be immediately available. Until appropriate investment properties can be identified and acquired, we may invest the net proceeds of this offering in interest-bearing short-term investments, including money market accounts and/or funds that are consistent with our intention to qualify as a REIT. These investments are expected to provide a lower net return than we seek to achieve from investments in our target assets. Any significant delay in investing the net proceeds of this offering would have a material adverse effect of our ability to generate cash flow and make distributions to our stockholders.
Additionally, as a public company, we will be subject to the ongoing reporting requirements under the Exchange Act. Pursuant to the Exchange Act, we may be required to file with the SEC financial statements of properties we acquire or financial statements of our tenants who have entered into triple-net leasing arrangements with us for a significant portion of our properties. To the extent any required financial statements are not available or cannot be obtained, we will not be able to acquire the property. As a result, we may be unable to acquire certain properties that otherwise would be a suitable investment. We could suffer delays in our acquisition of suitable properties due to these reporting requirements.
We expect that most of our tenants, including the proposed tenant for our Initial Property, will be start-up businesses and may be unable to pay rent with funds from operations or at all, which could adversely affect our cash available to make distributions to our stockholders or otherwise impair the value of your investment.
We expect that single tenants will occupy our properties and, therefore the success of our investments will be materially dependent on the financial stability of these tenants. We expect that our future tenants will be independent medical-use cannabis cultivation operators about which there is generally little or no publicly available operating and financial information. As a result, we will rely on our management team to perform due diligence investigations of their tenants and their properties, operations and prospects. We may not learn all of the material information we need to know regarding these businesses through our investigations. As a result it is possible that we could enter into a sale-leaseback arrangement with tenants or otherwise lease properties to tenants that ultimately are unable to pay rent to us, which could adversely impact our cash available for distributions.
We expect that most of our tenants, including the proposed tenant for our Initial Property, will be start-up businesses that have little or no revenue when they enter triple-net leasing arrangements with us and therefore, may be unable to pay rent with funds from operations. For example, PharmaCann LLC, the proposed tenant for our Initial Property, is not profitable and has experienced losses since inception. As a result, we expect that our tenants (including PharmaCann LLC) will make initial rent payments to us from proceeds from the sale of the property, in the case of sale-leaseback transactions, or other cash on hand. In addition, in general, as start-up businesses, we expect our tenants will be more vulnerable to adverse conditions resulting from federal and state regulations affecting their businesses or industries and will have limited access to traditional forms of financing.
Some of our tenants may have also been recently restructured using leverage acquired in a leveraged transaction or may otherwise be subject to significant debt obligations. Tenants that are subject to significant debt obligations may be unable to make their rent payments if there are adverse changes in their business plans or prospects, the regulatory environment in which they operate or in general economic conditions. Tenants that have experienced leveraged restructurings or acquisitions will generally have substantially greater debt and substantially lower net worth than they have prior to the leveraged transaction. In addition, the payment of rent and debt service may reduce the working capital available to leverage entities and prevent them from devoting the resources necessary to move from the start-up phase of their business into actual operations and profitability. Furthermore, we may be unable to monitor and evaluate tenant credit quality on an on-going basis.
Any lease payment defaults by a tenant could adversely affect our cash flows and cause us to reduce the amount of distributions to stockholders. In the event of a default by a tenant, we may also experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing our property as operators of medical-use cannabis cultivation and production facilities are generally subject to extensive state licensing requirements. Furthermore, we will not operate any of the facilities that we purchase.
Competition for the acquisition of properties suitable for the cultivation and production of medical-use cannabis may impede our ability to make acquisitions or increase the cost of these acquisitions, which could adversely affect our operating results and financial condition.
We will compete for the acquisition of properties suitable for the cultivation and production of medical-use cannabis with other entities engaged in agricultural and real estate investment activities, including corporate agriculture companies, cultivators and producers of medical-use cannabis, real estate companies and private real estate investors. These competitors may prevent us from acquiring desirable properties or may cause an increase in the price we must pay for properties. Our competitors may have greater resources than we do and may be willing to pay more for certain assets or may be willing to accept more risk than we believe can be prudently managed. In particular, larger companies may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Our competitors may also adopt transaction structures similar to ours, which would decrease our competitive advantage in offering flexible transaction terms. In addition, due to a number of factors, including but not limited to potential greater clarity of the laws and regulations governing medical-use cannabis by state and federal governments, the number of entities and the amount of funds competing for suitable investment properties may increase, resulting in increased demand and increased prices paid for these properties. If we pay higher prices for properties, our profitability may decrease, and you may experience a lower return on your investment. Increased competition for properties may also preclude us from acquiring those properties that would generate attractive returns to us.
There may only be a limited number of medical-use cannabis facilities operated by suitable tenants available for us to acquire, which could adversely affect the return on your investment.
We intend to use the net proceeds of this offering to purchase from licensed growers their medical-use cannabis facilities, which we then intend to lease to them under triple-net lease agreements. We also intend to target properties owned by growers that have been among the top candidates in the rigorous state licensing process and have been granted a license to operate multiple facilities. In light of the current regulatory landscape regarding medical-use cannabis, including but not limited to, the rigorous state licensing processes, limits on the number of licenses granted in certain states and in counties within such states, zoning regulations related to medical-use cannabis facilities, the inability of potential tenants to open bank accounts necessary to pay rent and other expenses and the ever-changing federal and state regulatory landscape, we may have only a limited number of medical-use cannabis facilities available to purchase that are operated by licensees that we believe would be suitable tenants. Our inability to locate suitable investment properties and tenants would have a material adverse effect on ability to generate cash flow and make distributions to our stockholders.
Our growth will depend upon future acquisitions of real estate assets, and we may be unable to consummate acquisitions on advantageous terms.
Our growth strategy is focused on the acquisition of specialized industrial real estate assets on favorable terms as opportunities arise. Our ability to acquire these real estate assets on favorable terms is subject to the following risks:
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· | competition from other potential acquirers may significantly increase the purchase price of a desired property; |
· | we may not successfully purchase and lease our properties to meet our expectations; |
· | we may be unable to obtain the necessary equity or debt financing to consummate an acquisition on satisfactory terms or at all; |
· | agreements for the acquisition of properties are typically subject to closing conditions, including satisfactory completion of due diligence investigations, and we may spend significant time and money on potential acquisitions that we do not consummate; and |
· | we may acquire properties without any recourse, or with only limited recourse, for liabilities, whether known or unknown, against the former owners of the properties. |
Our real estate portfolio will be concentrated in a limited number of properties, which subjects us to an increased risk of significant loss if any property declines in value or if we are unable to lease a property.
Based on the anticipated net proceeds to be received from this offering, the expected investment size and our senior management team’s experience in the marketplace, we estimate that we will purchase approximately 10 to 20 properties with the net proceeds of this offering. However, currently a substantial portion of the net proceeds of this offering is not committed to specific properties. To the extent we are able to leverage our investment acquisitions with borrowed funds, we will acquire additional properties with the net proceeds of borrowings, subject to our debt policy. One consequence of a limited number of investments is that the aggregate returns we realize may be substantially adversely affected by the unfavorable performance of a small number of leases or a significant decline in the value of any single property. Lack of diversification will increase the potential that a single underperforming investment could have a material adverse effect on our cash flows and the price we could realize from the sale of our properties. Because we expect that the properties we initially acquire will be geographically concentrated in New York, Illinois, Maryland, California, Arizona, Washington, Nevada, Massachusetts and Oregon, we will be subject to the any adverse change in the political or regulatory climate in those states or specific counties where our properties are located that could adversely affect our properties and our ability to lease properties.
We may acquire a property or properties, including our Initial Property, “as-is,” which increases the risk of an investment that requires us to remedy defects or costs without recourse to the prior owner.
We may acquire real estate properties, including our Initial Property, “as is” with only limited representations and warranties from the property seller regarding matters affecting the condition, use and ownership of the property. There may also be environmental conditions associated with properties we acquire of which we are unaware despite our diligence efforts. In particular, medical-use cannabis facilities may present environmental concerns of which we are not currently aware. If environmental contamination exists on properties we acquire or develops after acquisition, we could become subject to liability for the contamination. As a result, if defects in the property (including any building on the property) or other matters adversely affecting the property are discovered, including but not limited to environmental matters, we may not be able to pursue a claim for any or all damage against the property seller. Such a situation could harm our business, financial condition, liquidity and results of operations.
We expect that the properties that we initially acquire will be geographically concentrated in New York, Illinois, Maryland, California, Arizona, Washington, Nevada, Massachusetts and Oregon, and we will be subject to social, political and economic risks of doing business in these states and any other state in which we may own property.
We expect that the properties that we initially acquire will be geographically concentrated in New York, Illinois, Maryland, California, Arizona, Washington, Nevada, Massachusetts and Oregon. Circumstances and developments related to operations in these markets that could negatively affect our business, financial condition, liquidity and results of operations include, but are not limited to, the following factors:
· | the responsibility of complying with multiple and likely conflicting state and federal laws, including with respect to cultivation and distribution of medical-use cannabis, licensing, banking and insurance; |
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· | difficulties and costs of staffing and managing operations; |
· | unexpected changes in regulatory requirements and other laws; |
· | potentially adverse tax consequences; |
· | the impact of regional or state specific business cycles and economic instability; and |
· | access to capital may be more restricted, or unavailable on favorable terms or at all in certain locations. |
If our properties’ access to adequate water and power supplies is interrupted, it could harm our ability to lease the properties for medical-use cannabis cultivation and production, thereby adversely affecting our ability to generate returns on our properties.
In order to lease the properties that we intend to acquire with the proceeds of this offering, these properties will require access to sufficient water and power to make them suitable for the cultivation and production of medical-use cannabis. Although we expect to acquire properties with sufficient access to water, should the need arise for additional wells from which to obtain water, we would be required to obtain permits prior to drilling such wells. Permits for drilling water wells are required by state and county regulations, and such permits may be difficult to obtain due to the limited supply of water in areas where we expect to acquire properties. Similarly, our properties may be subject to governmental regulations relating to the quality and disposition of rainwater runoff or other water to be used for irrigation. In such case, we could incur costs necessary in order to retain this water. If we are unable to obtain or maintain sufficient water supply for our properties, our ability to lease them for the cultivation and production of medical-use cannabis would be seriously impaired, which would have a material adverse impact on the value of our assets and our results of operations.
Historically, states that have legalized medical-use cannabis cultivation have typically required that such cultivation take place indoors. Indoor cultivation of medical-use cannabis requires significant power for growing lights and heating, ventilation and air conditioning to remove the hot air generated by the growing lights. While outdoor and greenhouse cultivation is gaining acceptance in many states with favorable climates for such growth, we expect that a significant number of our properties will continue to utilize indoor cultivation methods. Any extended interruption of the power supply to our properties, particularly those using indoor cultivation methods, would likely harm our tenants’ crops, which could result in their inability to make lease payments to us for our properties. Any lease payment defaults by a tenant could adversely affect our cash flows and cause us to reduce the amount of distributions to stockholders.
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Some of our tenants could be susceptible to bankruptcy, which would affect our ability to generate rents from them and therefore negatively affect our results of operations.
In addition to the risk of tenants being unable to make regular rent payments, certain of our tenants who may depend on debt and leverage could be especially susceptible to bankruptcy in the event that their cash flows are insufficient to satisfy their debt. Any bankruptcy of one of our tenants would result in a loss of lease payments to us, as well as an increase in our costs to carry the property.
Additionally, under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has the option of continuing (“assuming”) or giving up (“rejecting”) any unexpired lease of non-residential real property. If a bankrupt tenant decides to give up (reject) a lease with us, any claim we might have for breach of the lease, excluding a claim against (1) collateral securing the lease, or (2) a guarantor guaranteeing lease obligations, would be treated as a general unsecured claim in the tenant’s bankruptcy case. The laws governing bankruptcy cases would impact the treatment of our general unsecured claim. Our claim would likely be capped at the amount the tenant owed us for unpaid rent prior to the bankruptcy unrelated to the termination, plus the greater of one year of lease payments or 15% of lease payments payable under the remaining term of the lease, but in no case more than three years of lease payments. In addition to the cap on our damages for breach of the lease, even if our claim is timely submitted to the bankruptcy court, there is no guaranty that the tenant’s bankruptcy estate would have funds to satisfy the claims of general unsecured creditors. Finally, a bankruptcy court could re-characterize a net lease transaction as a disguised secured lending transaction. If that were to occur, we would not be treated as the owner of the property, but might have additional rights as a secured creditor. This would mean our claim in bankruptcy court could be limited to the amount we paid for the property, which could adversely impact our financial condition.
Our real estate investments will consist of primarily industrial properties suitable for cultivation and production of medical-use cannabis, which may be difficult to sell or re-lease upon tenant defaults or early lease terminations, either of which would adversely affect returns to stockholders.
While our business objectives consist of principally acquiring and deriving rental income from industrial properties used in the regulated medical-use cannabis industry, we expect that at times we will deem it appropriate or desirable to sell or otherwise dispose of certain of the properties we acquire. These types of properties are relatively illiquid compared to other types of real estate and financial assets. This illiquidity could limit our ability to quickly dispose of properties in response to changes in regulatory, economic or other conditions. Therefore, our ability at any time to sell assets may be restricted and this lack of liquidity may limit our ability to make changes to our portfolio promptly, which could materially and adversely affect our financial performance. We cannot predict the various market conditions affecting the properties that we expect to acquire that will exist in the future. Due to the uncertainty of regulatory and market conditions which may affect the future disposition of the real estate assets we expect to acquire, we cannot assure you that we will be able to sell these assets at a profit in the future. Accordingly, the extent to which we will realize potential appreciation on the real estate investments we expect to acquire will depend upon regulatory and other market conditions. In addition, in order to qualify as a REIT and maintain our REIT status, we may not be able to sell properties when we would otherwise choose to do so, due to market conditions or changes in our strategic plan.
Furthermore, we may be required to make expenditures to correct defects or to make improvements before a property can be sold and we cannot assure you that we will have funds available to correct such defects or to make such improvements. With these kinds of properties, if the current lease is terminated or not renewed, we may be required to make expenditures and rent concessions in order to lease the property to another tenant. In addition, in the event we are forced to sell or re-lease the property, we may have difficulty finding qualified purchasers who are willing to buy the property or tenants who are willing to lease the property. These and other limitations may affect our ability to sell or re-lease properties, which may adversely affect returns to our stockholders.
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Liability for uninsured losses could adversely affect our financial condition.
While the terms of our leases with our tenants generally will require that they carry property and casualty insurance, losses from disaster-type occurrences, such as earthquakes, floods and weather-related disasters, may be either uninsurable or not insurable on economically viable terms. Should an uninsured loss occur, we could lose our capital investment or anticipated profits and cash flows from one or more properties.
Potential liability for environmental matters could adversely affect our financial condition.
We intend to purchase real estate and will be subject to the risk of liabilities under federal, state and local environmental laws. Some of these laws could subject us to:
· | responsibility and liability for the cost of removal or remediation of hazardous substances released on our properties, generally without regard to our knowledge of or responsibility for the presence of the contaminants; |
· | liability for the costs of removal or remediation of hazardous substances at disposal facilities for persons who arrange for the disposal or treatment of these substances; and |
· | potential liability for claims by third parties for damages resulting from environmental contaminants. |
We will generally include provisions in our leases making tenants responsible for all environmental liabilities and for compliance with environmental regulations, and we will seek to require tenants to reimburse us for damages or costs for which we have been found liable. However, these provisions will not eliminate our statutory liability or preclude third party claims against us. Even if we were to have a legal claim against a tenant to enable us to recover any amounts we are required to pay, there are no assurances that we would be able to collect any money from the tenant. Our costs of investigation, remediation or removal of hazardous substances may be substantial. In addition, the presence of hazardous substances on one of our properties, or the failure to properly remediate a contaminated property, could adversely affect our ability to sell or lease the property or to borrow using the property as collateral. Additionally, we could become subject to new, stricter environmental regulations, which could diminish the utility of our properties and have a material adverse impact on our results of operations.
Contingent or unknown liabilities could materially and adversely affect our business, financial condition, liquidity and results of operations.
We may in the future acquire properties, subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a claim were asserted against us based on ownership of any of these properties, we may have to pay substantial amounts to defend or settle the claim. If the magnitude of such unknown liabilities is high, individually or in the aggregate, our business, financial condition, liquidity and results of operations would be materially and adversely affected.
The assets we will acquire may be subject to impairment charges.
We will periodically evaluate the real estate investments we acquire and other assets for impairment indicators. The judgment regarding the existence of impairment indicators is based upon factors such as market conditions, tenant performance and legal structure. For example, the termination of a lease by a tenant may lead to an impairment charge. If we determine that an impairment has occurred, we would be required to make an adjustment to the net carrying value of the asset which could have an adverse effect on our results of operations in the period in which the impairment charge is recorded.
We may own properties subject to ground leases that expose us to the loss of such properties upon breach or termination of the ground leases.
A ground lease agreement permits a tenant to develop and/or operate a land parcel (property) during the lease period, after which the land parcel and all improvements revert back to the property owner. Under a ground lease, property improvements are owned by the property owner unless an exception is created and all relevant taxes incurred during the lease period are paid for by the tenant. Ground leases typically have a long duration generally ranging from 50 to 99 years with additional extension options. As a lessee under a ground lease, we are exposed to the possibility of losing the property upon termination, or an earlier breach by us, of the ground lease, which may have a material adverse effect on our business, financial condition and results of operations, our ability to make distributions to our stockholders and the trading price of our Class A common stock.
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Due to our involvement in the regulated medical-use cannabis industry, we may have a difficult time obtaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liabilities.
Insurance that is otherwise readily available, such as workers’ compensation, general liability, and directors’ and officers’ insurance, is more difficult for us to find and more expensive, because we lease our properties to companies in the regulated medical-use cannabis industry. There are no guarantees that we will be able to find such insurances in the future, or that the cost will be affordable to us. If we are forced to go without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.
Risks Related to Financing Our Business
Our growth depends on external sources of capital, which may not be available on favorable terms or at all.
We intend to grow by acquiring real estate assets, which we intend to finance primarily through newly issued equity or debt. We may not be in a position to take advantage of attractive investment opportunities for growth if we are unable, due to global or regional economic uncertainty, changes in the state or federal regulatory environment relating to the medical-use cannabis industry, our own operating or financial performance or otherwise, to access capital markets on a timely basis and on favorable terms or at all. In addition, U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gain and that it pay U.S. federal income tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. Because we intend to grow our business, this limitation may require us to raise additional equity or incur debt at a time when it may be disadvantageous to do so.
Our access to capital will depend upon a number of factors over which we have little or no control, including general market conditions and the market’s perception of our current and potential future earnings. If general economic instability or downturn leads to an inability to borrow at attractive rates or at all, our ability to obtain capital to finance the purchase of real estate assets could be negatively impacted. In addition, while we do not consider our company to be engaged in the medical-use cannabis industry, banks and other financial institutions may be reluctant to enter into lending transactions with us, particularly secured lending, because we intend to acquire, including through sale-leaseback transactions, properties used in the cultivation and production of medical-use cannabis. If this source of funding is unavailable to us, our levered return on the properties we purchase may be lower.
If we are unable to obtain capital on terms and conditions that we find acceptable, we likely will have to reduce the number of properties we can purchase. In addition, our ability to refinance all or any debt we may incur in the future, on acceptable terms or at all, is subject to all of the above factors, and will also be affected by our future financial position, results of operations and cash flows, which additional factors are also subject to significant uncertainties, and therefore we may be unable to refinance any debt we may incur in the future, as it matures, on acceptable terms or at all. All of these events would have a material adverse effect on our business, financial condition, liquidity and results of operations.
Any future indebtedness reduces cash available for distribution and may expose us to the risk of default under debt obligations that we may incur in the future.
Payments of principal and interest on borrowings that we may incur in the future may leave us with insufficient cash resources to operate the properties that we expect to acquire or to pay the distributions currently contemplated or necessary to satisfy the requirements for REIT qualification. Our level of debt and the limitations imposed on us by these debt agreements could have significant material and adverse consequences, including the following:
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· | our cash flow may be insufficient to meet our required principal and interest payments; |
· | we may be unable to borrow additional funds as needed or on favorable terms, or at all; |
· | we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness; |
· | to the extent we borrow debt that bears interest at variable rates, increases in interest rates could materially increase our interest expense; |
· | we may be forced to dispose of one or more of the properties that we expect to acquire, possibly on disadvantageous terms; |
· | we may default on our obligations or violate restrictive covenants, in which case the lenders may accelerate these debt obligations; and |
· | our default under any loan with cross default provisions could result in a default on other indebtedness. |
If any one of these events were to occur, our financial condition, results of operations, cash flow, and our ability to make distributions to our stockholders could be materially and adversely affected.
Risks Related to Regulation
Current favorable state laws relating to cultivation and production of medical-use cannabis may be modified or eliminated in the future, and new laws that are adverse to the business of our tenants may be enacted.
As of June 10, 2016, 26 states, plus the District of Columbia, have passed laws allowing their citizens to use medical cannabis. We are targeting for acquisition, properties that are owned by state-licensed cultivators and producers of medical-use cannabis. However, relevant state laws may be amended or repealed, or new laws may be enacted in the future to eliminate existing laws permitting cultivation and production of medical-use cannabis. If our tenants involved in the cultivation and production of medical-use cannabis were forced to close their operations, we would need to replace those tenants with tenants who are not engaged in the cannabis industry, who may pay lower rents. Moreover, any changes in state laws that reduce or eliminate the ability to cultivate and produce medical-use cannabis would likely result in a high vacancy rate for the kinds of properties that we seek to acquire, which would depress our lease rates and property values. In addition, we would realize an economic loss on any and all improvements made to properties that were specific to the medical-use cannabis industry.
Our ability to grow our business depends on state laws pertaining to the cannabis industry.
Continued development of the medical-use cannabis industry depends upon continued legislative authorization of cannabis at the state level. The status quo of, or progress in, the regulated medical-use cannabis industry, while encouraging, is not assured and any number of factors could slow or halt further progress in this area. While there may be ample public support for legislative action permitting the manufacture and use of cannabis, numerous factors impact the legislative process. For example, in 2015, voters in Ohio rejected a ballot initiative that would have legalized medical and adult-use cannabis, but would have allowed commercial cultivation only at ten specifically designated parcels owned by certain private investors. Further legalization attempts at the state level that create bad public policy could slow or stop further development of the medical-use cannabis industry. In addition, several states, including Colorado, Washington and Oregon, have imposed significant taxes on the growth, processing and/or retail sales of cannabis, which may have the impact of dampening growth of the cannabis industry and making it difficult for cannabis businesses, including our tenants, to operate profitably in those states. Any one of these factors could slow or halt additional legislative authorization of medical-use cannabis, which could harm our business prospects.
Although the federal government currently has expressed a relaxed enforcement position regarding individuals and entities that operate in compliance with state law regulating the production and sale of medical-use cannabis, the possession, manufacture, distribution, or dispensation of cannabis remains illegal under federal law, and therefore, strict enforcement of federal laws regarding cannabis would likely result in our inability and the inability of our tenants to execute our respective business plans.
Cannabis is a Schedule-I controlled substance under the Controlled Substances Act of 1970, or CSA. Even in those jurisdictions in which the manufacture and use of medical cannabis has been legalized at the state level, its possession, manufacture, distribution, or dispensation all remain violations of federal law that are punishable by imprisonment and substantial fines. Moreover, individuals and entities may violate federal law if they intentionally aid and abet another in violating these federal controlled substance laws, or conspire with another to violate them. The United States Supreme Court has ruled in United States v. Oakland Cannabis Buyers’ Coop. and Gonzales v. Raich that it is the federal government that has the right to regulate and criminalize cannabis, even for medical purposes. Therefore, were the federal government to strictly enforce federal law regarding cannabis, doing so would likely result in our inability to execute our business plan.
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The Obama administration has effectively stated that it is not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use, manufacture and distribution of medical cannabis. In furtherance thereof, on August 29, 2013, the U.S. Department of Justice provided guidance in the so-called “Cole Memo” to all federal prosecutors regarding the enforcement of federal laws regarding cannabis, which states that enforcement should be focused on eight priorities, which are to prevent: (1) distribution of cannabis to minors; (2) revenue from sale of cannabis to criminal enterprises, gangs and cartels; (3) transfer of cannabis from states where it is legal to states where it is illegal; (4) cannabis activity from being a pretext for trafficking of other illegal drugs or illegal activity; (5) violence or use of firearms in cannabis growth and distribution; (6) drugged driving and adverse public health consequences from cannabis use; (7) growth of cannabis on federal lands; and (8) cannabis possession or use on federal property.
In addition, as it did for the fiscal year 2015, Congress enacted an omnibus spending bill for fiscal year 2016 including a provision prohibiting the U.S. Department of Justice (which includes the DEA) from using funds appropriated by that bill to prevent states from implementing their medical-use cannabis laws. This provision, however, is effective only until December 9, 2016 and must be renewed by Congress in subsequent years. In USA vs. McIntosh , the United States Court of Appeals for the Ninth Circuit held that this provision prohibits the U.S. Department of Justice from spending funds from relevant appropriations acts to prosecute individuals who engage in conduct permitted by state medical-use cannabis laws and who strictly comply with such laws. However, the Ninth Circuit’s opinion, which only applies to the states of Alaska, Arizona, California, Hawaii, and Idaho, also held that persons who do not strictly comply with all state laws and regulations regarding the distribution, possession and cultivation of medical-use cannabis have engaged in conduct that is unauthorized, and in such instances the U.S. Department of Justice may prosecute those individuals.
We do not intend to acquire properties from or lease properties to companies whose activities involve or support those enumerated in the Cole Memo, but federal prosecutors have significant discretion in their interpretation of these priorities. Therefore, no assurance can be given that the federal prosecutor in each judicial district where we purchase a property will agree that the activities of our tenant on the property located in such prosecutor’s district do not involve those enumerated in the Cole Memo. There is also no guarantee that the current administration or future administrations will not revise the federal enforcement priorities enumerated in the Cole Memo or otherwise choose to strictly enforce the federal laws governing cannabis production or distribution. Any such change in the federal government’s current enforcement posture with respect to state-licensed cultivation of medical-use cannabis would result in our inability to execute our business plan and we would likely suffer significant losses with respect to our investment in medical-use cannabis facilities in the U.S. Furthermore, if our tenants were to continue the cultivation and production of medical-use cannabis on properties that we own following any such change in the federal government’s enforcement position, we could be subject to criminal prosecution, which could lead to imprisonment and/or the imposition of penalties, fines, or forfeiture.
FDA regulation of medical-use cannabis and the possible registration of facilities where medical-use cannabis is grown could negatively affect the medical-use cannabis industry, which would directly affect our financial condition.
Should the federal government legalize cannabis for medical-use, it is possible that the U.S. Food and Drug Administration, or the FDA, would seek to regulate it under the Food, Drug and Cosmetics Act of 1938. Additionally, the FDA may issue rules and regulations including certified good manufacturing practices, or cGMPs, related to the growth, cultivation, harvesting and processing of medical cannabis. Clinical trials may be needed to verify efficacy and safety. It is also possible that the FDA would require that facilities where medical-use cannabis is grown register with the FDA and comply with certain federally prescribed regulations. In the event that some or all of these regulations are imposed, we do not know what the impact would be on the medical-use cannabis industry, including what costs, requirements and possible prohibitions may be enforced. If we or our tenants are unable to comply with the regulations or registration as prescribed by the FDA, we and or our tenants may be unable to continue to operate their and our business in its current form or at all.
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We and our tenants may have difficulty accessing the service of banks, which may make it difficult to contract for real estate needs.
Despite recent rules issued by the U.S. Department of the Treasury mitigating the risks to banks who do business with medical-use cannabis companies that operate in compliance with applicable state laws, as well as recent guidance from the U.S. Department of Justice, banks remain wary of accepting funds from businesses in the medical-use cannabis industry. Because the possession, manufacture, distribution, and dispensation of medical cannabis remains illegal under federal law, strict enforcement of those federal laws could result in banks being found in violation of federal law when accepting for deposit funds derived from the sale or distribution of medical-use cannabis. Consequently, even those businesses involved in the regulated medical-use cannabis industry continue to encounter difficulty establishing banking relationships. The terms of our leases will require that our tenants make rental payments via check or wire transfer. The inability of our potential tenants to open accounts and continue using the services of banks may make it difficult for them 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. Although we currently have a bank account, our inability or our tenants’ ability to open additional bank accounts or maintain current accounts would make it difficult for us to do business.
Laws and regulations affecting the regulated cannabis industry are constantly changing, which could materially adversely affect our proposed operations, and we cannot predict the impact that future regulations may have on us.
Local, state and federal cannabis 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 our operations. It is also 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.
Applicable state laws may prevent us from maximizing our potential income.
Depending on the state, and the laws of that particular state, we may not be able to fully realize our potential to generate profit. Colorado and Washington have residency requirements for those directly involved in the medical-use cannabis industry, which may impede our ability to contract with cannabis businesses in those states. Furthermore, cities and counties are being given broad discretion to ban certain cannabis activities. Even if these activities are legal under state law, specific cities and counties may ban them.
Assets leased to cannabis businesses may be forfeited to the federal government.
Any assets used in conjunction with the violation of federal law are potentially subject to federal forfeiture, even in states where cannabis is legal. If the federal government decides to initiate forfeiture proceedings against cannabis businesses such as the medical-use cannabis facilities that we intend to acquire, our investment in those properties may be lost.
The properties that we expect to acquire will be subject to extensive regulations, which may result in significant costs and materially and adversely affect our business, financial condition, liquidity and results of operations.
The properties that we expect to acquire will be subject to various local laws and regulatory requirements. Local property regulations may restrict the use of properties we acquire and may require us to obtain approval from local authorities with respect to the properties that we expect to acquire, including prior to acquiring a property or when developing or undertaking renovations. Among other things, these restrictions may relate to cultivation of medical-use cannabis, the use of water and the discharge of waste water, fire and safety, seismic conditions, asbestos-cleanup or hazardous material abatement requirements. We cannot assure you that existing regulatory policies will not materially and adversely affect us or the timing or cost of any future acquisitions, developments or renovations, or that additional regulations will not be adopted that would increase such delays or result in additional costs. Our failure to obtain such regulatory approvals could have a material adverse effect on our business, financial condition, liquidity and results of operations.
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Compliance with environmental laws could materially increase our operating expenses.
There may be environmental conditions associated with properties we acquire of which we are unaware. If environmental contamination exists on properties we acquire, we could become subject to liability for the contamination. The presence of hazardous substances on a property may materially and adversely affect our ability to sell the property and we may incur substantial remediation costs. In addition, although we may require in our leases that tenants operate in compliance with all applicable laws and indemnify us against any environmental liabilities arising from a tenant’s activities on the property, we could nonetheless be subject to liability by virtue of our ownership interest and we cannot be sure that our tenants would satisfy their indemnification obligations to us. Such environmental liability exposure associated with properties we acquire could harm our business, financial condition, liquidity and results of operations.
Risks Related to Our Organization and Structure
We are dependent on our key personnel for our success.
We will depend upon the efforts, experience, diligence, skill and network of business contacts of our senior management team; therefore, our success will depend on their continued service. The departure of any of our executive officers or key personnel could have a material adverse effect on our performance. If any of our key personnel were to cease their employment, our operating results could suffer. Further, we do not intend to maintain key person life insurance that would provide us with proceeds in the event of death or disability of any of our key personnel.
We believe our future success depends upon our senior management team’s ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting and retaining such skilled personnel. If we lose or are unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered, and the value of your investment may decline.
Furthermore, we may retain independent contractors to provide various services for us, including administrative services, transfer agent services and professional services. Such contractors have no fiduciary duty to us and may not perform as expected or desired.
Our senior management team will manage our portfolio subject to very broad investment guidelines and generally will not seek board approval for each investment decision.
Our senior management team has broad discretion over the use of proceeds from this offering, and you will have no opportunity to evaluate the terms of transactions or other economic or financial data concerning our investments that are not described in this prospectus or other periodic filings with the SEC. Furthermore, currently a substantial portion of the net proceeds of this offering is not committed to specific properties. We will rely on the senior management team’s ability, subject to the oversight and approval of our board of directors. Our senior management team will be authorized to execute acquisitions and dispositions of real estate investments in accordance with very broad investment guidelines. Our board of directors will periodically review our investment guidelines and our portfolio but will not, and will not be required to, review all of our proposed investments. Our senior management team will have great latitude within the broad parameters of our investment guidelines in determining the assets that are proper investments for us, which could result in investment returns that are substantially below expectations or that result in losses, which would materially and adversely affect our business operations and results. Accordingly, you should not purchase shares of our Class A common stock unless you are willing to entrust all aspects of our day-to-day management to our senior management team.
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Certain provisions of Maryland law could inhibit changes in control.
Under certain provisions of the MGCL, “business combinations” between a Maryland corporation and an “interested stockholder” or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as: (a) any person who beneficially owns 10% or more of the voting power of the then-outstanding voting stock of the corporation; or (b) an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding stock of the corporation.
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which the person otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board of directors.
After the expiration of the five-year period described above, any business combination between the Maryland corporation and an interested stockholder must generally be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
· | 80% of the votes entitled to be cast by holders of the then-outstanding shares of voting stock of the corporation; and |
· | two-thirds of the votes entitled to be cast by holders of voting stock of the corporation, other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected, or held by an affiliate or associate of the interested stockholder. |
These supermajority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under the MGCL, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The MGCL also permits various exemptions from these provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
The “control share” provisions of the MGCL provide that, subject to certain exceptions, a holder of “control shares” of a Maryland corporation (defined as shares which, when aggregated with all other shares controlled by the stockholder (except solely by virtue of a revocable proxy), entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) has no voting rights with respect to such shares except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquirer of control shares, our officers and our personnel who are also our directors. Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock. This bylaw provision may be amended only by our board of directors.
The “unsolicited takeover” provisions of Title 3, Subtitle 8 of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain takeover defenses, some of which (for example, a classified board) we do not yet have. Our charter contains a provision whereby we have elected to be subject to the provisions of Title 3, Subtitle 8 of the MGCL, pursuant to which our board of directors has the exclusive power to fill vacancies on our board of directors. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide the holders of shares of Class A common stock with the opportunity to realize a premium over the then current market price. See the section entitled “Certain Provisions of Maryland Law and Our Charter and Bylaws—Business Combinations,” “—Control Share Acquisitions” and “—Subtitle 8.”
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Stockholders have limited control over changes in our policies and operations.
Our board of directors determines our major policies, including with regard to financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Under our charter and the MGCL, our stockholders generally have a right to vote only on the following matters:
· | the election or removal of directors; |
· | the amendment of our charter, except that our board of directors may amend our charter without stockholder approval to: |
· | change our name; |
· | change the name or other designation or the par value of any class or series of stock and the aggregate par value of our stock; |
· | increase or decrease the aggregate number of shares of stock that we have the authority to issue; |
· | increase or decrease the number of our shares of any class or series of stock that we have the authority to issue; |
· | effect certain reverse stock splits; |
· | our liquidation and dissolution; and |
· | our being a party to a merger, consolidation, sale or other disposition of all or substantially all of our assets or statutory share exchange. |
All other matters are subject to the discretion of our board of directors.
Our authorized but unissued shares of common and preferred stock may prevent a change in our control.
Our charter permits our board of directors to authorize us to issue additional shares of our authorized but unissued common or preferred stock. In addition, our board of directors may, without stockholder approval, amend our charter to increase the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have the authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the terms of the classified or reclassified shares. As a result, our board of directors may establish a class or series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for shares of our Class A common stock or otherwise be in the best interest of our stockholders.
Because of our holding company structure, we depend on our operating subsidiary and its subsidiaries for cash flow and we will be structurally subordinated in right of payment to the obligations of such operating subsidiary and its subsidiaries.
We are a holding company with no business operations of our own. Our only significant asset is and will be the general and limited partnership interests in our Operating Partnership. We conduct, and intend to conduct, all of our business operations through our Operating Partnership. Accordingly, our only source of cash to pay our obligations is distributions from our Operating Partnership and its subsidiaries of their net earnings and cash flows. We cannot assure you that our Operating Partnership or its subsidiaries will be able to, or be permitted to, make distributions to us that will enable us to make distributions to our stockholders from cash flows from operations. Each of our Operating Partnership’s subsidiaries is or will be a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from such entities. In addition, because we are a holding company, your claims as stockholders will be structurally subordinated to all existing and future liabilities and obligations of our Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our Operating Partnership and its subsidiaries will be able to satisfy your claims as stockholders only after all of our and our Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.
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Our Operating Partnership may issue additional limited partnership interests to third parties without the consent of our stockholders, which would reduce our ownership percentage in our Operating Partnership and would have a dilutive effect on the amount of distributions made to us by our Operating Partnership and, therefore, the amount of distributions we can make to our stockholders.
We are the sole general partner of our Operating Partnership and, upon consummation of this offering, will own, directly or through a subsidiary, 100% of the outstanding partnership interests in our Operating Partnership. We may, in connection with our acquisition of properties or otherwise, cause our Operating Partnership to issue additional limited partnership interests to third parties. Such issuances would reduce our ownership percentage in our Operating Partnership and affect the amount of distributions made to us by our Operating Partnership and, therefore, the amount of distributions we can make to our stockholders. Because you will not directly own any interest in our Operating Partnership, you will not have any voting rights with respect to any such issuances or other partnership level activities of our Operating Partnership.
If we issue limited partnership interests in our Operating Partnership in exchange for property, the value placed on such partnership interests may not accurately reflect their market value, which may dilute your interest in us.
If we issue limited partnership interests in our Operating Partnership in exchange for property, the per unit value attributable to such interests will be determined based on negotiations with the property seller and, therefore, may not reflect the fair market value of such limited partnership interests if a public market for such limited partnership interests existed. If the value of such limited partnership interests is greater than the value of the related property, your interest in us may be diluted.
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interests.
Our charter eliminates the liability of our present and former directors and officers to us and our stockholders for money damages to the maximum extent permitted under Maryland law. Under Maryland law, our present and former directors and officers will not have any liability to us or our stockholders for money damages other than liability resulting from:
· | actual receipt of an improper benefit or profit in money, property or services; or |
· | active and deliberate dishonesty by the director or officer that was established by a final judgment and was material to the cause of action adjudicated. |
Our charter authorizes us to indemnify our directors and officers for actions taken by them in those and other capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each present and former director or officer, and each person who served any predecessor of our company in a similar capacity, to the maximum extent permitted by Maryland law, in connection with the defense of any proceeding to which he or she is made, or threatened to be made, a party or a witness by reason of his or her service to us. In addition, we may be obligated to pay or reimburse the expenses incurred by such persons in connection with any such proceedings without requiring a preliminary determination of their ultimate entitlement to indemnification. See the section entitled “Certain Provisions of Maryland Law and Our Charter and Bylaws—Indemnification and Limitation of Directors’ and Officers’ Liability.”
Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management.
Our charter provides that, subject to the rights of holders of any series of preferred stock, a director may be removed only with cause upon the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast generally in the election of directors. Vacancies may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements make it more difficult to change our management by removing and replacing directors and may prevent a change in control of our company that is in the best interests of our stockholders.
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Ownership limitations may restrict change in control or business combination opportunities in which our stockholders might receive a premium for their shares.
In order for us to qualify as a REIT, shares of our stock must be owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of our stock may be owned, directly or constructively, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made). To assist us in preserving our REIT qualification, among other purposes, our charter generally prohibits any person from directly or indirectly owning more than 9.8% by value or number of shares, whichever is more restrictive, of the outstanding shares of our Class A common stock, of the outstanding shares of any class or series of our preferred stock, or of the outstanding shares of our capital stock. These ownership limits and other restrictions could have the effect of discouraging a takeover or other transaction in which holders of our Class A common stock might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests.
We will be subject to financial reporting and other requirements for which our accounting and other management systems and resources may not be adequately prepared.
Following this offering, we will be subject to reporting and other obligations under the Exchange Act, including the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 requires annual management assessments of the effectiveness of our internal controls over financial reporting and, after we are no longer an “emerging growth company,” our independent registered public accounting firm to express an opinion on the effectiveness of our internal controls over financial reporting. To the extent applicable, these reporting and other obligations will place significant demands on our management, administrative, operational, and accounting resources and will cause us to incur significant expenses. We will need to create systems; implement financial and management controls, reporting systems and procedures; and hire additional accounting and finance staff. If we are unable to accomplish these objectives in a timely and effective manner, our ability to comply with the financial reporting requirements and other rules that apply to public reporting companies could be impaired. Any failure to maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.
Pursuant to the recently enacted JOBS Act, we are eligible to take advantage of certain specified reduced disclosure and other requirements that are otherwise generally applicable to public companies for so long as we are an “emerging growth company.”
We are an “emerging growth company” as defined in the JOBS Act and we are eligible to take advantage of certain specified reduced disclosure and other requirements that are otherwise generally applicable to public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” if we have more than $1 billion in annual gross revenues, we have more than $700 million in market value of our Class A common stock held by non-affiliates or we issue more than $1 billion of non-convertible debt over a three-year period. If we do take advantage of any or all of these exemptions, we do not know if some investors will find our Class A common stock less attractive as a result. The result may be a less active trading market for our Class A common stock and our stock price may be more volatile.
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We plan to operate our business so that we are not required to register as an investment company under the Investment Company Act.
We intend to engage primarily in the business of investing in real estate and we do not intend to register as an investment company under the Investment Company Act. If our primary business were to change in a manner that would require us register as an investment company under the Investment Company Act, we would have to comply with substantial regulation under the Investment Company Act which could restrict the manner in which we operate and finance our business and could materially and adversely affect our business operations and results.
Risks Related to Our Class A Common Stock
We set the initial public offering price of our shares of Class A common stock arbitrarily and such price may not accurately reflect the value of our assets or our expected operating income.
We established the initial offering price of our shares of Class A common stock on an arbitrary basis. This price bears no relationship to our book or asset values or to any other established criteria for valuing shares. Because the initial offering price is not based upon any valuation (independent or otherwise), the trading price of our shares of Class A common stock following the completion of this offering could be lower or higher than the initial public offering price.
There is no public market for our Class A common stock and a market may never develop which could cause our Class A common stock to trade at a discount and make it difficult for holders of our Class A common stock to sell their shares.
Shares of our Class A common stock are newly-issued securities for which there is no established trading market. We have applied to list our Class A common stock on the NYSE. However, there can be no assurance that our listing application will be approved, or if approved, that an active trading market for our Class A common stock will develop, or if one develops, be maintained. Accordingly, no assurance can be given as to the ability of our stockholders to sell their Class A common stock or the price that our stockholders may obtain for their Class A common stock.
Some of the factors that could negatively affect the market price of our Class A common stock include:
· | our actual or projected operating results, financial condition, cash flows and liquidity or changes in business strategy or prospects; |
· | our ability to acquire our target assets on preferable terms or at all; |
· | equity issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may occur; |
· | actual or anticipated accounting problems; |
· | publication of research reports about us or the real estate industry; |
· | changes in market valuations of similar companies; |
· | adverse market reaction to any increased indebtedness we may incur in the future; |
· | interest rate changes; |
· | additions to or departures of our senior management team; |
· | speculation in the press or investment community; |
· | our failure to meet, or the lowering of, our earnings estimates or those of any securities analysts; |
· | changes in governmental policies, regulations or laws; |
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· | failure to qualify, or maintain our qualification, as a REIT; |
· | price and volume fluctuations in the stock market generally; and |
· | market and economic conditions generally, including the current state of the credit and capital markets and the market and economic conditions. |
Market factors unrelated to our performance could also negatively impact the market price of our Class A common stock. One of the factors that investors may consider in deciding whether to buy or sell our Class A common stock is our distribution rate as a percentage of our stock price relative to market interest rates. If market interest rates increase, prospective investors may demand a higher distribution rate or seek alternative investments paying higher dividends or interest. As a result, interest rate fluctuations and conditions in capital markets can affect the market value of our Class A common stock.
Common stock and preferred stock eligible for future sale may have material and adverse effects on our share price.
Subject to applicable law, our board of directors, without stockholder approval, may authorize us to issue additional authorized and unissued shares of common stock and preferred stock on the terms and for the consideration it deems appropriate. In addition, upon completion of this offering, certain of our executive officers and directors will own approximately 14.8% of our total outstanding shares of Class A common stock, including (i) 1,312,500 shares of Class A common stock that will be issued to certain executive officers and directors in exchange of outstanding shares of Class B common stock (or 1,509,375 shares if the underwriters’ over-allotment option is fully exercised), (ii) 150,000 shares of Class A common stock that our executive chairman intends to purchase in this offering at the public offering price, and (iii) grants of an aggregate of 27,500 shares of Class A common stock to two of our executive officers under the Incentive Plan that are expected to be approved at the first meeting of the compensation committee of our board of directors upon the completion of this offering.
Upon completion of this offering and following grants of shares of our Class A common stock expected to be made to two of our executive officers, there will be 972,500 shares of Class A common stock available for future issuance and sale under the Incentive Plan. In connection with stock splits, dividends, recapitalizations and certain other events, our board will make equitable adjustments that it deems appropriate in the aggregate number of shares of our Class A common stock that may be issued under the Incentive Plan and the terms of outstanding awards. The sale of awards under the Incentive Plan will dilute the ownership interests of our existing stockholders and may depress the trading price of our Class A common stock.
We cannot predict the effect, if any, of future sales of our common stock or the availability of shares for future sales, on the market price of our Class A common stock. Sales of substantial amounts of common stock or the perception that such sales could occur may materially and adversely affect the prevailing market price for our common stock.
We cannot assure you of our ability to make distributions in the future. We may be required to borrow funds to make distributions.
We intend to make regular quarterly distributions to our stockholders. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gain, and that it pay U.S. federal income tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We generally intend over time to distribute a minimum of 100% of our taxable income so as to satisfy the requirements for qualification as a REIT and avoid the payment of corporate level U.S. federal income taxes on our undistributed income. However, we cannot assure you that distributions will be made or sustained. Any distributions we make will be at the direction of our board of directors and will depend upon a number of factors, including our actual results of operations, economic conditions and other factors that could differ materially from our current expectations. See the section entitled “Distribution Policy.”
Our charter permits us to pay distributions from any source and, as a result, the amount of distributions paid at any time may not reflect the performance of our properties or as cash flow from operations.
Our organizational documents permit us to make distributions from any source. To the extent that our cash available for distribution is insufficient to cover our distributions, we expect to use the proceeds from this offering, the proceeds from the issuance of securities in the future, the proceeds from borrowings or other sources to pay distributions. It is possible that in our initial years of operation, any distributions declared will be paid from our offering proceeds, which would constitute a return of capital to our stockholders. If we fund distributions from borrowings, sales of properties or the net proceeds from this offering, we will have fewer funds available for the acquisition of additional properties resulting in potentially fewer investments, less diversification of our portfolio and a reduced overall return to our stockholders. In addition, the value of our shares of Class A common stock may be diluted because funds that would otherwise be available to make investments would be diverted to fund distributions.
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The market price of our Class A common stock could be materially and adversely affected by our level of cash distributions.
The market value of the equity securities of a REIT is based primarily upon the market’s perception of our growth potential and its current and potential future cash distributions, whether from operations, sales or re-financings, and is secondarily based upon the real estate market value of the underlying assets. For that reason, our Class A common stock may trade at prices that are higher or lower than our net asset value per share. To the extent we retain operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our Class A common stock. Our failure to meet the market’s expectations with regard to future earnings and cash distributions likely would materially and adversely affect the market price of our Class A common stock.
Future offerings of debt or preferred equity securities, which may rank senior to our Class A common stock, may materially and adversely affect the market price of our Class A common stock.
If we decide to issue debt securities in the future, which would rank senior to our Class A common stock, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any preferred equity securities or convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our Class A common stock and may result in dilution to owners of our Class A common stock. We and, indirectly, our stockholders will bear the cost of issuing and servicing such securities. Because our decision to issue debt or preferred equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our Class A common stock will bear the risk of our future offerings reducing the market price of our Class A common stock and diluting the value of their stock holdings in us.
If you purchase shares of Class A common stock in this offering, you will incur immediate and substantial dilution.
If you purchase shares of Class A common stock in this offering, you will incur immediate and substantial dilution in the amount of $4.08 per share, because the assumed initial public offering price of $20.00 is substantially higher than the pro forma net tangible book value per share of our outstanding common stock after the consummation of this offering and related transactions. This dilution is due in large part to the conversion of the shares of Class B common stock held by certain executive officers and directors into 1,312,500 shares of Class A common stock upon completion of this offering (or 1,509,375 shares if the underwriters’ over-allotment option is fully exercised). Investors who purchase shares in this offering will contribute approximately 100% of the total amount of equity capital raised by us through the date of this offering, but will only own approximately 87% of our outstanding shares of Class A common stock following the completion of this offering. For additional information, see the section entitled “Dilution.”
Your percentage of ownership may become diluted if we issue new shares of stock or other securities, and issuances of preferred stock or other securities by us may subordinate the rights of the holders of our Class A common stock.
Our board of directors is authorized, without your approval, to cause us to issue additional shares of our common stock or to raise capital through the issuance of preferred stock (including equity or debt securities convertible into preferred stock), options, warrants and other rights, on terms and for consideration as our board of directors in its sole discretion may determine. Any such issuance could result in dilution of the equity of our stockholders.
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Our charter also authorizes our board of directors, without stockholder approval, to designate and issue one or more classes or series of preferred stock (including equity or debt securities convertible into preferred stock) and to set or change the voting, conversion or other rights, preferences, restrictions, limitations as to dividends or other distributions and qualifications or terms or conditions of redemption of each class of shares so issued. If any preferred stock is publicly offered, the terms and conditions of such preferred stock (including any equity or debt securities convertible into preferred stock) will be set forth in a registration statement registering the issuance of such preferred stock or equity or debt securities convertible into preferred stock. Because our board of directors has the power to establish the preferences and rights of each class or series of preferred stock, it may afford the holders of any series or class of preferred stock preferences, powers, and rights senior to the rights of holders of common stock or other preferred stock. If we ever create and issue additional preferred stock or equity or debt securities convertible into preferred stock with a distribution preference over common stock or preferred stock, payment of any distribution preferences of new outstanding preferred stock would reduce the amount of funds available for the payment of distributions on the common stock and junior preferred stock. Further, holders of preferred stock are normally entitled to receive a preference payment if we liquidate, dissolve, or wind up before any payment is made to the common stockholders, likely reducing the amount common stockholders would otherwise receive upon such an occurrence. In addition, under certain circumstances, the issuance of additional preferred stock may delay, prevent, render more difficult or tend to discourage a merger, tender offer, or proxy contest, the assumption of control by a holder of a large block of our securities, or the removal of incumbent management.
Risks Related to Our Taxation as a REIT
Our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and local taxes, which would reduce the amount of cash available for distribution to our stockholders.
We have been organized and we intend to operate in a manner that will enable us to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2016. We have not requested and do not intend to request a ruling from the Service that we qualify as a REIT, and the statements in this prospectus are not binding on the Service or any court. Qualification as a REIT involves the application of highly technical and complex Code provisions and regulations promulgated by the U.S. Treasury Department, or the Treasury Regulations, thereunder for which there are limited judicial and administrative interpretations. Accordingly, we cannot provide assurance that we will qualify or remain qualified as a REIT.
To qualify as a REIT, we must meet, on an ongoing basis, various tests regarding the nature and diversification of our assets and our income, the ownership of our outstanding stock, and the amount of our distributions to stockholders. Our ability to satisfy these asset tests depends upon the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to manage successfully the composition of our income and assets on an ongoing basis. Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT. Thus, while we intend to operate in a manner to qualify as a REIT, in view of the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, we cannot provide assurance that we will so qualify for any particular year. These considerations also might restrict the types of income we can realize, or assets that we can acquire in the future.
If we fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. We will not be able to deduct distributions to our stockholders in any year in which we fail to qualify, nor will we be required to make distributions to our stockholders. In such a case, we might need to borrow money, sell assets, or reduce or even cease making distributions in order to pay our taxes. Our payment of income tax would reduce significantly the amount of cash available for distribution to our stockholders. If we fail to qualify as a REIT, all distributions to stockholders, to the extent of current and accumulated earnings and profits, will be taxable to the stockholders as dividend income (which may be subject to tax at preferential rates) and corporate distributes may be eligible for the dividends received deduction if they satisfy the relevant provisions of the Code. Furthermore, if we fail to qualify as a REIT, we no longer would be required to distribute substantially all of our net taxable income to our stockholders. In addition, unless we were eligible for certain statutory relief provisions, we could not re-elect to qualify as a REIT until the fifth calendar year following the year in which we failed to qualify. We might not be entitled to the statutory relief described in this paragraph in all circumstances.
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The REIT distribution requirements could adversely affect our ability to execute our business plan, require us to borrow funds during unfavorable market conditions or subject us to tax, which would reduce the cash available for distribution to our stockholders.
To qualify as a REIT, we must distribute to our stockholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. In addition, we will be subject to U.S. federal income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income (including net capital gain) and will be subject to a 4% nondeductible excise tax on the amount by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. We intend to distribute our net income to our stockholders in a manner intended to satisfy the REIT 90% distribution requirement and to avoid U.S. federal income tax and the 4% nondeductible excise tax. However, we can provide no assurances that we will have sufficient cash or other liquid assets to meet these requirements. Difficulties in meeting the distribution requirements might arise due to competing demands for available funds or timing differences between tax reporting and cash receipts. In addition, if the Service were to disallow certain of our deductions, such as employee salaries, depreciation or interest expense, by alleging that we, through our rental agreements with our state-licensed medical cannabis tenants, are primarily or vicariously liable for “trafficking” a Schedule 1 substance (cannabis) under Section 280E of the Code or otherwise, we would be unable to meet the distribution requirements and would fail to qualify as a REIT. Likewise, if any governmental entity were to impose fines on us for our business involvement in state-licensed medical-use cannabis, such fines would not be deductible and the inability to deduct such fines could also cause us to be unable to satisfy the distribution requirement.
We may also generate less cash flow than taxable income in a particular year. In such event, we may be required to use cash reserves, incur debt or liquidate assets at rates or times that we regard as unfavorable or, to the extent possible, make a taxable distribution of our stock in order to satisfy the REIT 90% distribution requirement and to avoid U.S. federal income tax and the 4% nondeductible excise tax in that year. Under certain circumstances, we may be able to rectify a failure to meet the distribution requirement for a year by paying “deficiency dividends” to stockholders in a later year, which may be included in our deduction for dividends paid for the earlier year. Thus, we may be able to avoid being taxed on amounts distributed as deficiency dividends; however, we will be required to pay penalties and interest based upon the amount of any deduction taken for deficiency dividends. If we do not have sufficient cash to distribute, we may incur U.S. federal income tax, U.S. federal excise tax and/or our REIT status may be jeopardized.
If we are deemed to be subject to Section 280E of the Code because of the business activities of our tenants, the resulting disallowance of tax deductions could cause us to incur U.S. federal income tax and jeopardize our REIT status.
Section 280E of the Code provides that, with respect to any taxpayer, no deduction or credit is allowed for expenses incurred during a taxable year “in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the U.S. Controlled Substances Act of 1970, or CSA) which is prohibited by federal law or the law of any State in which such trade or business is conducted.” Because cannabis is a Schedule I controlled substance under the CSA, Section 280E by its terms applies to the purchase and sale of medical-use cannabis products. Although we will not be engaged in the purchase, sale, growth, cultivation, harvesting, or processing of medical-use cannabis products, we will lease our properties to tenants who will engage in such activities, and therefore our tenants will likely be subject to Section 280E. If the Service were to take the position that, through our rental agreements with our state-licensed medical-use cannabis tenants, we are primarily or vicariously liable under federal law for “trafficking” a Schedule 1 substance (cannabis) under section 280E of the Code or for any other violations of the CSA, the Service may seek to apply the provisions of Section 280E to our company and disallow certain tax deductions, including for employee salaries, depreciation or interest expense. If such tax deductions are disallowed, we would be unable to meet the distribution requirements applicable to REITs under the Code, which could cause us to incur U.S. federal income tax and fail to qualify as a REIT. Because we will not be engaged in the purchase and/or sale of a controlled substance, we do not believe that we will be subject to the disallowance provisions of Section 280E, and neither we nor our tax advisors are aware of any tax court cases or guidance from the Service in which a taxpayer not engaged in the purchase or sale of a controlled substance was disallowed deductions under Section 280E. However, there is no assurance that the Service will not take such a position either currently or in the future.
Complying with REIT requirements may cause us to forego otherwise attractive business opportunities or liquidate otherwise attractive investments.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually. In addition, we must ensure that, at the end of each calendar quarter, at least 75% of the value of our total assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans, certain kinds of mortgage-backed securities and certain securities issued by other REITs. The remainder of our investment in securities (other than government securities, securities of corporations that are treated as TRSs, and qualified REIT real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total securities can be represented by securities of one or more TRSs, and, the aggregate value of debt instruments issued by public REITs held by us that are not otherwise secured by real property may not exceed 25% of the value of our total assets. See the section entitled “Material U.S. Federal Income Tax Considerations—Asset Tests.” If we fail to comply with these asset requirements at the end of any calendar quarter, we generally must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences.
To meet these tests, we may be required to take or forgo taking actions that we would otherwise consider advantageous. For instance, in order to satisfy the gross income or asset tests applicable to REITs under the Code, we may be required to forego investments that we otherwise would make. Furthermore, we may be required to liquidate from our portfolio otherwise attractive investments. In addition, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders. Thus, compliance with the REIT requirements may hinder our investment performance.
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The tax on prohibited transactions could limit our ability to engage in certain transactions or subject us to a 100% penalty tax.
We will be subject to a 100% tax on any income from a prohibited transaction. “Prohibited transactions” generally include sales or other dispositions of property (other than property treated as foreclosure property under the Code) that is held as inventory or primarily for sale to customers in the ordinary course of a trade or business by a REIT, either directly or indirectly through certain pass-through subsidiaries. Although we do not intend to hold a significant amount of assets as inventory or primarily for sale to customers in the ordinary course of our business, the characterization of an asset sale as a prohibited transaction depends on the particular facts and circumstances. The Code provides a safe harbor that, if met, allows a REIT to avoid being treated as engaged in a prohibited transaction. It is likely that we may sell certain properties that have not met all of the requirements of such safe harbor if we believe the transaction would not be a prohibited transaction based on a facts and circumstances analysis. If the Service were to successfully argue that such a sale was in fact a prohibited transaction, we would be subject to a 100% penalty tax with respect to such sale.
If we were considered to actually or constructively pay a “preferential dividend” to certain of our stockholders, our status as a REIT could be adversely affected.
In order to qualify as a REIT, we must annually distribute to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order for distributions to be counted as satisfying the annual distribution requirements for REITs, and to provide us with a REIT-level tax deduction, the distributions must not be “preferential dividends.” A dividend is not a preferential dividend if the distribution is pro rata among all outstanding shares of stock within a particular class, and in accordance with the preferences among different classes of stock as set forth in our organizational documents. Currently, there is uncertainty as to the Service’s position regarding whether certain arrangements that REITs have with their stockholders could give rise to the inadvertent payment of a preferential dividend (e.g., the pricing methodology for stock purchased under a distribution reinvestment program inadvertently causing a greater than 5% discount on the price of such stock purchased). There is no de minimis exception with respect to preferential dividends; therefore, if the Service were to take the position that we inadvertently paid a preferential dividend, we may be deemed to have failed the 90% distribution test, and our status as a REIT could be terminated for the year in which such determination is made if we were unable to cure such failure. While we believe that our operations will be structured in such a manner that we will not be treated as inadvertently paying preferential dividends, we can provide no assurance to this effect.
The “preferential dividend” prohibition described above does not apply to a “publicly offered REIT,” which generally is a REIT that is required to make regular filings with the SEC under the Exchange Act. While we intend to qualify as a “publicly offered REIT” and therefore expect that the preferential dividend prohibition will not apply to us, we cannot provide you with assurance that we will so qualify and, accordingly, we may be subject to the prohibition.
The ability of our board of directors to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders.
Our charter provides that the board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if the board of directors determines that it is no longer in our best interest to attempt to, or continue to, qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our net taxable income and we generally would no longer be required to distribute any of our net taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders.
Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations, which could adversely affect the value of our Class A common stock.
The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends (other than capital gain dividends) payable by REITs, however, generally are not eligible for the reduced rates and therefore may be subject to a 39.6% maximum U.S. federal income tax rate on ordinary income when paid to such stockholders. Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of our Class A common stock.
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Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets, if properly identified under applicable Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a TRS generally will not provide any tax benefit, except for being carried forward against future taxable income of such TRS.
Non-U.S. stockholders will generally be subject to withholding tax with respect to our ordinary dividends.
Non-U.S. stockholders (as defined in “Material U.S. Federal Income Tax Considerations”) generally will be subject to U.S. federal withholding tax on ordinary dividends received from us at a 30% rate, subject to reduction under an applicable treaty or a statutory exemption under the Code.
Legislative or regulatory tax changes related to REITs could materially and adversely affect our business.
At any time, the U.S. federal income tax laws or Treasury Regulations governing REITs or the administrative interpretations of those laws or regulations may be changed, possibly with retroactive effect. We cannot predict if or when any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective or whether any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation. You also should note that our counsel’s tax opinion is based upon existing law, applicable as of the date of its opinion, all of which will be subject to change, either prospectively or retroactively.
Your investment has various tax risks.
Although provisions of the Code generally relevant to an investment in shares of our Class A common stock are described in “Material U.S. Federal Income Tax Considerations,” you should consult your tax advisor concerning the effects of U.S. federal, state, local and foreign tax laws to you with regard to an investment in our Class A common stock.
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We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “could,” “may” or similar expressions, we intend to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking:
· | use of proceeds of this offering; |
· | our business and investment strategy; |
· | our projected operating results; |
· | actions and initiatives of the U.S. or state governments and changes to government policies and the execution and impact of these actions, initiatives and policies; |
· | the state of the U.S. economy generally or in specific geographic areas; |
· | economic trends and economic recoveries; |
· | shifts in public opinion regarding medical-use cannabis; |
· | our ability to obtain and maintain financing arrangements; |
· | financing rates for our target assets; |
· | our expected leverage; |
· | general volatility of the securities markets in which we may invest; |
· | changes in the values of our assets; |
· | our expected portfolio of assets; |
· | our expected investments; |
· | interest rate mismatches between our target assets and our borrowings used to fund such investments; |
· | changes in interest rates and the market value of our target assets; |
· | rates of default on leases for our target assets; |
· | the degree to which our hedging strategies may or may not protect us from interest rate volatility; |
· | impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; |
· | our ability to qualify as a REIT and, once qualified, maintain our qualification as a REIT for U.S. federal income tax purposes; |
· | our ability to maintain our exemption from registration under the Investment Company Act; |
· | availability of investment opportunities in real estate-related investments and securities; |
· | availability of qualified personnel; |
· | estimates relating to our ability to make distributions to our stockholders in the future; |
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· | our understanding of our competition; and |
· | market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy. |
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described in this prospectus under the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Market data and industry forecasts and projections used in this prospectus have been obtained from independent industry sources. Forecasts, projections and other forward-looking information obtained from such sources are subject to similar qualifications and uncertainties as other forward-looking statements in this prospectus.
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We estimate that we will receive net proceeds from this offering of approximately $ (or approximately $ if the underwriters’ over-allotment option is exercised in full), after deducting underwriting discounts and commissions, and estimated expenses of the offering, assuming a public offering price of $20.00 per share.
We will contribute the net proceeds of this offering to our Operating Partnership. Our Operating Partnership will use approximately $30 million, or %, of the net proceeds to acquire our Initial Property. We intend to invest the remaining net proceeds of the offering in connection with the acquisition, ownership, and leasing of real estate assets that support the regulated medical-use cannabis industry and for general business purposes.
We generally intend to invest the remaining net proceeds as promptly as we can identify specialized industrial real estate assets that support the regulated medical-use cannabis industry that are consistent with our investment strategy, with a general goal of seeking to invest the remaining net proceeds within six to twelve months following completion of this offering, which will depend on the amount of time necessary to evaluate a target property’s suitability based on our acquisition criteria. However, we cannot predict if or when we will identify and acquire properties that meet our acquisition criteria so as to permit us to invest the net proceeds of this offering. Until appropriate assets can be identified, we may invest the net proceeds of the offering in interest-bearing short-term investments that are consistent with our intention to qualify as a REIT. Any interest-bearing short-term investment we make likely will provide a lower net return than we will seek to achieve from our target assets.
IGP Advisers, a company that is owned by Messrs. Gold, Smithers and Fahey, is funding certain of our organization, offering and transaction costs. In addition, IGP Advisers has funded $375,000 as an earnest money deposit (credited against the total purchase price of $30 million) required by the purchase agreement for our Initial Property. We expect to use approximately $ of the net proceeds of this offering to reimburse IGP Advisers for these expenses upon completion of this offering and the acquisition of our Initial Property.
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We intend to elect and qualify to be treated as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2016. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gain, and that it pay U.S. federal income tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income.
We are a newly formed company that has not commenced operations and, as a result, we have not paid distributions as of the date of this prospectus. To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income tax, we intend to make quarterly distributions of all or substantially all of our taxable income to holders of our common stock out of assets legally available therefor. However, we cannot assure you that distributions will be made or sustained. Any distributions we make will be at the direction of our board of directors and will depend upon a number of factors, including our actual results of operations, economic conditions, maintenance of REIT qualification and the applicable provisions of the MGCL and such other factors as our board may determine in its sole discretion.
Our organizational documents permit us to make distributions from any source. If our cash available for distribution is insufficient to cover our distributions, we expect to use the proceeds from this offering, the proceeds from the issuance of securities in the future, the proceeds from borrowings or other sources to pay distributions. During our initial years of operation, certain of our distributions declared may be paid from our offering proceeds, which would constitute a return of capital to our stockholders.
We anticipate that our distributions generally will be taxable as ordinary income to our stockholders, although a portion of the distributions may be designated by us as qualified dividend income or capital gain or may constitute a return of capital. We will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain. For more information, see the section entitled “Material U.S. Federal Income Tax Considerations – Taxation of U.S. Holders – Taxation of Taxable U.S. Holders on Distributions on Shares.”
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The following table sets forth (i) our actual capitalization as of September 30, 2016, and (ii) our pro forma capitalization, as adjusted to give effect to the sale of the 8,750,000 shares of our Class A common stock in this offering, at an assumed initial public offering price of $20.00 per share after deducting underwriting discounts and commissions and estimated offering expenses payable by us, the expected issuance of an aggregate of 27,500 shares of Class A common stock to two executive officers under the Incentive Plan, and the issuance of 1,312,500 shares of Class A common stock to certain executive officers and directors in exchange for outstanding shares of Class B common stock.
You should read this table together with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto included elsewhere in this prospectus.
September 30, 2016 |
||||||||
Actual |
As Adjusted (1)(2) |
|||||||
Stockholders’ equity: | ||||||||
Class A common stock, par value $0.001 per share; 49,000,000 shares authorized and no shares issued and outstanding on an actual basis, and 10,090,000 shares issued and outstanding, as adjusted |
$ | — | $ |
10,090 |
||||
Class B common stock, par value $0.001 per share; 1,000,000 shares authorized and 508,065 shares issued and outstanding on an actual basis, and no shares issued and outstanding as adjusted | 508 | — | ||||||
Preferred Stock, par value $0.001 per share; 50,000,000 shares authorized and no shares issued and outstanding | — | — | ||||||
Additional paid-in capital | — | 160,640,418 | ||||||
Total stockholders’ equity | $ | 508 | $ | 160,650,508 |
(1) | Excludes (i) up to 1,312,500 shares of our Class A common stock that may be issued by us upon exercise of the underwriters’ over-allotment option and (ii) up to 196,875 shares of Class A common stock that may be issued to certain of our executive officers and directors who are holders of Class B common stock in connection with the exercise of the underwriters’ over-allotment option. |
(2) | The as adjusted amounts include (i) an aggregate of 27,500 shares of Class A common stock that are expected to be issued to two executive officers under our Incentive Plan upon approval at the first meeting of the compensation committee of our board of directors upon completion of this offering and (ii) 1,312,500 shares of Class A common stock (excluding shares of Class A common stock issuable upon exercise of the underwriters’ over-allotment option) that will be issued to certain executive officers and directors in exchange for outstanding shares of Class B common stock. The shares of Class B common stock issued and outstanding immediately prior to the consummation of the offering will have automatically converted upon the consummation of the offering into that number of shares of Class A common stock equal to 15% of the shares of Class A common issued in this offering (including any shares issued upon exercise of the underwriters’ over-allotment option). See the sections of this prospectus entitled “Description of Securities” and “Certain Relationships and Related Transactions.” The as adjusted amounts do not include 972,500 shares of Class A common stock reserved for future issuance under the Incentive Plan. |
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Investors participating in this offering will incur immediate and substantial dilution. If you invest in shares of our Class A common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma net tangible book value per share of our Class A common stock upon completion of this offering, taking into account the issuance of shares of Class A common stock under the Incentive Plan upon completion of this offering and the automatic conversion of all outstanding shares of Class B common stock into 15% of the shares of Class A common stock to be issued in this offering.
After giving effect to our sale of 8,750,000 shares of our Class A common stock in this offering, at an assumed initial public offering price of $20.00 per share and after deducting the estimated underwriting discounts and commission and estimated organizational, offering and other expenses payable by us, our pro forma net tangible book value as of September 30, 2016 would have been approximately $160.7 million, or $15.92 per share of our Class A common stock. This represents an immediate decrease in pro forma net tangible book value of $4.08 per share to new investors purchasing shares in this offering. See “Risk Factors—Risks Related to Our Class A Common Stock— If you purchase shares of Class A common stock in this offering, you will incur immediate and substantial dilution.”
The following table illustrates this dilution:
Assumed initial public offering price per share | $ | 20.00 | ||
Pro forma net tangible book value per share after the offering, before the conversion of shares of Class B common stock and the issuance of shares under the Incentive Plan (1) | $ | 18.36 | ||
Decrease in pro forma net tangible book value per share to existing stockholders attributable to the conversion of shares of Class B common stock and the issuance of shares under the Incentive Plan (2) | $ | (2.44 | ) | |
Pro forma net tangible book value per share after this offering (3) | $ | 15.92 | ||
Dilution per share to new investors (4) | $ | 4.08 |
(1) | After deducting underwriting discounts, commissions and organizational, offering and other costs. |
(2) | Includes the issuance of (i) an aggregate of 27,500 shares of Class A common stock that are expected to be issued to two of our executive officers under our Incentive Plan upon approval at the first meeting our of compensation committee of our board of directors upon completion of this offering and (ii) 1,312,500 shares of Class A common stock upon conversion of the outstanding shares of Class A common stock as follows: 886,251 shares of Class A common stock issued to Mr. Gold, 232,500 shares of Class A common stock issued to Mr. Smithers, 64,583 shares of Class A common stock issued to Mr. Fahey, 64,583 shares of Class A common stock issued to Mr. Andrew Fenton, our executive vice president, capital markets, and 64,583 shares of Class A common stock issued to Mr. Kreitzer. The actual number of shares of Class A common stock issued to our executive officers and directors upon conversion of the Class B common stock will be equal, in the aggregate, to 15% of the shares of common stock issued in this offering (including any shares issued upon exercise of the underwriters’ over-allotment option). If the underwriters’ over-allotment option is fully exercised, holders of our Class B common stock immediately before this offering will receive an additional 196,875 shares of Class A common stock as follows: 132,936 shares to Mr. Gold, 34,875 shares to Mr. Smithers, 9,688 shares to Mr. Fahey, 9,688 shares to Mr. Fenton, and 9,688 shares to Mr. Kreitzer. |
(3) | Based on pro forma net tangible book value attributable to common stockholders of approximately $160.7 million divided by the sum of (i) 8,750,000 shares of our common shares to be issued in this offering, (ii) 27,500 shares expected to be issued under the Incentive Plan, and (iii) 1,312,500 shares to be issued upon the conversion of shares of Class B common stock. |
(4) | Dilution is determined by subtracting pro forma net tangible book value per share of our Class A common stock after giving effect to this offering from the initial public offering price paid by a new investor for a shares of Class A common stock. |
The information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing The number of shares of our Class A common stock to be outstanding after this offering is based on a total of 10,090,000 shares of our Class A common stock, consisting of 8,750,000 shares of Class A common stock sold in this offering, 27,500 shares of Class A common stock expected to be issued under the Incentive Plan upon completion of this offering, 1,312,500 shares of Class A common stock resulting from the automatic conversion of Class B common stock upon the completion of this offering and excludes 972,500 shares of our Class A common stock reserved for future issuance under the Incentive Plan. There will be further dilution to new investors with respect to the shares issued pursuant to stock awards issued under the Incentive Plan.
The following table shows on a pro forma as adjusted basis, as of September 30, 2016, after giving effect to this offering on an assumed initial public offering price of $20.00 per share, the difference between the holders of Class B common stock and new investors with respect to the total number of shares of Class A common stock purchased from us (taking into account the automatic conversion of all outstanding shares of Class B common stock into 15% of the shares issued in this offering, or approximately 13% of the shares of Class A common stock to be outstanding following the offering), the total consideration paid to us for these shares, and the price per share paid, before deducting estimated underwriting discounts and commissions and estimated offering expenses:
Shares Purchased |
Total
Consideration (1) |
Price | ||||||||||||||||||
Number | Percent | Amount | Percent | Per Share | ||||||||||||||||
Existing stockholders | 1,312,500 | 13.0 | % | $ | 508 | 0.0 | % | $ | 0.001 | |||||||||||
New investors | 8,750,000 | 87.0 | 175,000,000 | 100.0 | 20.00 | |||||||||||||||
Total | 10,062,500 | 100.0 | % | $ | 175,000,508 | 100.0 | % |
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SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth selected historical and pro forma financial information that has been derived from our historical audited consolidated balance sheet as of September 30, 2016. Except for the historical information as of September 30, 2016, the information provided below is unaudited.
The unaudited pro forma consolidated balance sheet as of September 30, 2016 gives effect to the completion of the initial public offering, the acquisition of our Initial Property and the entry into the related lease agreement , and the payment of a consulting fee and reimbursement of other costs to IGP Advisers LLC from the net proceeds of the initial public offering, as if the closing of the offering and the acquisition of our Initial Property occurred on September 30, 2016. The unaudited pro forma consolidated statements of income for the year ended December 31, 2015 and the nine months ended September 30, 2016 give effect to the completion of the initial public offering, the acquisition of our Initial Property and the entry into the related lease agreement , the payment of a consulting fee and reimbursement of other costs to IGP Advisers LLC from the net proceeds of the initial public offering , as if the completion of the offering and the acquisition of our Initial Property had occurred on January 1, 2015.
The unaudited pro forma financial information incorporates certain assumptions that are included in the Notes to the Unaudited Pro Forma Consolidated Financial Statements included elsewhere in this prospectus. The unaudited pro forma financial information is presented for informational purposes only, and is not necessarily indicative of future results of operations or financial condition and should not be viewed as indicative of future results of operations or financial condition. The unaudited pro forma financial information does not purport to represent what our actual financial position or results of operations would have been as of or for the periods indicated had the transactions been completed as of the date indicated.
You should read the following selected historical and pro forma financial information together with “Management’s Discussion and Analyses of Financial Condition and Results of Operations” and our historical consolidated financial statements, including the related notes, included elsewhere in this prospectus. As of the date of this prospectus, we have not commenced any operations because we are in our organizational state. We will not commence any significant operations until we have completed this offering.
For the Year Ended
December 31, 2015 |
For the Nine Months Ended
September 30, 2016 |
|||||||||||||||
Historical | Pro Forma | Historical | Pro Forma | |||||||||||||
Statement of operations data: | ||||||||||||||||
Revenues: | ||||||||||||||||
Rental income | $ | — | $ | 5,628,169 | $ | — | $ | 4,221,127 | ||||||||
Total revenues | — | 5,628,169 | — | 4,221,127 | ||||||||||||
Expenses: | ||||||||||||||||
Depreciation and amortization | — | 641,429 | — | 481,072 | ||||||||||||
General and administrative (1) | — | — | — | — | ||||||||||||
Total expenses | — | 641,429 | — | 481,072 | ||||||||||||
Net income | $ | — | $ | 4,986,740 | $ | — | $ | 3,740,055 | ||||||||
Pro forma net income per share | $ | — | $ | 2.51 | $ | — | $ | 1.88 | ||||||||
Pro forma weighted average shares outstanding (2) | 1,987,769 | 1,987,769 |
(1) | The unaudited pro forma consolidated financial statements do not include any general and administrative expenses expected to be incurred to operate as a public company as such expenses are not yet known or factually supportable. We expect annual costs for items such as legal, accounting, insurance, public company reporting, stockholder relations, public relations, travel, office rent, compensation, director fees and other general and administrative expenses associated with operating a public company to be between $5 million and $6 million. This estimate is based on management’s previous experience in managing public real estate investment trusts and is not reflected in the pro forma consolidated statements of income. |
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(2) | Represents shares of Class A common stock whose proceeds are being reflected in pro forma adjustments in the income statement, such as proceeds used for acquisitions and offering costs. The pro forma weighted average shares outstanding assumes (i) the issuance of 1,728,495 shares of Class A common stock at $20.00 per share, which provides sufficient cash (net of underwriting discounts and commissions) to purchase our Initial Property and pay offering and other costs; and (ii) the conversion of 508,065 shares of Class B common stock into 259,274 shares of Class A common stock (which is 15% of the shares of Class A common stock assumed to be issued in the initial public offering). The 8,074,731 additional shares of Class A common stock issued in the initial public offering (assuming that the underwriters’ over-allotment option to purchase additional shares of Class A common stock is not exercised and that no restricted shares are awarded) and related transactions are excluded for purposes of the calculations of the pro forma net income per share. |
As of September 30, 2016 | ||||||||
Historical | Pro Forma | |||||||
Balance sheet data: | ||||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 508 | $ | 132,712,982 | ||||
Property escrow deposit | 375,000 | — | ||||||
Buildings | — | 22,450,000 | ||||||
Land | — | 7,600,000 | ||||||
Total real estate investments | — | 30,050,000 | ||||||
Total assets | $ | 375,508 | $ | 162,762,982 | ||||
Liabilities: | ||||||||
Security deposit | $ | — | $ | 2,112,474 | ||||
Due to IGP Advisers, LLC, a related party | 375,000 | — | ||||||
Total liabilities | 375,000 | 2,112,474 | ||||||
Stockholders’ Equity: | ||||||||
Class A common stock | — | 10,063 | ||||||
Class B common stock | 508 | — | ||||||
Additional paid-in-capital | — | 161,190,445 | ||||||
Accumulated deficit | — | (550,000 | ) | |||||
Total stockholders’ equity | 508 | 160,650,508 | ||||||
Total liabilities and stockholders’ equity | $ | 375,508 | $ | 162,762,982 |
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Overview
We are a newly-formed, self-advised Maryland corporation focused on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities. Initially, we intend to acquire our properties through sale-leaseback transactions and third-party purchases. We expect to lease our properties on a triple-net lease basis, where the tenant is responsible for all aspects of and costs related to the property and its operation during the lease term, including maintenance, taxes and insurance.
Our executive chairman, Alan D. Gold, is a 30-year veteran of the real estate industry, including co-founding two NYSE- listed REITs: BioMed Realty (formerly NYSE: BMR), a REIT focused on acquiring, developing, owning, leasing and managing laboratory and office space for the life science industry; and Alexandria Real Estate (NYSE: ARE), an urban office REIT focused on collaborative science and technology campuses. Our senior management team has significant experience in all aspects of the real estate industry, including acquisitions, dispositions, construction, development, management, finance and capital markets. We believe the industry experience and relationships of our senior management team will provide us with a competitive advantage in sourcing and negotiating acquisition opportunities for our target properties, including through sale-leaseback transactions.
We plan to finance our growth through the application of the net proceeds of this offering, and, when necessary, through additional equity and debt offerings. We currently anticipate that the average size of our investments will range from $5 million to $30 million and will involve between 25,000 and 150,000 square feet of space.
Our principal business objective is to maximize stockholder returns through a combination of (1) distributions to our stockholders, (2) sustainable long-term growth in cash flows from increased rents, which we hope to pass on to stockholders in the form of increased distributions, and (3) potential long-term appreciation in the value of our properties from capital gains upon future sale. We plan to aggressively pursue our growth strategy through the acquisition, ownership and leasing of medical-use cannabis facilities operated by sophisticated and experienced state-licensed operators.
We intend to elect and to operate our business so as to qualify, to be taxed as a REIT for U.S. federal income tax purposes, commencing with our taxable year ending December 31, 2016. So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our taxable income to the extent that we annually distribute all of our taxable income on a timely basis to stockholders. We will conduct all of our operations through our Operating Partnership.
Factors Impacting Our Operating Results
We expect that our results of operations will be affected by a number of factors and will primarily depend on the rental revenue we receive from the properties that we expect to acquire, the timing of lease expirations, general market conditions, the regulatory environment in the medical-use cannabis industry, and the competitive environment for real estate assets that support the regulated medical-use cannabis industry.
Rental Revenues
We expect to receive income primarily from rental revenue generated by the properties that we expect to acquire. The amount of rental revenue will depend upon a number of factors, including:
· | our ability to enter into leases with increasing or market value rents for the properties that we expect to acquire; and |
· | rent collection, which primarily relates to each of our future tenant’s financial condition and ability to make rent payments to us on time. |
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The properties that we expect to acquire will consist of real estate assets that support the regulated medical-use cannabis industry. Changes in current favorable state laws in the cannabis industry may impair our ability to renew or re-lease properties and the ability of our tenants to fulfill their lease obligations could materially and adversely affect our ability to maintain or increase rental rates for our properties.
Conditions in Our Markets
Positive or negative changes in regulatory, economic or other conditions, drought, and natural disasters in the markets where we acquire properties may affect our overall financial performance.
Competitive Environment
We face 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, cannabis operators themselves, all of whom may compete with us in our efforts to acquire real estate zoned for cannabis cultivation and production operations. Competition from others may diminish our opportunities to acquire a desired property on favorable terms or at all. In addition, this competition may put pressure on us to reduce the rental rates below those that we expect to charge for the properties that we acquire, which would adversely affect our financial results.
Operating Expenses
Our operating expenses will include general and administrative expenses, including personnel costs, legal, accounting, and other expenses related to corporate governance, public reporting and compliance with the various provisions of U.S. securities laws. We will structure our leases so that the tenant is responsible for taxes, maintenance, insurance, and structural repairs with respect to the premises throughout the lease term. Increases or decreases in such operating expenses will impact our overall financial performance.
Our Qualification as a REIT
We have been organized and we intend to elect, and to operate our business so as to qualify, to be taxed as a REIT, for U.S. federal income tax purposes, commencing with our taxable year ending December 31, 2016. Shares of our Class A common stock are subject to restrictions on ownership and transfer that are intended, among other purposes, to assist us in qualifying and maintaining our qualification as a REIT. Our charter, subject to certain exceptions, limits ownership of any class or series of our capital stock to no more than 9.8% in value or number of shares, whichever is more restrictive, among other restrictions.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with GAAP, and are the basis for our discussion and analysis of financial condition and results of operations. In the future, when preparing our consolidated financial statements, we will be required to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. We will strive to make these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We will continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions.
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Acquisition of Rental Property, Depreciation and Impairment
In order to prepare our consolidated financial statements according to the rules and guidelines set forth by GAAP, many subjective judgments must be made with regard to critical accounting policies. One of these judgments is our estimate for useful lives in determining depreciation expense for our properties. Depreciation on a majority of our buildings and improvements will be computed using the straight-line method over an estimated useful life of 30 to 40 years for buildings and 4 to 20 years for improvements, which we believe are appropriate estimates of useful life. If we use a shorter or longer estimated useful life, it could have a material impact on our results of operations.
Management must make significant assumptions in determining the fair value of assets acquired and liabilities assumed. Upon acquisition of property, we allocate the purchase price of the properties in accordance with guidance issued by the Financial Accounting Standards Board (“FASB”) under FASB Accounting Standard Codification 805, Business Combinations , based upon the fair value of the assets acquired and liabilities assumed, which generally consists of land, buildings, site improvements, and furniture and fixtures. We allocate the purchase price to the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. If the acquisition does not meet the definition of a business, we record the acquisition as an asset acquisition. For asset acquisitions, the purchase price allocation is based upon the relative fair values of all assets acquired and liabilities assumed. For transactions that are business combinations, acquisition costs are expensed as incurred and restructuring costs that do not meet the definition of a liability at the acquisition date are expensed in periods subsequent to the acquisition date. For transactions that are an asset acquisition, acquisition costs are capitalized as incurred.
Another significant judgment must be made as to if, and when, impairment losses should be taken on our properties when events or a change in circumstances indicate that the carrying amount of the asset may not be recoverable. A provision is made for impairment if estimated future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property. Key inputs that we utilize in this analysis include projected rental rates, estimated holding periods, historical sales and releases, capital expenditures, and property sales capitalization rates. If a property is held for sale, it is carried at the lower of carrying cost or estimated fair value, less estimated cost to sell. The carrying value of our real estate is anticipated to be the largest component of our consolidated balance sheet. Our strategy of primarily holding properties, long-term, directly decreases the likelihood of their carrying values not being recoverable, thus requiring the recognition of an impairment. However, if our strategy, or one or more of the above assumptions were to change in the future, an impairment may need to be recognized. If events should occur that require us to reduce the carrying value of our real estate by recording provisions for impairment, they could have a material impact on our results of operations.
Revenue Recognition and Accounts Receivable
We anticipate that all leases will be triple-net leases and will be accounted for as operating leases. Under this method, leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term. Any rental revenue contingent upon a tenant’s sales is recognized only after the tenant exceeds its sales breakpoint. Rental increases based upon changes in the CPI are recognized only after the changes in the indexes have occurred and are then applied according to the lease agreements. In certain cases, our leases may contain reimbursement obligations. Contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses will be included in tenant reimbursements in the period when such costs are incurred.
We will recognize an allowance for doubtful accounts relating to accounts receivable for amounts deemed uncollectible. We consider tenant specific issues, such as financial stability and ability to pay, when determining collectability of accounts receivable and appropriate allowances to record.
Gain on Sales of Properties
When real estate is sold, the related net book value of the applicable assets is removed and a gain from the sale is recognized in our consolidated statements of income. We will record a gain from the sale of real estate provided that various criteria relating to the terms of the sale have been met.
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Income Taxes
We have been organized and we intend to elect, and to operate our business so as to qualify, to be taxed as a REIT, for U.S. federal income tax purposes, commencing with our taxable year ending December 31, 2016. Under the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable income for U.S. federal income tax purposes. As long as our dividends equal or exceed our taxable net income, we generally will not be required to pay U.S. federal income tax on such income.
Adoption of New or Revised Accounting Standards
As an “emerging growth company” under the JOBS Act, we can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. An “emerging growth company” may opt out of the extended transition period for complying with new or revised accounting standards. A decision to opt out, however, is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we can adopt the standard for the private company. This may make comparison of our financial statements with a public company that either is not an “emerging growth company” or is an “emerging growth company” that has opted out of using the extended transition period difficult or impossible as different or revised accounting standards may be used.
Results of Operations
As of the date of this prospectus, we have not commenced any operations because we are in our organizational state. We will not commence any significant operations until we have completed this offering. The factors that we anticipate impacting our results of operations in the future are discussed above under the section entitled “—Factors Impacting Our Operating Results.”
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements. We expect to use significant cash to acquire our target properties, pay dividends to our stockholders, fund our operations, and meet other general business needs.
We expect to meet our short-term liquidity requirements generally through the net proceeds of this offering and cash flows from operations. We intend to meet our long-term liquidity needs, such as property acquisitions, through the net proceeds of this offering, cash flows from operations and the issuance of equity and debt securities, including common stock, preferred stock and long-term notes. Generally, we do not expect to incur debt, pursuant to a revolving credit facility or otherwise, other than possibly assuming debt in connection with an acquisition. Our investment guidelines initially provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible assets at the time of any new borrowing, subject to our board of directors’ discretion.
We intend to invest in our target properties only as suitable opportunities arise. In the near-term, we intend to fund acquisitions with the net proceeds of this offering. Longer term, we intend to finance our investments with the net proceeds from additional issuances of equity and debt securities, including common stock, preferred stock and long-term notes. Where possible, we also may issue limited partnership interests in our Operating Partnership to acquire properties from existing owners seeking a tax-deferred transaction. We expect to issue equity and debt securities at times when we believe that our stock price is at a level that allows for the investment of offering proceeds in accretive property acquisitions. We may also issue common stock to permanently finance properties that were previously financed by debt securities. The success of our acquisition strategy may depend, in part, on our ability to access additional capital through issuances of equity securities. There can be no assurance that we will have access to the capital markets at times and on terms that are acceptable to us or make any investments in any properties that meet our investment criteria.
We will pay, or reimburse IGP Advisers and its affiliates for expenses incurred in connection with our organization and this offering.
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Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain periods, the U.S. credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and U.S. credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly.
Off Balance Sheet Arrangements
We have no unconsolidated investments, nor do we engage in trading activities involving energy or commodity contracts or any other off-balance sheet arrangements.
Interest Rate Risk
We have not issued any debt and have no debt outstanding, so we are not exposed to interest rate changes. At this time, we have no plans at this time to issue debt instruments. It is possible that a property we acquire in the future would be subject to a mortgage, which we may assume.
Impact of Inflation
We intend to enter into leases that generally provide for limited increases in rent as a result of increases in the CPI (typically subject to ceilings) or fixed increases. We expect these lease provisions to result in rent increases over time. During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.
Quantitative and Qualitative Disclosures about Market Risk
We have not issued any debt and have no debt outstanding, so we are not exposed to interest rate changes. If we were to issue debt or enter into a credit facility in the future, we would be exposed to interest rate changes. At this time, we have no plans at this time to issue debt instruments, other than possibly assuming debt in connection with an acquisition.
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Our Company
We are a newly-formed, self-advised Maryland corporation focused on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities. Initially, we intend to acquire our properties through sale-leaseback transactions and third-party purchases. We expect to lease our properties on a triple-net lease basis, where the tenant is responsible for all aspects of and costs related to the property and its operation during the lease term, including maintenance, taxes and insurance.
Our executive chairman, Alan D. Gold, is a 30-year veteran of the real estate industry, including co-founding two NYSE-listed REITs: BioMed Realty, a REIT focused on acquiring, developing, owning, leasing and managing laboratory and office space for the life science industry; and Alexandria Real Estate, an urban office REIT focused on collaborative science and technology campuses. Our senior management team has significant experience in all aspects of the real estate industry, including acquisitions, dispositions, construction, development, management, finance and capital markets. We believe the industry experience and relationships of our senior management team will provide us with a competitive advantage in sourcing and negotiating acquisition opportunities for our target properties, including through sale-leaseback transactions.
We plan to finance our growth through the application of the net proceeds of this offering, and, when necessary, through additional equity and debt offerings. We currently anticipate that the average size of our investments will range from $5 million to $30 million and will involve between 25,000 and 150,000 square feet of space.
We are actively seeking and evaluating medical-use cannabis facilities to purchase with the net proceeds of this offering. We have entered into a definitive purchase agreement for the acquisition of our Initial Property, a 127,000-square foot industrial property located in New York for a purchase price of approximately $30 million in a sale-leaseback transaction. See the section entitled “—Our Initial Property” below. In addition, our senior management team has identified and is in various stages of reviewing in excess of $88 million of additional potential properties for acquisition, which amount is estimated based on sellers’ asking prices for the properties, preliminary discussions with sellers, our internal assessment of the values of such properties after taking into account the current and expected annualized lease revenue, operating history, age and condition of the property, and other relevant factors. We have entered into two non-binding letters of intent with respect to approximately $80 million of these potential acquisitions. The acquisition of our Initial Property is subject to ongoing diligence and the satisfaction of closing conditions, and the acquisition of any property under a non-binding letter of intent requires the negotiation and execution of a definitive purchase agreement and is subject to diligence and the satisfaction of closing conditions. There can be no assurance that we will consummate the acquisition of any of the properties in our current acquisition pipeline on the terms anticipated, or at all.
Market Opportunity
The Industrial Real Estate Sub-Market
The industrial real estate sub-market recently has performed well with vacancies in several markets at historical lows. According to Colliers, the U.S. industrial property vacancy rate declined for the 22 nd consecutive quarter in the first quarter of 2016, declining 10 basis points to 6.3% and down 70 basis points from the first quarter of 2015. Almost 64 million square feet of industrial real estate was absorbed in the first quarter of 2016, an increase of 9.6% year over year, which resulted in increased rental rates for the 18 th consecutive quarter, according to Colliers.
We believe this supply/demand dynamic creates significant opportunity for owners of industrial facilities, particularly those focused on niche categories, as options are limited for tenants requiring specialized buildings. We intend to capitalize on this opportunity by purchasing specialized industrial properties that are mission critical to the medical-use cannabis industry.
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The Regulated Medical-Use Cannabis Industry
We believe that a convergence of changing public attitudes, increased legalization momentum in various states, and a more relaxed federal enforcement posture toward regulated medical-use cannabis creates an attractive opportunity to invest in the industrial real estate sector with a focus on regulated medical-use cannabis facilities. We also believe that the increased sophistication of the regulated medical-use cannabis industry and the development of strong business, operational, and compliance practices have made the sector more attractive for investment. Increasingly, stated-licensed, medical-use cannabis cultivation and processing facilities are becoming sophisticated business enterprises that use state-of-the-art technologies and well-honed business and operational processes to maximize product yield and revenues. Additionally, growers and dispensers have developed a growing portfolio of products into which they are able to incorporate legal medical-use cannabis in a safe and appealing manner, including a variety of edibles, drinks, and topicals.
The regulated medical-use cannabis industry has generally been driven by state law and regulation, and accordingly, the market is varies on a state-by-state basis. State laws that legalize and regulate medical-use cannabis allow patients to consume cannabis for medicinal reasons with a doctor’s recommendation subject to various requirements and limitations. States have authorized numerous medical conditions as qualifying conditions for treatment with medical-use cannabis, including but not limited to treatment for cancer, glaucoma, HIV/AIDs, wasting syndrome, pain, nausea, seizures, muscle spasms, multiple sclerosis, post-traumatic stress disorder (PTSD), migraines, arthritis, Parkinson's disease, Alzheimer's, lupus, residual limb pain, spinal cord injuries, inflammatory bowel disease and terminal illness.
We believe that the following conditions create a favorable environment for investing in real estate assets that support the regulated medical-use cannabis industry:
● | Significant industry growth in recent years and expected continued growth; |
● | A shift in public opinion and increasing momentum toward the legalization of cannabis, especially as it relates to medical-use cannabis; |
● | The federal government’s current expressed relaxed enforcement posture toward medical-use cannabis that is legal under state law; and |
● | Limited access to capital by industry participants in light of banking and money transfer limitations driven by federal law. |
We believe that these conditions, which are described in more detail below, create an attractive opportunity to invest in industrial real estate assets that are tailored for tenants in the regulated medical-use cannabis industry.
Cannabis Industry Growth and Trends
According to ArcView, nationwide sales of legal cannabis grew to $5.4 billion up from $4.6 billion in 2014, of which approximately 92% consisted of medical-use sales. Demand is expected to remain strong in 2016 with legal markets projected to grow to $6.7 billion, according to ArcView, a 24% increase over 2015, as new state medical markets, including Nevada, Illinois, Massachusetts and New York, expand. According to ArcView, by 2020, legal market sales are expected to grow to approximately $21.8 billion, of which estimated medical-use sales are expected to be approximately $10.2 billion.
According to ProCon.org, as of March 1, 2016, an estimated 1.2 million people use or were registered to use legalized medical cannabis. Cannabis has been used to treat medical conditions including glaucoma, HIV, cancer, migraines and chronic pain. As the industry continues to evolve, new ways to consume cannabis are being developed in order for patients to have the treatment needed for their condition.
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As with any nascent but growing industry, operational and business practices evolve and become more sophisticated over time. We believe that the quality and experience of industry participants and the development of sound business, operational, and compliance practices have reached a turning point that makes the regulated medical-use cannabis industry attractive for investment at this time.
Growth in the regulated medical-use cannabis market has been strengthened by an increase in the variety of products in which cannabis is incorporated. In addition to smoking and vaporizing of dried leaves, cannabis is incorporated into a variety of edibles, including cookies, crackers, nut mixes, lollipops, chews, and other kinds of food. Cannabis is also infused into teas, juices, smoothies, and sodas. Cannabis oil can also be incorporated into spray products or transdermal patches as well as topicals that have no psychoactive effects, such as salves, ointments, lotions, and sprays.
Shifting Public Attitudes
We believe that the growth of the cannabis market will be fueled by changing public attitudes in the United States toward regulation and legalization of cannabis. A 2015 poll by Harris found 81% of Americans support legalization of cannabis for medical use.
State Law and Legislative Activity
As of June 10, 2016, 26 states, plus the District of Columbia, have passed laws allowing their citizens to use medical cannabis. The first state to permit the medical use of cannabis was California in 1996, when California adopted the Compassionate Care Act. The law allowed doctors to recommend cannabis for serious medical conditions and patients were permitted to use, possess and grow cannabis themselves. Several other states, namely Washington, Oregon, and Alaska, adopted medical-use laws two years later in 1998, and the remaining medical-use states adopted their laws on various dates through 2016.
The following is a list of the states that have legalized cannabis for medical use in some form as of June 10, 2016:
Jurisdictions with Legal Access to Cannabis
Year (1) | Jurisdiction (1) |
Population
as of
July 1, 2015 (in millions) (2) |
||||
1996 | California | 39.1 | ||||
1998 | Washington | 7.2 | ||||
1998 | Oregon | 4.0 | ||||
1999 | Alaska | 0.7 | ||||
1999 | Maine | 1.3 | ||||
2000 | Hawaii | 1.4 | ||||
2000 | Colorado | 5.5 | ||||
2000 | Nevada | 2.9 | ||||
2004 | Vermont | 0.6 | ||||
2004 | Montana | 1.0 | ||||
2006 | Rhode Island | 1.1 | ||||
2007 | New Mexico | 2.1 | ||||
2008 | Michigan | 9.9 | ||||
2010 | District of Columbia | 0.7 | ||||
2010 | New Jersey | 9.0 | ||||
2010 | Arizona | 6.8 | ||||
2011 | Delaware | 0.9 | ||||
2012 | Massachusetts | 6.8 | ||||
2012 | Connecticut | 3.6 | ||||
2013 | Illinois | 12.9 | ||||
2013 | New Hampshire | 1.3 | ||||
2014 | Maryland | 6.0 | ||||
2014 | Minnesota | 5.5 | ||||
2014 | New York | 19.8 | ||||
2016 | Louisiana | 4.7 | ||||
2016 | Pennsylvania | 12.8 | ||||
2016 | Ohio | 11.6 | ||||
Total | 27 | 179.2 |
(1) | Source: ArcView Market Research |
(2) | Source: U.S. Census Bureau |
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Although the above states have all approved the medical use of cannabis, the applicable state and local laws and regulations vary widely. For example, most states’ laws allow commercial production and sales through dispensaries and set forth rigorous licensing requirements; in other states the licensing rules are unclear. In some states, dispensaries are mandated to operate on a not-for-profit basis. Some states permit home cultivation activities. The states also differ on the form in which cannabis can be sold. For example, some states do not permit cannabis-infused products such as concentrates, edibles, and topicals.
In 2016, a number of state legislative or ballot measures passed or are pending that will increase the size of the regulated cannabis industry. Some of the more significant measures are summarized below.
· | Arizona. Arizona will vote on whether to legalize cannabis for adult-use in 2016. Medical-use cannabis legalization passed by only a small margin in 2010, and permitting adult-use of cannabis is typically much more controversial. |
· | California. California is positioned to legalize adult-use cannabis. A ballot initiative creating a regulated framework for legalizing, selling and taxing cannabis sales similar to alcohol, has been proposed in California. The measure is reported to have strong support from several influential cannabis-related advocacy and industry groups. As is it home to almost 40 million people and the state accounts for the largest medical-use cannabis industry in the country. It is estimated that the state could generate billions of dollars in cannabis sales if adult-use of cannabis is legalized. |
· | Connecticut. Connecticut originally enacted its medical-use cannabis program in 2012. Connecticut expanded its medical-use cannabis program twice in 2016, including expanding the list of permitted medical conditions for treatment and allowing minors to qualify for medical-use cannabis if they have been diagnosed with certain medical conditions. |
· | Florida . Florida will likely legalize medical cannabis this year as more than 57% of voters in Florida supported legalizing cannabis for medical use when it was on the ballot in 2014 (a 60% vote is required). If the initiative passes this year, Florida would become the second-largest market for medical-use cannabis behind California. |
· | Kentucky . Kentucky legalized cannabidiol oil in 2015, and advocates believe the legislature is poised to approve a broader medical cannabis bill in 2017. Medical cannabis was a frequent topic during 2015’s gubernatorial campaign, and the new Republican governor has publicly stated that medical evidence supports the benefits of cannabis to patients with cancer and epilepsy. |
· | Maine. Maine will vote on whether to legalize cannabis for adult-use in 2016. Maine was one of the first states to legalize medical-use cannabis in 1999. |
· | Massachusetts. Massachusetts first approved medical-use cannabis in 2012. Massachusetts will vote on whether to legalize cannabis for adult-use in 2016. |
· | Michigan. In September 2016, Michigan’s state legislature approved cannabis regulations for medical use that cover the entire state, which was signed into law by Michigan’s governor. |
· | Nevada. Nevada is considered a strong candidate for legalizing adult-use cannabis. Nevada currently permits out-of-state medical-use cannabis cardholders to purchase cannabis while visiting Nevada. In addition, numerous public officials support the cannabis industry in general, viewing it as a source of growth for tourism and the state’s economy. |
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· | Rhode Island. Rhode Island may legalize cannabis for adult-use by legislative action in 2016. In 2015, legislation was introduced to legalize cannabis in Rhode Island for adult-use, but the session adjourned before a vote could be held on the measure. Supporters believe the bill will be introduced in the legislature again this year, and if it passes, Rhode Island will become the first state east of Colorado to legalize adult-use cannabis. |
· | Vermont. As with Rhode Island, Vermont also saw the introduction of legislation that would legalize adult-use of cannabis in 2015. Although the bill did not pass, one of the measure’s key sponsors has announced that he plans to reintroduce the bill, and Governor Peter Shumlin has also publicly supported legalizing the adult use of cannabis. |
Source : Batter Up: The Next States to Legalize , Marijuana Business Magazine, January 2016; Marijuana Policy Project.
Following approval of medical or adult-use cannabis, programs must be developed and businesses must be licensed before commencing cannabis sales. Some states have developed the necessary procedures and licensing requirements quickly, while other states have taken years to develop their programs for production and sales of cannabis. According to Marijuana Business Daily, the average amount of time that elapsed between the legalization of medical cannabis sales and the opening of the first dispensaries in six states that recently commenced sales was 27 months. According to the same source, there are signs of industry maturation, and states are increasingly demonstrating an ability to efficiently and quickly establish regulatory frameworks following legalization. This is particularly true when recreational cannabis use is legalized in states where regulated medical cannabis systems are already in place. For example, the average amount of time that elapsed between voters approving recreational cannabis production and sales to the opening of the first stores in Colorado, Washington and Oregon was 15 months.
Even when regulatory frameworks for cannabis production and sales are in place, states tend to revise these rules over time. These revisions often impact sales, making it difficult to predict the potential of new markets. States may restrict the number of cannabis businesses permitted or limit the medical conditions that are eligible for cannabis treatment, both of which can limit growth of the cannabis industry in those states. Alternatively, states may relax their initial regulations relating to cannabis production and sales, which would likely accelerate growth of the cannabis industry in such states.
The Federal Legal Landscape
Cannabis is a categorized as a Schedule I controlled substance by the DEA and the U.S. Department of Justice, and therefore is illegal to grow, possess and consume under federal law. Cannabis is illegal under the CSA and is classified as a Schedule I drug with no medical use. The CSA bans cannabis-related businesses; the possession, cultivation, and production of cannabis-infused products; and the distribution of cannabis and products derived from it. Moreover, on two separate occasions the US Supreme Court ruled that the CSA trumps state law. That means that the federal government has the option of enforcing US drug laws, creating a climate of potential legal uncertainty regarding the production and sale of medical-use cannabis. Although the CSA’s basic prohibition remains in force, the U.S. Department of Justice under the Obama administration has issued memoranda characterizing enforcement of federal cannabis prohibitions as low priority and instructing all federal prosecutors not to take action against individuals complying with state medical cannabis laws and has deferred its right to challenge state laws regarding state adult-use cannabis laws. Congress has also enacted an omnibus spending bill including a provision prohibiting the U.S. Department of Justice (which includes the DEA) from using funds appropriated by that bill to prevent states from implementing their medical-use cannabis laws. See the section entitled “Business—Government Regulation.”
Cannabis reform has gained the support of a bipartisan coalition of members of Congress, some of whom have introduced legislation on various reform-related topics. Certain proposed legislation introduced into the 114th Congress is summarized below. If passed, this legislation would address certain conflicts existing between state and federal law.
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· | H.R. 1940 – The Respect State Marijuana Laws Act . H.R. 1940 codifies in federal law the current position of the U.S. Department of Justice refraining from prosecuting participants in state-authorized cannabis programs under the CSA. The law amends the CSA by excepting from federal law persons that operate in compliance with state cannabis laws. The bill also addresses the lack of access to banking services by the state-authorized cannabis industry as well as public safety issues created by contradictory state and federal laws. |
· | H.R. 1538 and S. 683 – The Compassionate Access, Research Expansion and Respect States Act of 2015, or CARERS Act. The CARERS Act amends the CSA to allow states to set medical cannabis laws, moves cannabis to Schedule II of the CSA, alters federal banking laws to allow banks to provide services to legal cannabis businesses, removes barriers to medical research, and allows federal Veterans Affairs physicians to discuss medical cannabis with patients. |
· | H.R. 1013 – The Regulate Marijuana Like Alcohol Act. The bill removes cannabis from all CSA schedules of controlled substances and subjects cannabis to provisions that apply to spirits and liquors. H.R. 1013 provides to the FDA the same authority for cannabis as the FDA exercises with regard to alcohol. Cannabis enforcement functions are also moved from the DEA to the Bureau of Alcohol, Tobacco, Firearms and Explosives. |
· | H.R. 1014 – The Marijuana Tax Revenue Act of 2015. The Act levies an excise tax on “marijuana enterprises,” which include persons who engage in commercial activities with respect to the production, sale, or transfer of cannabis, by amending the Code. |
· | H.R. 262 – The States Medical Marijuana Property Rights Protection Act . The bill denies federal officials from using civil forfeiture laws against owners of property that has been leased to cannabis dispensaries and other operations that are in compliance with state medical-use cannabis laws. |
· | H.R. 1855 and S. 987 – The Small Business Access to Banking Act. Amends the Code to permit trades or businesses that sell cannabis in compliance with state laws to receive tax credits and deduct business expenses. |
· | S. 1726 and H.R. 2076 – The Marijuana Business Access to Banking Act . Enables financial institutions to provide banking services to cannabis-related businesses that operate legally under state laws. The bill resolves banking-related conflicts between state and federal law while addressing the issue of reporting suspicious activity by financial institutions with respect to cannabis-related businesses. |
Access to Capital
To date, the status of medical-use cannabis under federal law has significantly limited the ability of industry participants to fully access the U.S. banking system and traditional financing sources. These limitations, when combined with the high costs of maintaining licensed and stringently regulated growing and cannabis facilities (including meeting extensive zoning requirements), substantially increase the cost of production. Because of the lack of access to traditional financing sources, we believe that our sale-leaseback solutions will be attractive to medical-use cannabis cultivators and producers.
Market Opportunity and Associated Risks
We plan to take advantage of this market opportunity by purchasing the medical-use cannabis facilities of state-licensed growers with a focus on properties that we believe also have potential for long-term appreciation in value. We believe that our sale-leaseback solutions offer an attractive alternative to licensed cultivators who lack access to traditional financing alternatives. We intend to acquire medical-use cannabis facilities in states that permit medical-use cannabis cultivation, including New York, Illinois, Washington, Oregon, Nevada, California, Arizona, Massachusetts and Maryland. We expect that acquisition opportunities will continue to expand as additional states legalize medical-use cannabis and license new cultivators.
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Notwithstanding the foregoing market opportunity and trends, and despite legalization at the state level, we continue to believe that the current state of federal law creates significant uncertainty and potential risks associated with investing in medical-use cannabis facilities. For a more complete description of these risks, see the sections entitled “Risk Factors—Risks Related to Regulation” and “Business—Governmental Regulation.”
Our Competitive Strengths
We believe that we have the following competitive strengths:
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The Experience of Our Executive Chairman and Our Senior Management Team . Mr. Gold and our senior management team have substantial experience in all aspects of the real estate industry, including acquisitions, dispositions, construction, development, management, finance and capital markets. In particular, in August 2004, Mr. Gold and Gary A. Kreitzer a member of our board of directors, founded BioMed Realty (formerly NYSE: BMR), an internally-managed NYSE-listed REIT focused on acquiring, developing, owning, leasing and managing laboratory and office space for the life science industry, an industry they believed to be underserved by commercial property investors and lenders and poised for significant growth. During their tenure at BioMed Realty, Messrs. Gold and Kreitzer oversaw the growth of the company’s portfolio of life science and laboratory real estate from 30 buildings with approximately 2.4 million rentable square feet at the time of the initial public offering in 2004 to 196 buildings with approximately 18.9 million rentable square feet as of January 2016. Although Messrs. Gold and Kreitzer, along with the other members of our senior management team, have a demonstrated track record for evaluating and investing in real estate, they have also experienced significant challenges at times, particularly during the economic downturn from 2008 through 2010, which saw rising capitalization rates and a corresponding decline in the net asset value of BioMed Realty. As a result, certain investors, depending on the timing of their investments and holding periods, may not have earned positive returns on their investments in the company. In early 2016, an affiliate of The Blackstone Group L.P. purchased BioMed Realty in an acquisition transaction valued at approximately $8 billion. |
· | Focus on Recurring and Dependable Revenue . Our business strategy will focus on acquiring real estate assets from and entering into long-term net leasing arrangements with licensed medical-use cultivators, which we believe will support a recurring and dependable revenue base from our properties. |
· | Focus on Underserved Industry with Less Competition . Our focus on specialized industrial real estate assets leased to tenants in the regulated medical-use cannabis industry may result in significantly less competition from existing REITs and institutional buyers due to the unique nature of the real estate and its tenants. Moreover, we believe the banking industry’s general reluctance to finance owners of these facilities coupled with the owners’ need for capital to fund the growth of their operations will result in significant opportunities for us to acquire specialized industrial properties that provide stable and increasing rental revenue along with the potential for long-term appreciation in value. |
· | Positive Medical-Use Cannabis Industry Trends. Based on the growth projections for the medical-use cannabis industry, we expect to see significant spending by state-licensed medical-use cannabis cultivators on their existing and new medical-use cannabis facilities. |
Our Business Objectives and Growth Strategies
Our principal business objective is to maximize stockholder returns through a combination of (1) distributions to our stockholders, (2) sustainable long-term growth in cash flows from increased rents, which we hope to pass on to stockholders in the form of increased distributions, and (3) potential long-term appreciation in the value of our properties from capital gains upon future sale. Our primary strategy to achieve our business objective is to acquire and own a portfolio of medical-use cannabis facilities leased to tenants holding the requisite state licenses to operate in the regulated medical-use cannabis industry. This strategy includes the following components:
· | Owning Medical-Use Cannabis Cultivation Properties and Related Real Estate Assets for Income. We primarily intend to acquire medical-use cannabis facilities from licensed growers who will continue their cultivation operations after our acquisition of the property. We expect to hold acquired properties for investment and to generate stable and increasing rental income from leasing these properties to licensed growers. |
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· | Owning Medical-Use Cannabis Cultivation Properties and Related Real Estate Assets for Appreciation. We primarily intend to lease our acquired properties under long-term triple-net leases. However, from time to time, we may elect to sell one or more properties if we believe it to be in the best interests of our stockholders. Potential purchasers may include others in the regulated medical-use cannabis industry desiring access to properties having the requisite zoning and regulatory approvals for cultivation and production of medical-use cannabis or financial purchasers seeking to acquire property for investment purposes. Accordingly, we will seek to acquire properties that we believe also have potential for long-term appreciation in value. |
· | Expanding Our Operations As Additional States Permit Medical-Use Cannabis Cultivation and Production. We intend to acquire properties in states that permit cannabis cultivation for medical-use, including New York, Illinois, Washington, Oregon, Nevada, California, Arizona, Massachusetts and Maryland. We expect that our acquisition opportunities will continue to expand as additional states legalize medical-use cannabis and license new cultivators. |
· | Owning Mortgages on Medical-Use Cannabis Cultivation Properties and Related Real Estate Assets. In circumstances where our purchase of medical-use cannabis facilities is not feasible, we may provide the owner of the property with a first lien mortgage loan secured by the property along with an option to sell the property to us in the future at a predetermined price. We do not expect that we will use more than 15% of the net proceeds of this offering for any such loans or that over time our mortgages held will exceed 15% of the fair value of our investment assets. |
Our Target Markets
We anticipate that our initial target markets will be Illinois and New York. We currently have a definitive agreement to purchase one medical-use cannabis facility in New York and non-binding letters of intent to purchase two medical-use cannabis facilities in Illinois and four in California. We also intend to target other states, as described below. According to ArcView, the following is a description of the regulated medical-use cannabis market opportunity in the states we currently intend to target:
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Arizona : Arizona legalized medical-use cannabis in 2010 and saw its first legal dispensary open in December 2012. By 2015, Arizona had approximately 100 licensed medical-use cannabis dispensaries and approximately 87,000 registered patients able to purchase cannabis. The market for medical-use cannabis sales in Arizona was $215.3 million in 2015 and is projected to be $269.4 million in 2016. Growth levels are projected to remain in double digits through 2020. Arizona will vote on whether to legalize cannabis for adult-use in 2016. |
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California : California passed legislation legalizing medical-use cannabis in 1996. California represents approximately 62% of the national medical-use cannabis market with estimated sales of $2.7 billion in 2015. California’s medical-use cannabis market operated for nearly 20 years with limited government regulation. In 2015, however, California took steps to establish more stringent regulations for medical-use cannabis businesses. In California, there is a proposed ballot initiative for November 2016, which is modeled on the successful initiatives in Washington and Colorado. This initiative would create a regulated framework for legalizing, selling and taxing adult and medical-use cannabis sales similar to alcohol. If the initiative is passed, sales in the California adult-use cannabis market are projected to be $1.4 billion in the first full year of operations and $6.6 billion after five years of operations. |
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Illinois : Illinois legalized medical-use cannabis in 2013, and in 2015, the medical-use cannabis market was $1.7 million. The medical-use cannabis market in Illinois is projected to be $15.6 million in 2016. Illinois has taken steps over time to broaden access to its medical-use cannabis program, including amending its laws to expand treatable conditions. |
· | Maryland : Maryland adopted a comprehensive medical-use cannabis program in 2014 that addressed patient registration, licensing and commercial distribution. The medical-use cannabis market is not yet operational in Maryland, but is expected to be operational in 2017. Geographically, Maryland is in a strategic position that could bolster its growth, as it borders the District of Columbia where it is legal to possess and consume cannabis, but not to sell it. As a result, the market environment in Maryland is believed to be favorable for a newly legalized medical-use cannabis state and the medical-use cannabis market in Maryland is expected to grow at a compound annual rate of 81%, from $9.7 million in 2017, to $57.4 million by 2020. |
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Massachusetts: Massachusetts first approved medical-use cannabis in 2012. However, only four medical-use cannabis dispensaries were open in Massachusetts by the end of 2015. In 2015, the medical-use cannabis market in Massachusetts was $7.9 million and is projected to grow to $78.7 million in 2016 as the state’s regulatory framework matures. By 2017, Massachusetts is projected to have the sixth largest medical-use cannabis market in the country. Massachusetts will vote on whether to legalize cannabis for adult-use in 2016. |
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Nevada: The first legal, medical-use cannabis sale took place in Nevada at a licensed dispensary in August 2015. In 2015, the medical-use cannabis market in Nevada was $25.8 million, and is projected to be $75 million in 2016. The State will vote on legalization of cannabis for adult-use in 2016. If the vote is successful, the adult-use cannabis market in Nevada is expected to quickly surpass the medical-use market, and by 2020 adult-use sales are expected to account for more than 62% of the State’s total legal cannabis market. If cannabis is legalized for adult-use in Nevada, it could become the largest cannabis market in the country due to Nevada’s sizable tourism industry. |
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New York: New York permitted medical-use cannabis sales for the first time in 2016 and has acted quickly to implement its regulatory framework. In 2016, medical-use cannabis sales in New York are projected to be $33.3 million. Annual medical-use cannabis sales in New York are projected to increase to $248.9 million by 2020. The size of the medical-use cannabis market in New York is modest compared to other states of similar size due to bans on smoking cannabis. The medical-use cannabis market in New York is expected to remain conservative until there are legislative changes that permit smoking or other cannabis product delivery formats are more widely accepted. |
· | Oregon: In October of 2015, Oregon became the third state to legalize cannabis for both medical and adult-use. Oregon’s total legal cannabis market (medical and adult-use) is expected to reach annual sales of $1.3 billion by 2020. Approximately 75% of such sales are expected to be derived from the adult-use market. |
· | Washington: In 2012, Washington legalized cannabis for adult-use, and opened its first dispensary in 2014. The adult-use cannabis market in 2015 was $615.6 million and is projected to be $1.1 billion in 2016. Washington is projected to have the largest adult-use cannabis market by 2020, with annual sales estimated to exceed $2.6 billion. |
Although we currently intend to target the above states, we may also invest in state-licensed medical-use cannabis cultivation facilities in other states in which the market and legal conditions satisfy our investment criteria.
Our Target Properties
We are actively seeking and evaluating medical-use cannabis facilities to purchase with the net proceeds of this offering. We have entered into a definitive purchase agreement for the acquisition of our Initial Property, a 127,000-square foot industrial property located in New York for a purchase price of approximately $30.0 million in a sale-leaseback transaction. See the section entitled “—Our Initial Property” below. In addition, our senior management team has identified and is in various stages of reviewing in excess of $88 million of additional potential properties for acquisition, which amount is estimated based on the sellers’ asking prices for the properties, preliminary discussions with the sellers or our internal assessment of the values of such properties after taking into account the current and expected annualized lease revenue, operating history, age and condition of the property, and other relevant factors. We have entered into two non-binding letters of intent with respect to the potential acquisition of approximately $80 million of these properties. Entering into a binding commitment with the seller of any of these properties is influenced by many factors, including the existence of other competitive bids, satisfactory completion of due diligence, regulatory or other approvals, if required, and the closing of the offering of our Class A common stock as described in this prospectus.
We have not entered into binding commitments to purchase any property other than our Initial Property and there can be no assurance that we will enter into definitive agreements to acquire or ultimately complete the acquisition of any property in our acquisition pipeline on the terms currently anticipated, or at all. Generally, we will base our determination of whether or not a future acquisition is “probable” on a number of factors, including whether all of the following have occurred:
· | a satisfactory third-party site inspection has been conducted; |
· | a purchase contract containing customary representations and warranties, covenants and conditions to closing, has been executed and delivered by us and the seller; |
· | a deposit, if required, has been paid on the property; |
· | any required approvals by the selling entity and any third party approvals that are material to the transaction have been obtained; and |
· | satisfactory engineering, environmental, survey and title reports have been received and due diligence has been substantially completed. |
All of the above conditions with respect to our Initial Property have not yet been fulfilled. We have not yet received a title report with respect to our Initial Property, certain items identified in the third-party site inspection are being further investigated, and certain third party consents relating to transfer of construction warranties and other contracts have not yet been obtained. Satisfactory completion of these items is an essential step in our evaluation of whether to proceed with the acquisition of our Initial Property. Accordingly, we have determined that the acquisition of our Initial Property is not yet “probable.”
None of the above conditions have yet been fulfilled with respect to the properties that we are evaluating pursuant to non-binding letters of intent. The letters of intent with respect to these properties provide that the purchase and sale of the property will only occur pursuant to a definitive and binding purchase and sale agreement between the parties, if any. Neither we nor the potential seller has any obligation to negotiate further or pursue a transaction. The letters of intent set forth only general terms, the majority of which, are subject to further negotiation and revision. The purchase prices remain subject to our completing due diligence, which we have not yet commenced. Based on the foregoing, there can be no assurance that we and the sellers will enter into a definitive binding agreement on the terms set forth in the letter of intent, or at all. Any definitive purchase and sale agreement would need to address numerous conditions to closing, including obtaining third party consents and approvals that are beyond our control and due diligence, including receipt of satisfactory engineering, environmental, survey and title reports. Accordingly, we have concluded that the acquisition of the properties that we are evaluating pursuant to non-binding letters of intent are not currently “probable.” There can be no assurance that we will consummate the acquisition of any of the $85 million of properties that we are currently evaluating.
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Our Initial Property
We have entered into a definitive purchase agreement for the acquisition of our Initial Property, a 127,000-square foot industrial property located in Montgomery, New York for a purchase price of approximately $30 million. We expect to acquire our Initial Property with the net proceeds of this offering. The acquisition of our Initial Property is subject to ongoing diligence and the satisfaction of closing conditions. There can be no assurance that we will consummate the acquisition of our Initial Property on the terms anticipated, or at all.
Property Description. Our Initial Property consists of approximately 70 acres of land, which includes three buildings comprising approximately 127,000 square feet. Our Initial Property is also expected to support the future development of additional medical-use cannabis cultivation facilities totaling approximately 204,000 additional square feet. The current property owner and future tenant is licensed by the state of New York to operate a medical-use cannabis cultivation and processing facility, and has operated such facility at the property since June 2016, when construction of the facility was substantially completed.
Acquisition Terms . On August 22, 2016, and as amended on September 16, 2016, we entered into a definitive purchase agreement to acquire our Initial Property from PharmaCann LLC in a sale-leaseback transaction for an aggregate purchase price of $30 million. The purchase price for our Initial Property was determined by negotiation with the seller after taking into consideration the expected annualized lease revenue, expected lease, operating history, age and condition of the property, and other relevant factors. We paid a $375,000 deposit upon execution of the purchase agreement that is refundable in the event we do not close an initial public offering of not less than $75.0 million within a specified timeframe. The $375,000 necessary to pay the deposit was paid by IGP Advisers and is to be repaid with the proceeds of this offering. The definitive agreement provides for a due diligence period investment during which we have the right to access and inspect the property and may terminate the agreement if we determine that the property does not meet our criteria. Following the diligence period, we have agreed to purchase the property “as is,” subject to all faults and conditions thereon, which increases the risk that we may have to remedy defects or costs without recourse to the prior owner. The closing of the purchase is subject to the completion of this offering and customary closing conditions. The purchase agreement provides that closing is to occur within 30 days after the expiration of the due diligence period and the agreement is terminable at the option of either party thereafter. We intend to purchase our Initial Property as soon as reasonably practicable after satisfaction of all closing conditions, including the closing of this offering.
Lease Terms. Upon the closing of the acquisition, we will lease 100% of our Initial Property to the seller of the property, PharmaCann LLC, to operate a medical-use cannabis cultivation and processing facility in compliance with applicable state and local law and in compliance with the terms of the tenant’s license from the state of New York. PharmaCann LLC is a start-up business that commenced retail operations in late 2015. PharmaCann secured one of only five licenses granted to date in New York for the cultivation and dispensary of medical-use cannabis. As of the date of this prospectus, PharmaCann LLC currently operates four registered medical-use cannabis dispensaries in Illinois and one manufacturing facility in New York that currently distributes to three registered dispensaries operated by it in New York. The lease is a triple-net lease with the tenant responsible for paying all operating expenses, insurance and taxes related to the property. The base rent is approximately $319,580 per month, which shall be increased annually at the rate based on the higher of (i) 4% or (ii) 75% of the CPI. We also receive a property management fee under the lease equal to 1.5% of the then-current base rent throughout the term, and supplemental base rent for the first five years of the term at a rate of $105,477 per month. Together, the annualized initial base rent, property management fee and supplemental base rent equate to approximately 17.2% of the purchase price of our Initial Property. The lease term is 15 years, with two options to extend the term of the lease for two additional five-year periods. As a start-up business, PharmaCann LLC has not been profitable. As a result, at least initially, we expect that PharmaCann LLC will make rent payments to us from proceeds from the sale of the property or cash on hand, and not funds from operations.
Our Financing Strategy
We intend to meet our long-term liquidity needs through cash flow from operations and the issuance of equity and debt securities, including common stock, preferred stock and long-term notes. Where possible, we also may issue limited partnership interests in our Operating Partnership to acquire properties from existing owners seeking a tax-deferred transaction. We expect to issue equity and debt securities at times when we believe that our stock price is at a level that allows for the reinvestment of offering proceeds in accretive property acquisitions. We may also issue common stock to permanently finance properties that were previously financed by debt securities. However, we cannot assure you that we will have access to the capital markets at times and on terms that are acceptable to us. Our investment guidelines initially provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible assets at the time of any new borrowing, subject to our board of directors’ discretion.
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Our Leases
The following is a general description of the type of lease we typically expect to enter into with our tenants. The terms and conditions of any actual lease may vary from those described below. If we determine that the terms of a lease at a property, in the context of the entire investment, are favorable to us, we may enter into leases with terms that are substantially different from the terms described below.
We intend to acquire industrial medical-use cannabis facilities and lease them to tenants who are the state-licensed operators of such facilities. While we target the acquisition of medical-use cannabis facilities, our leases do not prohibit cannabis cultivation for adult-use that is permissible under the state and local laws where our facilities are located. Consequently, certain of our tenants may subsequently cultivate adult-use cannabis in our medical-use cannabis facilities, if permitted by such state and local laws. Our leases with tenants will be triple-net lease arrangements, where we as the landlord have limited exposure to expense escalations. While the structure of our leases may vary depending on the type and location of the property, we generally seek to structure our leases so that the tenant is responsible for taxes, maintenance, insurance, and structural repairs with respect to the premises throughout the lease term. We expect that our lease structure will offer predictability and stability of our expenses, which we believe will help us to achieve stable and consistent cash distributions to our stockholders.
We expect to enter into lease agreements for a term of 15 years with two consecutive five-year renewal options. We expect that the leases will commence concurrent with the closing of our purchase of the property. We may acquire properties and enter into lease agreements with shorter lease terms if the property benefits from an attractive location, if the property is difficult to replace or if the property has other significant and favorable real estate attributes. We also may enter into leases with longer lease terms if we believe the potential investment yield is particularly attractive.
Under most commercial leases, tenants are obligated to pay a predetermined annual base rent on a monthly basis. We expect that our leases will contain annual rent adjustments at the rate based on the higher of (i) 4% or (ii) 75% of the CPI. The terms of our leases will require that our tenants make rental payments via check or wire transfer. A tenant may experience difficulty curing a default of the manner of payment requirement under our lease due to continued reluctance of banks to accept clients who operate in the medical-use cannabis industry. See the section entitled “Risk Factors—We and our tenants may have difficulty accessing the service of banks, which may make it difficult to contract for real estate needs.”
Generally, our leases will require each tenant to procure, at its expense, commercial general liability insurance. The tenant typically will pay for property insurance covering the structures for the full replacement value and naming the owner as the additional insured on the policy. In addition, we generally expect to obtain loss-of-rent (business interruption) insurance for a period of approximately 36 months in case of property damage, fire, or other instances which render the property uninhabitable. Tenants will be required to provide proof of insurance by furnishing a certificate of insurance to us upon request.
We do not typically expect to permit leases to be assigned or subleased without our prior written consent. If we do consent to an assignment or sublease, generally we expect the terms of such consent to provide that the original tenant will remain fully liable under the lease unless we release that original tenant from its obligations.
Certain properties that we acquire may be subject to ground leases. A ground lease agreement permits a tenant to develop and/or operate a land parcel (property) during the lease period, after which the land parcel and all improvements revert back to the property owner. Under a ground lease, property improvements are owned by the property owner unless an exception is created and all relevant taxes incurred during the lease period are paid for by the tenant. Ground leases typically have a long duration generally ranging from 50 to 99 years with additional extension options.
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Risk Management
We estimate that we will purchase approximately 10 to 20 properties with the net proceeds of this offering and will attempt to diversify the investment size and location of our portfolio of properties in order to manage our portfolio-level risk. Over the long term, we intend that no single property will exceed 25% of our total assets and that no single tenant will exceed 30% of our total assets. However, until a sufficient number of properties are acquired, we anticipate that we will have single properties and single tenants in excess of these long-term targets.
We expect that single tenants will occupy our properties pursuant to triple-net lease arrangements in general and, therefore, the success of our investments will be materially dependent on the financial stability of these tenants. We expect to evaluate the credit quality of our tenants and any guarantors on an ongoing basis by reviewing, where available, the publicly filed financial reports, press releases and other publicly available industry information regarding our tenants and any guarantors. In addition, we will monitor the payment history data for all of our tenants and, in some instances, we intend to monitor our tenants by periodically conducting site visits and meeting with the tenants to discuss their operations. In many instances, we will generally not be entitled to financial results or other credit-related data from our tenants. See the section entitled “Risk Factors— Risks Related to Our Business.”
Investment Guidelines
Our board of directors will adopt the following initial investment guidelines:
· | No investment will be made that would cause us to fail to qualify as a REIT. |
· | No investment will be made that would cause us to be regulated as an investment company under the Investment Company Act. |
· | The proceeds of this offering, any future offering by us or our Operating Partnership, and cash from operations and capital transactions may be invested in interest-bearing, short-term, investment-grade investments, subject to the requirements for maintaining our status as a REIT. |
· | No investment in any single property will exceed 25% of our total assets. |
· | No more than 30% of our total assets will be invested in properties having the same tenant. |
· | The restrictions on investments in any single property or in properties having the same tenant described above shall not apply until we have invested 80% of the proceeds of this offering. |
· | Our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of its tangible assets at the time of any new borrowing. |
Subject to oversight by our board of directors, our senior management team will oversee our investment portfolio and compliance with our investment guidelines and policies. These investment guidelines may be changed or waived by our board of directors without the approval of our stockholders. We will disclose any material changes to our investment guidelines in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Form 10-Q or Form 10-K for the period in which the change was made, or in a Current Report on Form 8-K, if required by the rules of the SEC or the board of directors believes it advisable, in their sole discretion. Furthermore, it is expected that our board of directors will delegate authority to a management investment committee, generally comprised of our executive officers, for certain investments, dispositions and financings, subject to specified parameters, which may include, among other things, dollar limits on investments on an individual basis and in the aggregate for any calendar year; that any transaction not be with a “related party” as defined in applicable securities laws or our related party transaction policy; and that the investments be limited to stabilized medical-use cannabis facilities. Our board would retain approval authority over any investments, dispositions and financings that do not fall within the authority of the management investment committee, and would periodically evaluate this delegation of authority and make any changes that the board deems appropriate in its discretion.
Our Operating Structure
We were formed as a Maryland corporation on June 15, 2016. We intend to conduct business in an UPREIT structure through our Operating Partnership. We are the sole general partner of our Operating Partnership and, upon completion of this offering, we will own , directly or through a subsidiary, 100% of the limited partnership interests in our Operating Partnership . Our board of directors will oversee our business and affairs.
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Our Operating Partnership was formed as a Delaware limited partnership on June 20, 2016 and will commence operations upon the completion of this offering. Following the completion of this offering, substantially all of our assets will be held by, and our operations will be conducted through, our Operating Partnership. We will contribute the net proceeds from this offering to our Operating Partnership in exchange for limited partnership interests. Our interest in our Operating Partnership will generally entitle us to share in cash distributions from, and in the profits and losses of, our Operating Partnership in proportion to our percentage ownership, which is currently 100%. As the sole general partner of our Operating Partnership, we generally will have the exclusive power under the partnership agreement to manage and conduct our Operating Partnership’s business and affairs, subject to certain limited approval and voting rights of the limited partners, which are described in the section entitled “Our Operating Partnership and the Operating Partnership Agreement.” In the future, we may issue limited partnership interests from time to time in connection with property acquisitions, as compensation or otherwise.
IGP Advisers, a company that is owned by Messrs. Gold, Smithers, and Fahey, is funding certain of our organization, offering and transaction costs. In addition, IGP Advisers funded an earnest money deposit, pursuant to the purchase agreement for our Initial Property. IGP Advisers will seek reimbursement from us for these expenses upon completion of this offering and the acquisition of our Initial Property.
The chart below reflects our corporate structure after giving effect to this offering and the issuance of shares of our Class A common stock as described in this prospectus, including (i) 1,312,500 shares of Class A common stock that will be issued to certain executive officers and directors in exchange for outstanding shares of Class B common stock (or 1,509,375 shares if the underwriters’ over-allotment option is fully exercised), (ii) 150,000 shares of Class A common stock that our executive chairman intends to purchase in this offering at the public offering price, and (iii) grants of an aggregate of 27,500 shares of Class A common stock to two of our executive officers under the Incentive Plan that are expected to be approved at the first meeting of the compensation committee of our board of directors upon completion of this offering.
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Competition
The current market for properties that meet our investment objectives may be limited. We believe finding properties that are appropriate for the specific use of allowing medical-use cannabis growers may be limited as more competitors enter the market. 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, and cannabis operators themselves, all of whom may compete with us in our efforts to acquire real estate zoned for medical-use cannabis facilities. Several competitors have recently entered the marketplace, including Kalyx Development, Inc., AmeriCann, Inc., Zoned Properties, Cannabis-RX, Inc., The Cannabis Business Group, Inc., MJ Holdings, Inc., MJ Real Estate Investors, Home Treasure Finders, Inc., Advanced Cannabis Solutions, Inc. and Grow Condos, Inc. In some instances, we will be competing to acquire real estate with persons who have no interest in the cannabis industry, but have identified value in a piece of real estate that we may be interested in acquiring.
These competitors may prevent us from acquiring desirable properties or may cause an increase in the price we must pay for properties. Our competitors may have greater resources than we do and may be willing to pay more for certain assets or may be willing to accept more risk than we believe can be prudently managed. In particular, larger companies may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Our competitors may also adopt transaction structures similar to ours, which would decrease our competitive advantage in offering flexible transaction terms. In addition, due to a number of factors, including but not limited to potential greater clarity of the laws and regulations governing medical-use cannabis by state and federal governments, the number of entities and the amount of funds competing for suitable investment properties may increase, resulting in increased demand and increased prices paid for these properties. If we pay higher prices for properties, our profitability may decrease, and you may experience a lower return on your investment. Increased competition for properties may also preclude us from acquiring those properties that would generate attractive returns to us.
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Governmental Regulation
Agricultural Regulation
The properties that we intend to acquire will be used primarily for cultivation and production of medical-use cannabis and will be subject to the laws, ordinances and regulations of state, local and federal governments, including laws, ordinances and regulations involving land use and usage, water rights, treatment methods, disturbance, the environment, and eminent domain.
Each governmental jurisdiction has its own distinct laws, ordinances and regulations governing the use of agricultural lands. Many such laws, ordinances and regulations seek to regulate water usage and water runoff because water can be in limited supply, as is the case in certain locations including Illinois and New York, where we anticipate our initial properties will be located. In addition, runoff from rain or from irrigation is governed by laws, ordinances and regulations from state, local and federal governments. Additionally, if any of the water used on or running off from our properties flows to any rivers, streams, ponds, the ocean or other waters, there may be specific laws, ordinances and regulations governing the amount of pollutants, including sediments, nutrients and pesticides, that such water may contain.
We expect that the properties in our portfolio will, at the time of acquisition, have sources of water, including wells and/or surface water, that will provide sufficient amounts of water necessary for the current growing operations at each location. However, should the need arise for additional water from wells and/or surface water sources, we may be required to obtain additional permits or approvals or to make other required notices prior to developing or using such water sources. Permits for drilling water wells or withdrawing surface water may be required by federal, state and local governmental entities pursuant to laws, ordinances, regulations or other requirements, and such permits may be difficult to obtain due to drought, the limited supply of available water within the districts of the states in which our properties are located or other reasons.
In addition to the regulation of water usage and water runoff, state, local and federal governments also seek to regulate the type, quantity and method of use of chemicals and materials for growing crops, including fertilizers, pesticides and nutrient rich materials. Such regulations could include restricting or preventing the use of such chemicals and materials near residential housing or near water sources. Further, some regulations have strictly forbidden or significantly limited the use of certain chemicals and materials. Licenses, permits and approvals must be obtained from governmental authorities requiring such licenses, permits and approvals before chemicals and materials can be used at grow facilities. Reports on the usage of such chemicals and materials must be submitted pursuant to applicable laws, ordinances, and regulations and the terms of the specific licenses, permits and approvals. Failure to comply with laws, ordinances and regulations, to obtain required licenses, permits and approvals or to comply with the terms of such licenses, permits and approvals could result in fines, penalties and/or imprisonment.
The use of land for agricultural purposes in certain jurisdictions is also subject to regulations governing the protection of endangered species. When agricultural lands border, or are in close proximity to, national parks, protected natural habitats or wetlands, the agricultural operations on such properties must comply with laws, ordinances and regulations related to the use of chemicals and materials and avoid disturbance of habitats, wetlands or other protected areas.
Because the properties we own will be used for growing cannabis, there may be other additional land use and zoning regulations at the state or local level that affect our properties that may not apply to other types of agricultural uses. For example, both New York and Illinois require stringent security systems in place at grow facilities, and also require stringent procedures for disposal of waste materials.
As an owner of agricultural lands, we may be liable or responsible for the actions or inactions of our tenants with respect to these laws, regulations and ordinances.
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Environmental Matters
Our properties and the operations thereon are subject to federal, state and local environmental laws, ordinances and regulations, including laws relating to water, air, solid wastes and hazardous substances. Our properties and the operations thereon are also subject to federal, state and local laws, ordinances, regulations and requirements related to the federal Occupational Safety and Health Act, as well as comparable state statutes relating to the health and safety of our employees and others working on our properties. Although we believe that we and our tenants are in material compliance with these requirements, there can be no assurance that we will not incur significant costs, civil and criminal penalties and liabilities, including those relating to claims for damages to persons, property or the environment resulting from operations at our properties. See the section entitled “Risk Factors—Risks Related to Our Business—Potential liability for environmental matters could adversely affect our financial condition.”
Real Estate Industry Regulation
Generally, the ownership and operation of real properties is subject to various laws, ordinances and regulations, including regulations relating to zoning, land use, water rights, wastewater, storm water runoff and lien sale rights and procedures. These laws, ordinances or regulations, such as the Comprehensive Environmental Response and Compensation Liability Act and its state analogs, or any changes to any such laws, ordinances or regulations, could result in or increase the potential liability for environmental conditions or circumstances existing, or created by tenants or others, on our properties. Laws related to upkeep, safety and taxation requirements may result in significant unanticipated expenditures, loss of our properties or other impairments to operations, any of which would adversely affect our cash flows from operating activities.
Our property management activities, to the extent we are required to engage in them due to lease defaults by tenants or vacancies on certain properties, will likely be subject to state real estate brokerage laws and regulations as determined by the particular real estate commission for each state.
State Laws Applicable to the Medical-Use Cannabis Industry
In most states that have legalized cannabis in some form, the growing and/or dispensing of cannabis generally requires that the operator obtain one or more licenses in accordance with applicable state requirements. In addition, many states regulate various aspects of the growing and/or dispensing of medical-use cannabis. For example, New York limits the types of strains that can be grown, prices are set by the State Program Commissioner, a registered pharmacist is required to be on the premises of all dispensaries during hours of operation, and both flower and edibles are prohibited. Local governments in some cases also impose rules and regulations on the manner of operating cannabis businesses. As a result, applicable state and local laws and regulations vary widely. As a result of licensing requirements, if our tenants default under their leases, we may not be able to find new tenants that have the requisite license to engage in the cultivation of medical cannabis on the properties.
Federal Laws Applicable to the Medical-Use Cannabis Industry
Under the CSA, cannabis is a Schedule-I controlled substance. Even in those jurisdictions in which the use of medical cannabis has been legalized at the state level, the possession, use, cultivation, and transfer of cannabis remains a violation of federal law. Federal law criminalizing the use of cannabis preempts state laws that legalize its use for medicinal or adult-retail purposes, and therefore strict enforcement of federal law regarding cannabis would likely result in our inability to execute our business plan.
The Obama administration has effectively stated that it is not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. In furtherance thereof, on August 29, 2013, the U.S. Department of Justice provided guidance in the so-called “Cole Memo,” to all federal prosecutors regarding the enforcement of federal laws regarding cannabis, which states that enforcement should be focused on eight priorities, which is to prevent: (1) distribution of cannabis to minors; (2) revenue from sale of cannabis to criminal enterprises, gangs and cartels; (3) transfer of cannabis from states where it is legal to states where it is illegal; (4) cannabis activity from being a pretext for trafficking of other illegal drugs or illegal activity; (5) violence or use of firearms in cannabis growth and distribution; (6) drugged driving and adverse public health consequences from cannabis use; (7) growth of cannabis on federal lands; and (8) cannabis possession or use on federal property. Furthermore, the U.S. Department of Justice has deferred its right to challenge states’ legal recreational cannabis laws due to strict state regulatory schemes. Congress has also enacted an omnibus spending bill including a provision prohibiting the U.S. Department of Justice (which includes the DEA) from using funds appropriated by that bill to prevent states from implementing their medical-use cannabis laws.
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In addition, as it did for the fiscal year 2015, Congress enacted an omnibus spending bill for fiscal year 2016 including a provision prohibiting the U.S. Department of Justice (which includes the DEA) from using funds appropriated by that bill to prevent states from implementing their medical-use cannabis laws. This provision, however, is effective only until December 9, 2016 and must be renewed by Congress in subsequent years. In USA vs. McIntosh, the United States Circuit Court of Appeals for the Ninth Circuit held that this provision prohibits the U.S. Department of Justice from spending funds from relevant appropriations acts to prosecute individuals who engage in conduct permitted by state medical-use cannabis laws and who strictly comply with such laws. However, the Ninth Circuit’s opinion, which only applies in the states of Alaska, Arizona, California, Hawaii and Idaho, also held that persons who do not strictly comply with all state laws and regulations regarding the distribution, possession and cultivation of medical-use cannabis have engaged in conduct that is unauthorized, and in such instances the U.S. Department of Justice may prosecute those individuals.
We do not intend to acquire properties from or lease properties to companies whose activities involve or support those enumerated in the Cole Memo, but federal prosecutors have significant discretion in their interpretation of these priorities. Therefore, no assurance can be given that the federal prosecutor in each judicial district where we purchase a property will agree that the activities of our tenant on the property located in such prosecutor’s district do not involve those enumerated in the Cole Memo. There is also no guarantee that the current administration or future administrations will not revise the federal enforcement priorities enumerated in the Cole Memo or otherwise choose to strictly enforce the federal laws governing cannabis production or distribution. Any such change in the federal government’s current enforcement posture with respect to state-licensed cultivation of medical-use cannabis would result in our inability to execute our business plan and we would likely suffer significant losses with respect to our investment in medical-use cannabis facilities in the U.S.
Laws Applicable to Banking for Medical-Use Cannabis Industry
All banks are subject to federal law, whether the bank is a national bank or state-chartered bank. At a minimum, all banks maintain federal deposit insurance which requires adherence to federal law. Violation of federal law could subject a bank to loss of its charter. All banks are subject to the requirements of the Bank Secrecy Act, or BSA. Under the BSA, banks must report to the federal government any suspected illegal activity, which would include any transaction associated with a cannabis-related business. These reports must be filed even though the business is operating in compliance with applicable state and local laws.
The Financial Crimes Enforcement Network, a division of the Department of Treasury, issued guidance in February 2014 which sets expectations for financial institutions dealing with cannabis-related businesses. The guidance also sets extensive requirements for financial institutions to meet if they want to offer bank accounts to marijuana businesses, including close monitoring of businesses to determine that they meet all of the requirements established by the U.S. Department of Justice, including those enumerated in the Cole Memo. This is a level of scrutiny that is far beyond what is expected of any normal banking relationship.
As a result, many banks are hesitant to offer any banking services to cannabis-related businesses, including opening bank accounts. The lack of access to bank accounts or other basic banking services to cannabis-related businesses, including our tenants, would make it difficult for them to do business, increase their operating costs, and pose additional operational, logistical and security challenges.
Employees
Upon completion of this offering, we, through our Operating Partnership, will initially have six employees.
Legal Proceedings
We are not a party to any legal proceedings.
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Implications of Being an “Emerging Growth Company”
We qualify as an “emerging growth company,” as defined in the JOBS Act. An “emerging growth company” may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. While we are an “emerging growth company,” among other things:
· | we are exempt from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act; |
· | we are permitted to provide less extensive disclosure about our executive compensation arrangements; |
· | we are not required to give to our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements; and |
· | we have elected not to use an extended transition period for complying with new or revised accounting standards, and this election is irrevocable. |
We could remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our Class A common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
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Our Executive Officers, Directors and Director Nominees
Upon completion of this offering, our board of directors will consist of six directors, including our existing directors Messrs. Gold and Kreitzer. Of the six directors, we expect that our board of directors will determine that at least four of our directors are independent in accordance with the independence standards of the NYSE. Upon the expiration of their terms at the annual meeting of stockholders in 2017, the directors will be elected to serve one year terms. Our bylaws provide that a majority of the entire board of directors may establish, increase or decrease the number of directors, provided that the number of directors shall never be less than one, which is the minimum number required by the MGCL, nor more than 15. All of our executive officers will serve at the discretion of our board of directors. The following table sets forth certain information about our executive officers, directors and director nominees.
Name |
Age | Position(s) with Our Company | ||
Alan D. Gold | 56 | Executive Chairman | ||
Paul E. Smithers | 59 | President, Chief Executive Officer and Director Nominee | ||
Robert M. Sistek | 40 | Chief Financial Officer and Executive Vice President, Investments | ||
Gregory J. Fahey | 56 | Chief Accounting Officer and Treasurer | ||
Andrew Fenton | 34 | Executive Vice President, Capital Markets | ||
Brian J. Wolfe | 40 | Vice President, General Counsel and Secretary | ||
Gary A. Kreitzer | 61 | Director | ||
Gary M. Malino | 58 | Director Nominee | ||
Scott Shoemaker | 50 | Director Nominee | ||
David Stecher | 55 | Director Nominee |
Alan D. Gold has served as executive chairman of our board of directors since our formation. Mr. Gold served as chairman, chief executive officer, and president of BioMed Realty Trust, Inc. (formerly NYSE: BMR), a REIT specializing in acquiring, leasing, developing and managing laboratory and office space for the life science industry, from its inception in 2004 through the sale of the company to affiliates of Blackstone Real Estate Partners VIII L.P. in January 2016. Mr. Gold also served as chairman, president and chief executive officer of BioMed Realty’s privately-held predecessor, Bernardo Property Advisors, Inc., from August 1998 until August 2004. In addition, Mr. Gold was a co-founder and served as president and a director of Alexandria Real Estate Equities, Inc., a NYSE-listed urban office REIT, from its predecessor’s inception in 1994 until August 1998. Mr. Gold served as managing partner of GoldStone Real Estate Finance and Investments, a partnership engaged in the real estate and mortgage business, from 1989 to 1994. He also served as assistant vice president of commercial real estate for Northland Financial Company, a full service commercial property mortgage banker, from 1989 to 1990 and as real estate investment officer – commercial real estate for John Burnham Company, a regional full service real estate company, from 1985 to 1989. From December 2013 to June 2016, Mr. Gold served on the board of directors and as a member of the nominating and compensation committees of CatchMark Timber Trust, Inc., a publicly traded REIT focused on timberland ownership. From August 2011 to March 2013, Mr. Gold also served on the board of directors and as a member of the audit committee of American Assets Trust, Inc., a publicly traded REIT focused on acquiring, developing and managing retail, office, multifamily and mixed-use properties. Mr. Gold currently serves as a member of the board of trustees for the Salk Institute for Biological Studies, a research organization dedicated to fundamental research in biology and its relation to health, and as a member of the board of directors of the Campanile Foundation, a philanthropic foundation that supports San Diego State University. Mr. Gold received his Bachelor of Science Degree in Business Administration and his Master of Business Administration from San Diego State University. We believe that Mr. Gold’s 30 years of experience in the real estate industry, expertise in NYSE-listed REITs, and extensive management experience make him qualified to serve as executive chairman of our board of directors.
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Paul E. Smithers has served as our president and chief executive officer since our formation, and is a director nominee. From August 2013 to July 2015, Paul Smithers served as co-founder and chief legal officer of Iso Nano International, LLC, a designer and manufacturer of advanced materials for use in the aerospace, consumer goods, electronics, and safety industries. Prior to his time at Iso Nano, Mr. Smithers was the managing partner of Smithers & Player, Attorneys at Law from September 1989 to July 2013. Mr. Smithers is a member of the California Bar. We believe that Mr. Smithers’ management expertise and over 30 years of legal and regulatory experience are valuable to our board of directors.
Robert M. Sistek serves as our chief financial officer and executive vice president, investments. Prior to joining us, Mr. Sistek held the positions of senior vice president, investments from March 2015 through October 2016 and vice president, finance from May 2011 to March 2015 with BioMed Realty Trust, Inc. (formerly NYSE: BMR), a REIT specializing in acquiring, leasing, developing and managing laboratory and office space for the life science industry. Prior to BioMed Realty, Mr. Sistek was senior vice president of capital markets for CoreSite Realty Corporation, a publicly-traded REIT specializing in institutional quality data centers. Previously, he was a senior associate with The Carlyle Group, a predecessor company of CoreSite, from 2007 to 2010, vice president of finance and capital markets at DCT Industrial Trust from 2006 to 2007, and held senior positions with GMAC Commercial Mortgage and ProLogis from 2001 to 2005. Mr. Sistek received his Master of Business Administration from the Kellogg School of Management at Northwestern University and his Bachelor of Science in Accounting, summa cum laude, from the University of Northern Colorado. He is a Certified Public Accountant (inactive) and a member of the American Institute of Certified Public Accountants.
Gregory J. Fahey serves as our chief accounting officer and treasurer. Mr. Fahey has over 28 years of experience in the real estate industry. Prior to joining us, Mr. Fahey served as the senior vice president, controller of Realty Income Corporation, a NYSE-listed REIT, from January 2013 to June 2014. He joined Realty Income in 1986, serving in various positions until April 1998, when he began serving as the vice president, controller (a position he held until January 2013). As the controller, Mr. Fahey was the chief accounting officer of Realty Income and was responsible for the accounting and reporting functions of the company, including its SEC filings. He also worked on the each of the securities offerings of Realty Income. From June 2014 until joining us, Mr. Fahey was retired. Mr. Fahey is accredited as a certified management accountant.
Andrew Fenton will serve as our executive vice president, capital markets upon completion of this offering. Mr. Fenton has over a decade of REIT capital markets experience, including equity research at leading investment banks, high yield lending, and extensive equity investing comprising long/short, long only and preferred equity strategies. Prior to joining us, from 2014 to 2016, Mr. Fenton served as a senior vice president at Sorin Capital Management, an independent investment management firm focused on securities related to U.S. commercial real estate, where he invested in publicly traded real estate equity securities. Mr. Fenton served as a senior equity analyst at Real Estate Management Services Group, investing in REIT equities and preferred equities across multiple investment strategies from 2011 to 2013. Mr. Fenton began his career in 2004 at Raymond James & Associates where he worked on the REIT equity research team focused on self-storage REITs as well as homebuilding companies until 2006. Mr. Fenton’s additional equity research experience includes focusing on retail, multifamily and self-storage REITs while working on the REIT research team at Credit Suisse from 2010 to 2011. Mr. Fenton’s direct investing experience includes high yield investing through a variety of leveraged products while working for Four Corners Capital Management from 2006 to 2008, a majority owned entity of the Australian based investment bank Macquarie.
Brian J. Wolfe serves as our secretary and will also serve as our vice president, general counsel and secretary upon completion of this offering. Until March 2016, Mr. Wolfe served as vice president, corporate legal and assistant secretary of BioMed Realty Trust, Inc. (formerly NYSE: BMR), a REIT specializing in acquiring, leasing, developing and managing laboratory and office space for the life science industry, having joined BioMed Realty in 2007. Prior to that, Mr. Wolfe was an attorney with Latham & Watkins LLP, where he represented public and private companies in a broad range of industries with a focus on corporate finance, mergers and acquisitions, securities law compliance and corporate governance. Mr. Wolfe received his Juris Doctor Degree with honors from the University of Virginia School of Law and his A.B. in Economics with honors from Harvard College. Mr. Wolfe is a member of the California State Bar and San Diego County Bar Association.
Gary A. Kreitzer has served as a member of our board of directors since our formation. Mr. Kreitzer is a co-founder of BioMed Realty Trust, Inc. (formerly NYSE: BMR), a REIT specializing in acquiring, leasing, developing and managing laboratory and office space for the life science industry, and served as its general counsel from the company’s formation in 2004 until August 2012. Mr. Kreitzer currently serves as BioMed Realty’s executive vice president, a position he has held since its formation in 2004. Mr. Kreitzer also served in the same roles with Bernardo Property Advisors from December 1998 to August 2004. Mr. Kreitzer was a co-founder and served as senior vice president and in-house counsel of Alexandria Real Estate Equities, Inc., a NYSE-listed urban office REIT, from its predecessor’s inception in 1994 until December 1998. From 1990 to 1994, Mr. Kreitzer was in-house counsel and vice president for Seawest Energy Corporation, an alternative energy facilities development company. Mr. Kreitzer also served The Christiana Companies, Inc., a publicly traded investment and real estate development company, in a number of roles from 1982 to 1989, including as in-house counsel, secretary and vice president. Mr. Kreitzer is a member of the California Bar. We believe that Mr. Kreitzer’s 30 years of experience in the real estate industry, expertise in NYSE-listed REITs, and legal expertise are valuable to our board of directors.
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Gary M. Malino is one of our director nominees. Mr. Malino has been a member of the board of directors and the audit committee of PriceSmart, Inc., a publicly traded company that operates membership warehouse clubs in Central America, South America and the Caribbean, since May of 2016. He is a retired senior executive of Realty Income Corporation, a NYSE-listed REIT. Mr. Malino joined Realty Income Corporation in 1985 and was the chief financial officer of the company from 1994 until 2001, when he was promoted to president, chief operating officer, a position that he held until his retirement in December 2014. Prior to joining Realty Income, he was a certified public accountant for a Los Angeles based accounting firm and assistant controller with McMillin Development Company, a real estate development company. We believe that Mr. Malino’s extensive experience as an executive of a publicly traded company, his audit background as a certified public accountant, his knowledge of SEC filing requirements and his extensive experience with finance and compensation matters are valuable to our board of directors.
Scott Shoemaker, MD is one of our director nominees. Mr. Shoemaker is a practicing orthopedic surgeon specializing in pediatrics and trauma for Kaiser Permanente, an integrated managed care consortium, since 1999. He is also an inventor, assists in the development of medical devices, and is on a patent for a spine deformity system developed by NuVasive, Inc. for which he receives royalties. Mr. Shoemaker is also a founder of BOSS Logic, LLC, a company designed to generate ideas for the intellectual property and biotechnology sectors. BOSS logic holds multiple patents relating to how mobile devices share and distribute contact information. He is also part owner and developer of Aztek Paddles, a carbon fiber company. In this role, he assisted in designing paddles, writing patents, and testing paddles and was a team racer for their standup paddle brand. We believe that Mr. Shoemaker’s management experience and medical expertise are valuable to our board of directors.
David Stecher is one of our director nominees. Mr. Stecher has led the executive benefits practice at both NFP Retirement and its sister company, Retirement Plan Advisory Group, since December of 2009. NFP Retirement and Retirement Plan Advisory Group are companies that specialize in corporate retirement plans. Previously, Mr. Stecher served, from April 2004 to September 2009, as executive vice president for Retirement Capital Group, a company that provides employee compensation and benefits advisory services; from January 1984 to September 1986, as tax and auditing accountant for KPMG Peat Marwick; and from June 1997 to April 2004, as executive vice president and head of West Coast operations for AXA Advisors’ executive benefits group, a group that designs and implements corporate executive benefits and provides individual planning for asset accumulation and preservation. Mr. Stecher holds a wide range of certifications, including, CPA, CFP, CLU, and ChFC, as well as his Series 6, 7, 63, 65 and 24 licenses. We believe that Mr. Stecher’s expertise in employee compensation and benefits as well as his accounting background and experience are valuable to our board of directors.
Board Committees
Our board of directors will form an audit committee, a compensation committee and a nominating and corporate governance committee upon completion of this offering. The principal functions of each committee are briefly described below. Matters put to a vote of any one of our three committees must be approved by a majority of the directors on the committee who are present at a meeting, in person or as otherwise permitted by our bylaws, at which there is a quorum or by unanimous written consent of the directors on that committee.
Audit Committee
The audit committee will be composed of Messrs. Malino, Shoemaker and Stecher, each of whom will be an independent director for purpose of service on the audit committee and “financially literate” under the rules of the NYSE. Mr. Malino will serve as chair of the audit committee and as the “audit committee financial expert” as that term is defined by the SEC. The audit committee assists the board of directors in overseeing:
● | our accounting and financial reporting processes; |
● | the integrity and audits of our consolidated financial statements; |
● | our compliance with legal and regulatory requirements; |
● | the qualifications and independence of our independent registered public accounting firm; and |
● | the performance of our independent registered public accounting firm and any internal auditors. |
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The audit committee is also responsible for engaging an independent registered public accounting firm, reviewing with the independent registered public accounting firm the plans and results of the audit engagement, approving professional services provided by the independent registered public accounting firm and the related audit and non-audit fees.
Compensation Committee
The compensation committee will be composed of Messrs. Malino, Shoemaker and Stecher, each of whom will be an independent director under the rules of the NYSE. Mr. Stecher will serve as chair of the compensation committee, whose principal functions will be to:
· | evaluate the performance of and compensation of our chief executive officer; |
· | review and approve the compensation and benefits of our executive officers and members of our board of directors; and |
· | administer the Incentive Plan, as well as any other compensation, stock option, stock purchase, incentive or other benefit plans. |
The compensation committee is primarily responsible for establishing and implementing our compensation program and policies. To fulfill its responsibilities, the compensation committee may engage, oversee and provide appropriate funding for advisors and consultants to advise the committee on executive compensation matters.
Nominating and Corporate Governance Committee
The nominating and corporate governance committee will be composed of Messrs. Malino, Shoemaker and Stecher, each of whom will be an independent director under the rules of the NYSE. Mr. Shoemaker will serve as chair of the nominating and corporate governance committee, which is responsible for:
● | seeking, considering and recommending to the full board of directors qualified candidates for election as directors and recommending a slate of nominees for election as directors at the annual meeting of stockholders; |
● | periodically preparing and submitting to the board of directors for adoption the committee’s selection criteria for director nominees; |
● | reviewing and making recommendations on matters involving general operation of the board of directors and our corporate governance; |
● | recommending to the board of directors nominees for each committee of the board of directors; and |
● | annually facilitating the assessment of the board of directors’ performance as a whole and of the individual directors and reports thereon to the board of directors. |
Corporate Governance Guidelines and Code of Business Conduct and Ethics
Our board of directors will establish corporate governance guidelines and a code of business conduct and ethics that applies to our employees, officers and directors. Among other matters, our code of business conduct and ethics is designed to deter wrongdoing and to promote:
● | honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
● | full, fair, accurate, timely and understandable disclosure in our SEC reports and other public communications; |
● | compliance with applicable governmental laws, rules and regulations; |
● | prompt internal reporting of violations of the code to appropriate persons identified in the code; and |
● | accountability for adherence to the code. |
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Any waiver of the code of business conduct and ethics for our executive officers or directors may be made only by the audit committee and for those who are not our executive officers, by our chief executive officer and our chief legal officer, and will be promptly disclosed as required by law or stock exchange regulations.
Board Leadership Structure and Role in Risk Oversight
Our board of directors does not have a policy on whether the same person should serve as both the chief executive officer and chairman of the board of directors or, if the roles are separate, whether the chairman should be selected from the independent directors. Our board understands that there is no single, generally accepted approach to providing board leadership and believes that it should have the flexibility to periodically determine the leadership structure that is best for our company. Consistent with this understanding, our independent directors will consider the board’s leadership structure on an annual basis.
The board of directors believes that its current leadership structure, with Mr. Gold serving as executive chairman and Mr. Smithers serving as president, chief executive officer and director, is appropriate. Mr. Gold will be involved in both our day-to-day operations and the strategic decision making at the board level. We believe our current leadership structure is the optimal structure for us because it provides our company with strong, effective and consistent leadership.
Our board of directors will play an active role in overseeing the management of our risks. Upon completion of this offering, the committees of our board of directors will assist our full board in risk oversight by addressing specific matters within the purview of each committee. The audit committee will focus on oversight of financial risks; the compensation committee will focus primarily on risks relating to executive compensation plans and arrangements; and the nominating and corporate governance committee will focus on reputational and corporate governance risks, including the independence of our board of directors. While each committee will be responsible for evaluating certain risks and overseeing the management of such risks, our full board of directors plans to keep itself regularly informed regarding such risks through committee reports and otherwise.
Compensation Committee Interlocks and Insider Participation
No member of the compensation committee is a current or former officer or employee of ours or any of our subsidiaries. None of our executive officers serves as a member of the board of directors or compensation committee of any company that has one or more of its executive officers serving as a member of our board of directors or compensation committee.
Executive Officer and Director Compensation
Compensation of Directors
It is currently anticipated that each non-employee director will receive, upon consummation of this offering and following each annual meeting of stockholders, an annual retainer of $40,000 in cash (except in the case of Mr. Kreitzer, who will serve as vice chairman of the board of directors and is expected to receive an annual retainer of $80,000 in cash) and an annual retainer of $40,000 payable in restricted shares of common stock under the Incentive Plan, which will vest ratably over a three-year period. In addition, we anticipate that the audit committee chair will receive an additional annual retainer of $10,000 in cash and any other committee chair will receive an additional annual retainer of $5,000 in cash. All members of our board of directors will be reimbursed for their costs and expenses in attending our board meetings. Any member of our board of directors who is also an employee of our company will not receive additional compensation for serving as a director.
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Compensation of Executive Officers
Our policies with respect to the compensation of our executive officers upon completion of this offering will be administered by our board in consultation with the compensation committee (as described above) and in accordance with the applicable listing standards of the NYSE. The compensation policies followed by us will be intended to provide for compensation that is sufficient to attract, motivate and retain executives of outstanding ability and potential and to establish an appropriate relationship between executive compensation and the creation of stockholder value.
It is anticipated that performance and equity-based compensation will be an important foundation in executive compensation packages as we believe it is important to maintain a strong link between executive incentives and the creation of stockholder value. We believe that performance and equity-based compensation can be an important component of the total executive compensation package for maximizing stockholder value while, at the same time, attracting, motivating and retaining high-quality executives.
Upon completion of this offering, we expect to enter into severance and change in control agreements with our executive officers, subject to approval of the compensation committee of our board of directors. See “—Severance and Change in Control Agreements” below.
Overview of Compensation
Set forth below are the initial annual base salaries we expect to pay to our executive officers upon the closing of this offering:
Name and principal position | Base Salary | |||
Alan D. Gold
Executive Chairman |
$ | 600,000 | ||
Paul E. Smithers
President, Chief Executive Officer and Director Nominee |
$ | 350,000 | ||
Robert M. Sistek
Chief Financial Officer and Executive Vice President, Investments |
$ | 275,000 | ||
Gregory J. Fahey
Chief Accounting Officer and Treasurer |
$ | 180,000 | ||
Andrew Fenton
Executive Vice President, Capital Markets |
$ | 200,000 | ||
Brian J. Wolfe
Vice President, General Counsel and Secretary |
$ | 200,000 |
Although we expect such salaries to remain the same upon the completion of this offering, the compensation committee may increase or decrease such amounts as part of the compensation packages developed for each of our executive officers as described below.
Upon consummation of the offering, we will seek to provide total compensation packages that are competitive in terms of potential value to our executives, and which are tailored to our unique characteristics and needs within our industry in order to create an executive compensation program that will adequately reward our executives for their roles in creating value for our stockholders. We intend to be competitive with other similarly situated companies in the REIT industry following completion of the offering.
The compensation decisions regarding our executives will be based on our need to attract individuals with the skills necessary for us to achieve our business plan, to reward those individuals fairly over time, and to retain those individuals who continue to perform at or above our expectations.
It is anticipated that our executive compensation program will have three primary components — salary, cash incentive bonus and stock-based awards. We will view the three components of executive compensation as related but distinct. Although the compensation committee will review total compensation, we do not believe that significant compensation derived from one component of compensation should negate or reduce compensation from other components. We anticipate determining the appropriate level for each compensation component based in part, but not exclusively, on our view of internal equity and consistency, individual performance and other information deemed relevant and timely. Since the compensation committee will not be formed until the consummation of this offering, we have not adopted any formal or informal policies or guidelines for allocating compensation between annual and long-term compensation, between cash and non-cash compensation, or among different forms of compensation.
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In addition to the guidance provided by the compensation committee, we may utilize the services of third parties from time to time in connection with the hiring and compensation awarded to executive employees. This could include subscriptions to executive compensation surveys and other databases.
The compensation committee will be charged with performing an annual review of our executive compensation program, including its cash and equity compensation components, to confirm it provides adequate incentives and motivation to executive officers, encourages and maintains a performance-driven company culture, aligns the interests of our executive officers with the interests of our stockholders and adequately compensates our executive officers relative to comparable officers in other companies.
Benchmarking of Cash and Equity Compensation
We believe it is important when making compensation-related decisions to be informed as to current practices of similarly situated publicly-held companies in the REIT industry. We expect that the compensation committee will stay apprised of the cash and equity compensation practices of publicly-held companies in the REIT industry through the review of such companies’ public reports and through other resources. It is expected that any companies chosen for inclusion in any benchmarking group would have business characteristics comparable to us, which characteristics may include investment strategies, financial growth metrics, stage of development, employee headcount and market capitalization. While benchmarking may not always be appropriate as a stand-alone tool for setting compensation due to the aspects of our business objectives that may be unique to us, we generally believe that gathering this information will be an important part of our compensation-related decision-making process.
Compensation Components
Base Salary . Generally, we, working with the compensation committee, anticipate setting executive base salaries at levels comparable with those of executives in similar positions and with similar responsibilities at comparably sized companies. We will seek to maintain base salary amounts at or near the REIT industry norms, while avoiding paying amounts in excess of what we believe is necessary to motivate executives to meet corporate goals. It is anticipated base salaries will generally be reviewed annually, subject to terms of employment agreements, if any, and that the compensation committee and board will seek to adjust base salary amounts to realign such salaries with REIT industry norms after taking into account individual responsibilities, performance and experience. As described above, we have been accruing base salaries for each of executive officers at the salaries mentioned above from the date of their commencement of employment with us for their services rendered to us in connection with this offering and expect to pay such salaries in arrears upon completion of this offering. Although we expect such salaries to remain the same upon the completion of this offering, the compensation committee may increase or decrease such amounts as part of the compensation packages developed for each of our executive officers.
Annual Bonuses . We intend to utilize cash incentive bonuses for executives to focus them on achieving key operational and financial objectives within a yearly time horizon. Near the beginning of each year, the board, upon the recommendation of the compensation committee and subject to any applicable employment agreements, will determine performance parameters for appropriate executives. At the end of each year, the board of directors and compensation committee will determine the level of achievement for each corporate goal.
Since we will elect to qualify as a REIT under the Code, we generally will not be subject to federal income tax. Thus, the deduction limit contained in Section 162(m) of the Code for compensation paid to chief executive officers and certain other executive officers of public companies will not be material to the design and structure of our executive compensation program.
Equity Awards . We also expect to use restricted stock or restricted stock units and other stock-based awards to reward long-term performance. We believe that providing a meaningful portion of our executives’ total compensation package in restricted stock, restricted stock units and other stock-based awards will align the incentives of our executives with the interests of our stockholders and with our long-term success. The compensation committee and board will develop their equity award determinations based on their judgments as to whether the complete compensation packages provided to our executives are sufficient to retain, motivate and adequately award the executives.
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Equity awards will be granted through the Incentive Plan, which was adopted by our board and stockholders in June 2016. We expect that at the first meeting of the compensation committee of our board of directors upon completion of this offering, two executive officers, Messrs. Sistek and Wolfe, will each receive $275,000 in shares of Class A common stock under the Incentive Plan based on the public offering price, or 13,750 shares of Class A common stock at the assumed offering price of $20.00 per share.
We will account for any equity compensation expense under the rules of FASB Accounting Standards Codification 718, Compensation—Stock Compensation , which requires a company to estimate and record an expense for each award of equity compensation over the service period of the award. Accounting rules also will require us to record cash compensation as an expense at the time the obligation is accrued.
Other Compensation . We will establish and maintain various employee benefit plans, including medical, dental, life insurance and 401(k) plans. These plans will be available to all salaried employees and will not discriminate in favor of executive officers. We may extend other perquisites to our executives that are not available to our employees generally.
Severance and Change in Control Agreements
We consider the maintenance of a sound management team to be essential to protecting and enhancing our best interests. To that end, we recognize that the uncertainty that may exist among management with respect to their “at-will” employment with us that may result in the departure or distraction of management personnel to our detriment. Accordingly, we have determined that severance arrangements are appropriate to encourage the continued attention and dedication of certain members of our management and to allow them to focus on the value to stockholders without concern for the impact on their continued employment.
Subject to the approval of the compensation committee of our board of directors after the completion of this offering, we expect to enter into severance and change in control agreements with each of Messrs. Gold, Smithers, Sistek, Fahey, Fenton and Wolfe having the terms and conditions described herein. These agreements will expire on December 31, 2019, but will automatically renew for successive three-year terms unless either party gives written notice of non-renewal within 90 days before the end of the current term. We believe these agreements are important for retention purposes, as many companies with which we will compete with in the REIT industry offer severance compensation, particularly in connection with a change in control. Accordingly, our executive officers will have the right to receive severance compensation if they are terminated without cause or they leave for good reason while the agreement is in effect. If such termination occurs within two years after a change in control, enhanced severance compensation, consisting of the vesting of unvested equity awards, is provided. We believe that such compensation gives our named executive officers incentive (1) to stay with us despite the possibility of losing employment after a change in control and (2) to focus on obtaining the best possible value for stockholders in a change in control transaction.
The agreements will provide that if we terminate the executive without cause or the executive terminates his employment for good reason, in either case other than in connection with a change in control, the executive officer will receive a cash payment equal to a specified multiple (set forth below) of the sum of his annual base salary, his average annual cash bonus during the past three years, and the annual Consolidated Omnibus Reconciliation Act, or COBRA, premiums the executive would be required to pay to continue health plan coverage under our health plans. Generally, we will pay this amount in a lump sum within 60 days after the executive’s separation from service, subject to potential deferral required by Section 409A of the Code. In the event of a termination without cause or the executive officer leaves for good reason that is not related to a change in control, the executive officer’s unvested options and stock rights awards that vest solely on the basis of time will vest on a pro-rated basis and the executive officer’s performance shares will be earned on a pro-rated basis based on the level of achievement as of such date of termination.
In the event of a change in control and termination of the executive by us without cause or by the executive for good reason within two years after the change in control, in addition to the compensation set forth above, all unvested stock rights awards will vest immediately. Unearned performance shares also will vest at the greater of actual performance or target. If payments we make in connection with a change in control would be subject to the excise tax on “excess parachute payments” as defined and imposed under Section 4999 of the Code, then the payments will be delivered either (1) in full or (2) in an amount such that the value of the aggregate payments is $1.00 less than the maximum amount that the executive may receive without being subject to the excise tax, whichever of (1) or (2) results in the receipt by the executive of the greatest benefit on an after-tax basis.
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The severance and change in control agreements will require each executive officer to sign a general release of claims against us as a condition of receiving the severance payment. For one year after termination of employment for any reason, the executive is prohibited from:
· | directly or indirectly soliciting (1) any of our employees to leave us or (2) any prospective employees negotiating with us on the date of termination to cease negotiations; or |
· | directly or indirectly soliciting our tenants or other parties to terminate lease, joint venture, acquisition, business combination or development contracts to which we were a party on the date of termination, or soliciting prospects with whom we were actively conducting negotiations for a lease, joint venture, acquisition, business combination or development project on the date of termination of employment (unless the executive was not aware of the negotiations). |
The agreements will also require the executive to provide consulting services to us for up to 20 hours a month during the six months after any termination of employment and requires the executive to maintain the confidentiality of our confidential information. The agreements will not contain any provision for waiving a breach of the non-solicitation, confidentiality or consulting obligations described above.
The severance amounts payable above to each executive officer will be a specified multiple of the sum of the officer’s annual base salary and average annual cash bonus paid during the past three years. With respect to qualifying terminations occurring either prior to a change in control or after a change of control, the severance multiple will be 3.0 for each of Messrs. Gold and Smithers, and 2.0 for each of Messrs. Sistek, Fahey, Fenton and Wolfe.
In lieu of allowing executives to continue participating in our health plans during the severance period, we would pay an additional cash severance payment upon the executive’s qualifying termination in an amount equal to the COBRA premiums the executive would be required to pay to continue his or her health plan coverage during such severance period.
If the executive retires for other than good reason and gives us a specified advance notice before retiring, or if the executive dies or terminates employment because of disability, all unvested stock rights awards that vest based on continued employment will vest immediately on the date of such retirement or termination. The executive will remain eligible to receive performance shares awarded under our equity incentive plans before his or her termination if we achieve the stated performance goals during the remainder of the performance period, as if the executive’s employment had not terminated. To qualify for these benefits on retirement, the executive must retire after a specified age or with a combination of age plus years of service, depending on the benefit in question, as well as give us the required number of years of advance notice of retirement.
The agreements will also provide that severance payments are subject to recoupment as required by any recoupment policy approved by our board of directors.
The definition of “cause” under the agreements will include:
· | willful and continued failure by the executive to substantially perform his duties; |
· | an executive’s commission of fraud or dishonesty that results in economic or financial damage to us; |
· | an executive’s conviction of a felony or crime involving moral turpitude; |
· | a willful breach of an executive’s fiduciary duty to us which results in economic or other damage to us; or |
· | a willful and material breach of an executive’s obligations under the agreement relating to our confidential information, non-solicitation and post-employment consulting services. |
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The definition of “good reason” will track the definition in regulations under Section 409A of the Code and include the following, if the executive has given written notice of the condition within 90 days of its occurrence and the condition remains in effect for 30 days after the notice:
· | a material diminution in the authority, duties or responsibilities of the executive; |
· |
a material diminution in the executive’s annual base salary; |
· | a material change in the geographic location at which the executive must perform his duties; or |
· | any other action or inaction by us that constitutes a material breach of the agreement or any other agreement pursuant to which the executive provides services to us. |
The definition of “change in control” will track the definition in regulations under Section 409A of the Code and includes:
· | the acquisition of our stock as a result of which any person or group owns more than 50% of the total fair market value of our stock (subject to limited exceptions); |
· | the acquisition of our voting securities over a period of 12 months as a result of which any person or group owns at least 30% of the total voting power of our stock (subject to limited exceptions); |
· | a majority of our board of directors is replaced during any 12-month period by directors whose appointment or election was not endorsed by a majority of the board of directors prior to the date of the appointment or election; |
· | the acquisition over a period of 12 months as a result of which any person or group has acquired assets from us having a total gross fair market value of more than 50% of the total gross fair market value of all our assets immediately before the acquisition (subject to limited exceptions). |
Compensation Policies and Practices and Risk Management
When establishing and reviewing our compensation philosophy and programs, we will consider whether such programs align the interests of our directors and officers with our interests and those of our stockholders and whether such programs encourage unnecessary or excessive risk taking. We believe our compensation philosophy and programs will encourage our executives to strive to achieve both short- and long-term goals that are important to our success and building stockholder value, without promoting unnecessary or excessive risk taking. We will review our compensation policies and practices periodically to determine whether such policies and practices are appropriate in light of our risk management objectives.
2016 Omnibus Incentive Plan
In June 2016, our board of directors adopted, and our stockholders approved, the Incentive Plan.
A total of 1,000,000 shares of our Class A common stock is reserved for issuance under the Incentive Plan. As of the date of this prospectus, no awards have been made under the Incentive Plan.
Upon completion of this offering upon the first meeting of the compensation committee of our board of directors, it is expected that Messrs. Sistek and Wolfe will each receive $275,000 in shares of Class A common stock under the Incentive Plan based on the public offering price (representing 13,750 shares of Class A common stock each at the assumed offering price of $20.00), which shares are expected to vest in their entirety 180 days after completion of this offering. The Incentive Plan provides for the issuance of stock options, stock appreciation rights, performance shares, performance units, restricted stock , restricted stock units, shares of our Class A common stock, dividend equivalent units, incentive cash awards or other awards based on our Class A common stock. Awards may be granted alone or in addition to, in tandem with, or (subject to the Incentive Plan’s prohibitions on repricing) in substitution for any other award (or any other award granted under another plan of ours or of any of our affiliates).
Purpose. The two complementary purposes of the Incentive Plan are to help us attract, retain, focus and motivate our executives and other key employees, directors, consultants and advisors and to increase stockholder value. The Incentive Plan will accomplish these purposes by offering participants the opportunity to acquire shares of our Class A common stock, receive monetary payments based on the value of such Class A common stock or receive other incentive compensation on the potentially favorable terms that the Incentive Plan provides. Under the rules of the NYSE, we are required to have a compensation committee comprised entirely of independent directors who are responsible for determining the compensation of our chief executive officer and recommending the compensation of our other executive officers (including any incentive or equity based compensation) to our board of directors for approval.
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Administration. The Incentive Plan will be administered by the compensation committee, our board of directors or another committee (we refer to the applicable committee or our board of directors, as the case may be, as the administrator). The administrator may designate any of the following as a participant under the Incentive Plan to the extent consistent with its authority: any officer or other employee of our company or its affiliates; any individual whom we or an affiliate have engaged to become an officer or employee; any consultant or advisor who provides services to our company or its affiliates; or any director, including a non-employee director.
The administrator has full discretionary authority to administer the Incentive Plan, including but not limited to the authority to: (i) interpret the provisions of the Incentive Plan; (ii) prescribe, amend and rescind rules and regulations relating to the Incentive Plan; (iii) correct any defect, supply any omission, or reconcile any inconsistency in the Incentive Plan, any award or any award agreement in the manner and to the extent it deems desirable to carry the Incentive Plan or such award into effect; and (iv) make all other determinations necessary or advisable for the administration of the Incentive Plan. All administrator determinations will be made in the sole discretion of the administrator and are final and binding on all interested parties.
Our board of directors may delegate some or all of its authority under the Incentive Plan to a committee of the board, and the compensation committee may delegate some or all of its authority under the Incentive Plan to a sub-committee or one or more of our officers, subject in each case to limitations specified in the Incentive Plan.
Number and sources of shares. An aggregate of 1,000,000 shares of Class A common stock have been reserved for issuance under the Incentive Plan, all of which may be issued upon the exercise of incentive stock options. The shares reserved for issuance may be either authorized and unissued shares or shares held as treasury stock. The number of shares reserved for issuance under the Incentive Plan is reduced by the maximum number of shares, if any, that may be payable under an award as determined on the date of the grant of the award.
If (i) an award granted under the Incentive Plan lapses, expires, terminates or is cancelled without the issuance of shares under the award (whether due currently or on a deferred basis); (ii) it is determined during or at the conclusion of the term of an award granted under the Incentive Plan that all or some portion of the shares with respect to which the award was granted will not be issuable, or that other compensation with respect to shares covered by the award will not be payable on the basis that the conditions for such issuance will not be satisfied; (iii) shares are forfeited under an award; (iv) shares are issued under any award and we reacquire them pursuant to rights we reserved upon the issuance of the shares; or (v) shares are tendered to satisfy the exercise price of an award or federal, state or local tax withholding obligations, then such shares will be recredited to the Incentive Plan’s reserve and may again be used for new awards under the Incentive Plan. However, shares recredited to the Incentive Plan’s reserve under clause (iv) or (v) may not be issued pursuant to incentive stock options.
Eligibility. Incentive stock options may only be granted to our and our subsidiaries’ employees. All other awards may be granted to our and our subsidiaries’ employees, officers, directors and key persons (including consultants and prospective employees).
Amendment or termination of the Incentive Plan. The Incentive Plan terminates when all shares reserved for issuance under the Incentive Plan have been issued, subject to our board of directors’ right to terminate the Incentive Plan at any time. In addition, our board of directors or the administrator may amend the Incentive Plan at any time, except:
(i) | our board of directors must approve any amendment to the Incentive Plan if we determine such approval is required by prior action of our board of directors, applicable corporate law or any other applicable law; |
(ii) | stockholders must approve any amendment to the Incentive Plan if we determine that such approval is required by Section 16 of the Exchange Act, the listing requirements of any principal securities exchange or market on which our Class A common stock is then traded, or any other applicable law; and |
(iii) | stockholders must approve any amendment to the Incentive Plan that materially increases the number of shares of Class A common stock reserved under the Incentive Plan, the incentive stock option award limits or the per participant award limitations set forth in the Incentive Plan, that shortens the minimum vesting requirements under the Incentive Plan or that diminishes the provisions prohibiting repricing or backdating stock options and stock appreciation rights. |
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The administrator generally may modify, amend or cancel any award or waive any restrictions or conditions applicable to any award or the exercise of the award. Any modification or amendment that materially diminishes the rights of the participant or any other person who may have an interest in the award, or that cancels any award, will be effective only if agreed to by that participant or other person. The administrator does not need to obtain participant or other interested party consent, however, for the adjustment or cancellation of an award pursuant to the adjustment provisions of the Incentive Plan or the modification of an award to the extent deemed necessary to comply with any applicable law or the listing requirements of any principal securities exchange or market on which the Class A common stock is then traded, to the extent the administrator deems necessary to preserve favorable accounting or tax treatment of any award for our company, or to the extent the administrator determines that the action does not materially and adversely affect the value of an award or that such action is in the best interest of the affected participant or any other person(s) with an interest in the award.
The authority of the administrator to terminate or modify the Incentive Plan or awards will extend beyond the termination date of the Incentive Plan. In addition, termination of the Incentive Plan will not affect the rights of participants with respect to awards previously granted to them, and all unexpired awards will continue in force after termination of the Incentive Plan except as they may lapse or be terminated by their own terms and conditions.
Options and stock appreciation rights. Under the Incentive Plan, the administrator has the authority to grant stock options and to determine all terms and conditions of each stock option including but not limited to whether the option is an “incentive stock option” which meets the requirements of Section 422 of the Code, or a “nonqualified stock option” which does not meet the requirements of Section 422 of the Code. A stock option gives the participant the right to purchase shares of our Class A common stock at a fixed price, called the “option price,” after the vesting conditions of the option are met and prior to the date the option expires or terminates. The administrator fixes the option price per share of Class A common stock, which may not be less than the fair market value of the Class A common stock on the date of grant. The administrator determines the expiration date of each option, but the expiration date cannot be later than 10 years after the grant date. Options are exercisable at such times and are subject to such restrictions and conditions as the administrator deems necessary or advisable. The stock option exercise price is payable to us in full upon exercise.
Pursuant to the Incentive Plan, the administrator has the authority to grant stock appreciation rights. A stock appreciation right is the right of a participant to receive cash in an amount, and/or Class A common stock with a fair market value, equal to the appreciation of the fair market value of a share of Class A common stock during a specified period of time. The Incentive Plan provides that the administrator determines all terms and conditions of each stock appreciation right, including, among other things: whether the stock appreciation right is granted independently of a stock option or relates to a stock option; a grant price that is not less than the fair market value of the Class A common stock subject to the stock appreciation right on the date of grant; a term that must be no later than 10 years after the date of grant; and whether the stock appreciation right will settle in cash, Class A common stock or a combination of the two.
The specific terms and conditions of a participant’s option or stock appreciation right will be set forth in an award agreement delivered to the participant.
Repricing prohibited. Neither the administrator nor any other person may amend the terms of outstanding stock options or stock appreciation rights to reduce the exercise or grant price of such outstanding stock options or stock appreciation rights; cancel outstanding stock options or stock appreciation rights in exchange for stock options or stock appreciation rights with an exercise or grant price that is less than the exercise or grant price of the original options or stock appreciation rights; or cancel outstanding stock options or stock appreciation rights with an exercise or grant price above the current fair market value of a share of Class A common stock in exchange for cash or other securities.
Backdating prohibited. The administrator may not grant a stock option or stock appreciation right with a grant date that is effective prior to the date the administrator takes action to approve such award.
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Performance and stock awards. Pursuant to the Incentive Plan, the administrator has the authority to grant awards of restricted stock, restricted stock units, performance shares or performance units. Restricted stock means shares of Class A common stock that are subject to a risk of forfeiture, restrictions on transfer or both a risk of forfeiture and restrictions on transfer. Restricted stock unit means the right to receive a payment equal to the fair market value of one share of Class A common stock. Performance shares means the right to receive shares of Class A common stock to the extent performance goals are achieved. Performance unit means the right to receive a payment valued in relation to a unit that has a designated dollar value or the value of which is equal to the fair market value of one or more shares of Class A common stock, to the extent performance goals are achieved.
The administrator determines all terms and conditions of these types of awards, including, among other things: whether performance goals need to be achieved for the participant to realize any portion of the benefit provided under the award; whether the restrictions imposed on restricted stock or restricted stock units will lapse, and any portion of the performance goals subject to an award will be deemed achieved, upon a participant’s death, disability or retirement; the length of the vesting and/or performance period and, if different, the date on which payment of the benefit provided under the award is made; with respect to performance units, whether to measure the value of each unit in relation to a designated dollar value or the fair market value of one or more shares of Class A common stock; and, with respect to restricted stock units and performance units, whether the awards settle in cash, in shares of Class A common stock, or in a combination of the two.
The specific terms and conditions of a participant’s award of restricted stock, restricted stock units, performance shares or performance units will be set forth in an award agreement delivered to the participant.
Dividend equivalent rights. Pursuant to the Incentive Plan, the administrator has the authority to grant dividend equivalent units in connection with awards other than options, stock appreciation rights or other stock rights within the meaning of Section 409A of the Code. A dividend equivalent unit is the right to receive a payment, in cash or shares of Class A common stock, equal to the cash dividends or other distributions that we pay with respect to a share of Class A common stock. No dividend equivalent unit granted in tandem with another award may include vesting provisions more favorable to the participant than the vesting provisions, if any, to which the tandem award is subject.
The specific terms and conditions of a participant’s dividend equivalent units will be set forth in an award agreement delivered to the participant.
Incentive awards. The administrator has the authority to grant annual and long-term incentive awards. An incentive award is the right to receive a cash payment to the extent performance goals are achieved. The administrator will determine all of the terms and conditions of each incentive award, including the performance goals, the performance period, the potential amount payable and the timing of payment, provided that the administrator must require that payment of all or any portion of the amount subject to the award is contingent on the achievement of one or more performance goals during the period the administrator specifies, although the administrator may specify that all or a portion of the goals are deemed achieved upon a participant’s death, disability or (for awards not intended to qualify as performance-based compensation within the meaning of Section 162(m) of the Code) retirement, or such other circumstances as the administrator may specify. For long-term incentive awards, the performance period must relate to a period of more than one fiscal year.
The specific terms and conditions of a participant’s incentive award will be set forth in an award agreement or another document delivered to the participant.
Other stock-based awards. The administrator has the authority to grant other types of awards, which may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, shares of Class A common stock, either alone or in addition to or in conjunction with other awards, and payable in shares of Class A common stock or cash. Such awards may include shares of unrestricted Class A common stock, which may be awarded, without limitation (except as provided in the Incentive Plan), as a bonus, in payment of director fees, in lieu of cash compensation, in exchange for cancellation of a compensation right, or upon the attainment of performance goals or otherwise, or rights to acquire shares of our Class A common stock from us. The administrator determines all terms and conditions of the award, including the time or times at which such award is made and the number of shares of Class A common stock to be granted pursuant to such award or to which such award relates. Any award that provides for purchase rights must be priced at 100% of the fair market value of our Class A common stock on the date of the award.
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The specific terms and conditions of a participant’s award will be set forth in an award agreement or another document delivered to the participant.
Per participant award limits. Subject to the adjustment provisions of the Incentive Plan, no participant may be granted awards that could result in such participant:
(i) | receiving options for, and/or stock appreciation rights with respect to, more than 200,000 shares (or 200,000 shares, in the case of a non-employee director) during any fiscal year; |
(ii) | receiving awards of restricted stock and/or restricted stock units, and/or other stock-based awards, relating to more than 200,000 shares (or 200,000 shares, in the case of a non-employee director) during any fiscal year; |
(iii) | receiving awards of performance shares, and/or awards of performance units the value of which is based on the fair market value of shares, for more than 200,000 shares (or 200,000 shares, in the case of a non-employee director) during any fiscal year; or |
(iv) | receiving awards of performance units the value of which is not based on the fair market value of shares, annual incentive award(s), long-term incentive award(s) or dividend equivalent unit(s) that would pay more than $2,000,000 to the participant (or $2,000,000, in the case of a non-employee director) during any single fiscal year. |
Performance goals. Awards may be made contingent on the achievement of performance goals. Performance goals include any goals the administrator establishes that relate to one or more of the following with respect to us or any one or more of our subsidiaries, affiliates or other business units: funds from operations; adjusted funds from operations, earnings before any one or more of the following: interest, taxes, depreciation, amortization and/or stock compensation; operating (or gross) income or profit; pretax income before allocation of corporate overhead and/or bonus; operating efficiencies; operating income as a percentage of net revenue; return on equity, assets, capital, capital employed or investment; after tax operating income; net income; earnings or book value per share; financial ratios; cash flow(s); total rental income or revenues; capital expenditures as a percentage of rental income; total operating expenses, or some component or combination of components of total operating expenses, as a percentage of rental income; stock price or total stockholder return, including any comparisons with stock market indices; appreciation in or maintenance of the price of the Class A common stock or any of our publicly-traded securities; dividends; debt or cost reduction; comparisons with performance metrics of peer companies; comparisons of our stock price performance to the stock price performance of peer companies; strategic business objectives, consisting of one or more objectives based on meeting specified cost, acquisition or leasing targets, meeting or reducing budgeted expenditures, attaining division, group or corporate financial goals, meeting business expansion goals and meeting goals relating to leasing, acquisitions, joint ventures or collaborations or dispositions; economic value-added models; or any combination of any of the foregoing. In addition, in the case of awards that the administrator determines at the date of grant will not be considered “performance-based compensation” under Section 162(m) of the Code, the administrator may establish other performance goals.
Effect of a change in control. If we experience a “change in control,” as defined in the Incentive Plan, then, unless otherwise expressly provided in an award agreement or another contract, or under the terms of a transaction constituting a change in control, the administrator may, in its discretion, provide that:
· | Any outstanding award (or portion thereof) will vest or be earned on an accelerated basis in connection with the change in control or a subsequent termination; and/or |
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· | Any of the following will occur: (i) shares or other securities of the surviving corporation or any successor corporation, or a parent or subsidiary thereof, will be substituted for shares subject to any outstanding award, in which event the aggregate purchase or exercise price, if any, of such award, or portion thereof, will remain the same, (ii) any outstanding award, or portion thereof, will be converted into a right to receive cash or other property upon or following the consummation of the change in control in an amount equal to the value of the consideration to be received by holders of shares of our Class A common stock in connection with the transaction for one share, less the per share purchase or exercise price of such award, if any, multiplied by the number of shares subject to such award, or portion thereof, (iii) the vesting (and, as applicable, the exercisability) of any and/or all outstanding awards will be accelerated, (iv) any outstanding and unexercised awards upon or following the consummation of the change in control (without the consent of an award holder or any person with an interest in an award) will be cancelled, (v) all outstanding options or stock appreciation rights will be cancelled in exchange for a cash payment equal to the excess of the change in control price per share over the exercise price of the shares subject to such option or stock appreciation right upon the change in control (or for no cash payment if such excess is zero), and/or (vi) any awards will be cancelled in exchange for a cash payment based on the value of the award as of the date of the change in control (or for no payment if the award has no value). |
In general, if any payments or benefits paid by us under the Incentive Plan would cause payments made to or benefits received by a participant in connection with a change in control to be subject to the excise tax imposed by Section 4999 of the Code on excess parachute payments, then the payments will be delivered either (i) in full or (ii) in an amount such that the value of the aggregate payments is $1.00 less than the maximum amount that the participant may receive without being subject to the excise tax, whichever of (i) or (ii) results in the receipt by the participant of the greatest benefit on an after-tax basis.
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The following table provides information, as of the date of this prospectus, regarding the number and percentage of shares of our common stock beneficially owned by each executive officer, director and director nominee, each person known to us to be the beneficial owner of more than 5% of our outstanding shares of common stock and all executive officers, directors and director nominees as a group. In accordance with SEC rules, each listed person’s beneficial ownership includes all shares of common stock the person actually owns beneficially or of record, all shares of common stock over which the person has or shares voting or dispositive control (such as in the capacity as a general partner of an investment fund), and all shares the person has the right to acquire within 60 days (such as shares of restricted common stock which are scheduled to vest within 60 days or upon the exercise of warrants or options). Except as otherwise provided, all shares are owned directly, and the indicated person has sole voting and investing power. The business address of the stockholders listed below is the address of our principal executive office.
Immediately Prior to
this Offering |
Immediately After
this Offering |
|||||||||||||||
Beneficial Owner |
Number of
Shares Owned (1) |
Percentage of
Outstanding Common Stock |
Number of
Shares Owned (1) |
Percentage of
Outstanding Common Stock |
||||||||||||
Alan D. Gold | 343,065 | 67.5 | % | 1,036,251 | (2) | 10.3 | % | |||||||||
Paul E. Smithers | 90,000 | 17.7 | % | 232,500 | 2.3 | % | ||||||||||
Robert M. Sistek | — | — | 13,750 | (3) | * | |||||||||||
Gregory J. Fahey | 25,000 | 4.9 | % | 64,583 | * | |||||||||||
Andrew Fenton | 25,000 | 4.9 | % | 64,583 | * | |||||||||||
Brian J. Wolfe | — | — | 13,750 | (3) | * | |||||||||||
Gary A. Kreitzer | 25,000 | 4.9 | % | 64,583 | * | |||||||||||
Gary M. Malino | — | — | — | — | ||||||||||||
Scott Shoemaker | — | — | — | — | ||||||||||||
David Stecher | — | — | — | — | ||||||||||||
All executive officers, directors and director nominees as a group | 508,065 | 100.0 | % | 1,490,000 | 14.8 | % |
*Less than 1.0%.
(1) | Except as otherwise indicated, interests shown consist solely of founder shares classified as Class B common stock. The shares of our Class B common stock issued and outstanding immediately prior to the consummation of the offering will automatically convert upon the consummation of the offering into that number of shares of Class A common stock equal to 15% of the shares of our Class A common stock issued in this offering (including any shares issued upon exercise of the underwriters’ over-allotment option). See the sections of this prospectus entitled “Description of Securities” and “Certain Relationships and Related Transactions.” As a result, after this offering (including any shares issued upon exercise of the underwriters’ over-allotment option), our initial stockholders will beneficially own 13% of the issued and outstanding shares of our Class A common stock based on such conversion, excluding (i) 150,000 shares of Class A common stock that Mr. Gold, intends to purchase in this offering at the public offering price, and (ii) grants of an aggregate of 27,500 shares of Class A common stock to two of our executive officers under the Incentive Plan that are expected to be approved at the first meeting of our board of directors upon completion of this offering. In addition, certain of our other officers and directors may purchase shares of our Class A common stock in this offering. |
(2) | Includes 150,000 shares of Class A common stock that Mr. Gold intends to purchase in this offering at the public offering price. |
(3) | Represents a grant of Class A common stock expected to be approved at the first meeting of the compensation committee of our board of directors upon completion of this offering. |
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Purchase of Shares of Common Stock in this Offering by Certain Executive Officers
Mr. Gold intends to purchase 150,000 shares of our Class A common stock in this offering at the public offering price. In addition, certain of our other officers and directors may purchase shares of our Class A common stock in this offering at the public offering price. No underwriting discount will be paid on the shares of Class A common stock purchases by Mr. Gold and our other executive officers and directors in this offering.
Restricted Stock Grants to Certain Executive Officers and Directors
Founder Shares
In connection with the initial issuance of shares of our Class B common stock, we entered into restricted stock purchase agreements with each of our founding stockholders, Messrs. Gold, Smithers, Fahey, Fenton and Kreitzer. Pursuant to the restricted stock agreements, we issued an aggregate of 508,065 shares of our Class B common stock for a total purchase price of $508. Upon completion of this offering, such shares of Class B common stock will be automatically exchanged for a number of shares of Class A common stock equal to 15% of the shares of Class A common stock issued in this offering, including any shares issued upon the exercise of the underwriters’ over-allotment option, as follows:
No Exercise of Over-Allotment
Option |
Full Exercise of Over-Allotment
Option |
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Name |
Number
of
Shares (1) |
Value (2) |
Number
of
Shares (3) |
Value (2) | ||||||||||||
Alan D. Gold | 886,251 | $ | 17,725,020 | 1,019,187 | $ | 20,383,740 | ||||||||||
Paul E. Smithers | 232,500 | $ | 4,650,000 | 267,375 | $ | 5,347,500 | ||||||||||
Gregory J. Fahey | 64,583 | $ | 1,291,660 | 74,271 | $ | 1,485,420 | ||||||||||
Andrew Fenton | 64,583 | $ | 1,291,660 | 74,271 | $ | 1,485,420 | ||||||||||
Gary A. Kreitzer | 64,583 | $ | 1,291,660 | 74,271 | $ | 1,485,420 | ||||||||||
Total | 1,312,500 | $ | 26,250,000 | 1,509,375 | $ | 30,187,500 |
(1) | Based on the sale of 8,750,000 shares of Class A common stock in this offering. | |
(2) | Based upon an assumed initial public offering price of $20.00 per share, which is the price set forth on the front cover of this prospectus. | |
(3) | Based on the sale of 10,062,250 shares of Class A common stock in this offering, which assumes the full exercise of the underwriters’ over-allotment option. |
The restricted stock purchase agreements provide us with an option to repurchase such shares of Class B common stock (or the shares of Class A common stock issued upon conversion of the shares of Class B common stock upon consummation of the offering) for a period of 90 days if such purchaser ceases his affiliation with us as either a director, employee or consultant at a per share price equal to the lesser of (i) the fair market value of the shares at such time and (ii) the purchase price.
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For so long as the purchaser remains affiliated with us as either a director, employee or consultant 25% of the shares will be released from our repurchase option on June 15, 2017. The remaining shares will be released from our repurchase option in equal monthly installments over the four-year period commencing on July 31, 2017, such that all shares will be released by July 31, 2021 subject to continued service as a director, employee or consultant. In the event of a change in control, as defined in the restricted stock purchase agreements, all shares shall be released from the repurchase option immediately prior to the change in control.
Our executive officers and directors may not transfer any shares of Class B common stock (or the shares of Class A common stock issued upon conversion of the shares of Class B common stock upon consummation of the offering) (or any interest therein) that remain subject to our repurchase option. Prior to the completion of this offering, we have a right of first refusal to purchase any shares of Class B common stock that have been released from our repurchase option that a purchaser proposes to transfer. See the section of this prospectus entitled “Description of Securities” for a description of our Class B common stock.
Other Restricted Stock Grants
It is expected that at the first meeting of the compensation committee of our board of directors upon completion of this offering, Mr. Sistek, our chief financial officer and executive vice president, investments, and Brian J. Wolfe, our vice president, general counsel and secretary, will each receive $275,000 in shares of Class A common stock under the Incentive Plan, or 13,750 shares of Class A common stock based on the assumed initial public offering set forth on the cover of this prospectus, which shares are expected to vest in their entirety 180 days after completion of the offering.
Reimbursement of Pre-Closing Transaction Costs
We intend to use proceeds of this offering to reimburse IGP Advisers, a company that is owned by Messrs. Gold, Smithers and Fahey, for out-of-pocket expenses it incurred in connection with the formation of our company and this offering. In addition, we expect to use approximately $375,000 to reimburse IGP Advisers for an earnest money deposit it funded (credited against the total purchase price of $30 million), as required by the purchase agreement for our Initial Property. As of September 30, 2016, IGP Advisers has incurred costs totaling $204,000, of which $162,000 is for offering costs, $34,000 is for organization costs and $8,000 is for transaction costs. In addition, $595,000 of offering costs have been incurred by us and are contingently payable upon the successful completion of the offering and are expected to be paid out of the offering proceeds.
In addition, we entered into a consulting agreement with IGP Advisers that provides for, upon the completion of this offering, a consulting fee of $500,000 to be paid to IGP Advisers for services rendered to assist us in completing this offering. Pursuant to the consulting agreement, the fee increases by $3,300 for each day that the closing of this offering occurs after November 15, 2016. In the event that this offering is not successful, a fee of $5,000 will be due to IGP Advisers under this agreement.
Severance and Change in Control Agreements
Subject to the approval of the compensation committee of our board of directors after the completion of this offering, we expect to enter into severance and change in control agreements with each of Messrs. Gold, Smithers, Sistek, Fahey, Fenton and Wolfe, as described in “Our Management—Executive Officer and Director Compensation—Compensation of Executive Officers—Severance and Change in Control Agreements.” These agreements will provide benefits to each of our executive officers in the event his employment is terminated under certain circumstances. We may enter into similar agreements with certain executive officers that we hire in the future.
Indemnification Agreements
We expect to enter into an indemnification agreement with each of our officers and directors. Each indemnification agreement will provide, among other things, that we will indemnify, to the maximum extent permitted by law, the covered officer or director against any and all judgments, penalties, fines and amounts paid in settlement, and all reasonable and out-of-pocket expenses (including attorneys’ fees), actually and reasonably incurred in connection with any threatened, pending or completed action, suit, arbitration, alternative dispute resolution mechanism, investigation, inquiry, administrative hearing or other proceeding that arises out of the officer’s or director’s status as a present or former officer, director, employee or agent of the company. Each indemnification agreement will also require us, upon request of the covered officer or director, to advance the expenses related to such an action provided that the officer or director undertakes to repay any amounts to which he is subsequently determined not to be entitled.
The indemnification agreement will not be exclusive of any other rights to indemnification or advancement of expenses to which the covered officer or director may be entitled, including any rights arising under our charter or by-laws or applicable law.
Related Party Transaction Policies
Conflicts of Interest Policies
Our governing instruments do not restrict any of our directors, officers, stockholders or affiliates from having a pecuniary interest in an investment or transaction in which we have an interest or from conducting, for their own account, business activities of the type we conduct. However, our policies will be designed to eliminate or minimize potential conflicts of interest. A “conflict of interest” occurs when a director’s, officer’s or employee’s private interest interferes in any way, or appears to interfere, with our interests as a whole. Our board of directors plans to adopt a policy that prohibits personal conflicts of interest. This policy will provide that any situation that involves, or may reasonably be expected to involve, a conflict of interest must be disclosed immediately to a supervisor or a member of the audit committee.
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Our board of directors will adopt a written related person transaction policy. The purpose of this policy will be to describe the procedures used to identify, review, approve and disclose, if necessary, any transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which (x) we were, are, or will be a participant, (y) the aggregate amount involved exceeds $120,000 and (z) a related person has or will have a direct or indirect interest. For purposes of this policy, a related person is (i) any person who is, or at any time since the beginning of our last fiscal year was, an executive officer, director or director nominee of ours, (ii) any person who is known to be the beneficial owner of more than 5% of our common stock, (iii) any immediate family member of any of the foregoing persons, or (iv) any firm, corporation or other entity in which any of the foregoing persons is employed or is a general partner or principal or in a similar position, or in which all the related persons, in the aggregate, have a 10% or greater beneficial interest. Under this policy, the audit committee will be responsible for reviewing, approving or ratifying each related person transaction or proposed transaction. In determining whether to approve or ratify a related person transaction, the audit committee will consider all relevant facts and circumstances of the related person transaction available to it and will approve only those related person transactions that are in, or not inconsistent with, our best interests and the best interests of our stockholders, as the audit committee determines in good faith. No member of the audit committee will be permitted to participate in any consideration of a related person transaction with respect to which that member or any of his or her immediate family is a related person.
These policies may not be successful in eliminating the influence of conflicts of interest or related person transactions. If they are not successful, decisions could be made that might fail to reflect fully the interests of all stockholders.
Interested Director and Officer Transactions
Pursuant to Maryland law, a contract or other transaction between a company and a director or between the company and any other corporation or other entity in which a director serves as a director or has a material financial interest is not void or voidable solely on the grounds of the common directorship or interest, the presence of that director at the meeting at which the contract or transaction is authorized, approved or ratified or the counting of the director’s vote in favor thereof if (1) the material facts relating to the common directorship or interest and as to the transaction are disclosed to the board of directors or a committee of the board, and the board of directors or committee in good faith authorizes the transaction or contract by the affirmative vote of a majority of disinterested directors, even if the disinterested directors constitute less than a quorum, (2) the material facts relating to the common directorship or interest of the transaction are disclosed to the stockholders entitled to vote thereon, and the transaction is approved in good faith by vote of the stockholders, or (3) the transaction or contract is fair and reasonable to the company at the time it is authorized, ratified or approved.
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PolicIES with Respect to Certain Activities
The following is a discussion of our investment policies and our policies with respect to certain other activities, including financing matters and conflicts of interest. These policies may be amended or revised from time to time at the discretion of our board of directors, without a vote of our stockholders. Any change to any of these policies by our board of directors, however, would be made only after a thorough review and analysis of that change, in light of then-existing business and other circumstances, and then only if, in the exercise of its business judgment, our board of directors believes that it is advisable to do so in our and our stockholders’ best interests. We cannot assure you that our investment objectives will be attained.
Investments in Real Estate or Interests in Real Estate
We plan to invest principally in specialized industrial properties. Our executive management team will identify and negotiate acquisition opportunities. For information concerning the investing experience of these individuals, please see the sections entitled “Business” and “Our Management.”
We intend to conduct substantially all of our investment activities through our Operating Partnership and its subsidiaries. There are no limitations on the amount or percentage of our total assets that may be invested in any one property. Additionally, no limits have been set on the concentration of investments in any one location or facility type.
Additional criteria with respect to our specialized industrial properties is described in “Business—Our Business Objectives and Growth Strategies.”
Investments in Mortgages, Structured Financings and Other Lending Policies
We may make loans to third parties, which may be to joint ventures in which we participate, subject to maintaining our exemption from registration under the Investment Company Act and our qualification as a REIT.
Investments in Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers
Subject to the requirements for qualification as a REIT, we may, but do not intend to, underwriter or invest in equity or debt securities of other REITs, other entities engaged in real estate related activities or securities of other issuers, including for the purpose of exercising control. However, we do not anticipate investing in other issuers of securities for the purpose acquiring any investments primarily for sale in the ordinary course of business or holding any investments with a view to making short-term profits from their sale. In any event, we do not intend that our investments in securities will cause us to fall within the definition of “investment company” under the Investment Company Act. For this reason, we do not plan to register as an “investment company” under the Investment Company Act, and we intend to divest securities before any registration would be required.
Generally speaking, we do not expect to engage in any significant investment activities with other entities, although we may consider joint venture investments with other investors. We may also invest in the securities of other issuers in connection with acquisitions of indirect interests in properties (normally general or limited partnership interests in special purpose partnerships owning properties).
We do not intend to engage in trading, underwriting, agency distribution or sales of securities of other issuers.
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Disposition Policy
Although we have no current plans to dispose of any of the specialized industrial properties we acquire, we will consider doing so, subject to REIT qualification and prohibited transaction rules under the Code, if our management determines that a sale of a property would be in our interests based on the price being offered for the property, the operating performance of the property, the tax consequences of the sale and other factors and circumstances surrounding the proposed sale.
Equity Capital and Debt Financing Policies
If our board of directors determines that additional capital is required or appropriate, we may raise such funds through additional offerings of equity or debt securities or the retention of cash flow (subject to the distribution requirements applicable to REITs and our desire to minimize our U.S. federal income tax obligations) or any combination of these methods. In the event that our board of directors determines to raise additional equity or debt capital, it has the authority, without stockholder approval, to issue additional common stock, preferred stock or debt securities in any manner and on such terms and for such consideration as it deems appropriate, at any time, subject to compliance with applicable rules on the exchanges where our securities trade. While our investment guidelines initially provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible assets at the time of any new borrowing, our board of directors has similarly broad authority to approve our incurrence of debt.
Subject to applicable law and the requirements for listed companies on the NYSE, our board of directors has the authority, without further stockholder approval, to issue additional authorized common stock and preferred stock or otherwise raise capital, including through the issuance of senior securities, in any manner and on the terms and for the consideration it deems appropriate, including in exchange for property. Existing stockholders will have no preemptive right to additional shares issued in any offering, and any offering might cause a dilution of investment. We may in the future issue common stock in connection with acquisitions. Where possible, we also may issue limited partnership interests in our Operating Partnership to acquire properties.
Our board of directors may authorize the issuance of preferred stock with terms and conditions that could have the effect of delaying, deterring or preventing a transaction or a change in control of our company that might involve a premium price for holders of our common stock or otherwise might be in their best interests. Additionally, preferred stock could have distribution, voting, liquidation and other rights and preferences that are senior to those of our common stock.
We may, under certain circumstances, purchase common or preferred stock in the open market or in private transactions with our stockholders, if those purchases are approved by our board of directors. Our board of directors has no present intention of causing us to repurchase any shares, and any action would only be taken in conformity with applicable federal and state laws and the applicable requirements for qualifying as a REIT.
In the future, we may institute a dividend reinvestment plan, or DRIP, which would allow our stockholders to acquire additional shares of common stock by automatically reinvesting their cash dividends. Shares would be acquired pursuant to the plan at a price equal to the then prevailing market price, without payment of brokerage commissions or service charges. Stockholders who do not participate in the plan will continue to receive cash distributions as declared.
Conflict of Interest Policy
Our current board consists of Messrs. Gold, Smithers and Kreitzer, and as a result, the transactions and agreements entered into in connection with our formation prior to this offering have not been approved by our independent directors.
Effective upon closing of this offering, we intend to adopt policies to reduce potential conflicts of interest. See “Certain Relationships and Related Transactions –Related Party Transaction Policies.”
Reporting Policies
We intend to make available to our stockholders our annual reports, including our audited financial statements. After this offering, we will become subject to the information reporting requirements of the Exchange Act. Pursuant to those requirements, we will be required to file annual and periodic reports, proxy statements and other information, including audited financial statements, with the SEC.
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The following summary description of our capital stock does not purport to be complete and is subject to and qualified in its entirety by reference to the MGCL and to our charter and our bylaws. For a more complete understanding of our securities, we encourage you to read carefully this entire prospectus, as well as our charter and our bylaws, the forms of which are filed as exhibits to the registration statement of which this prospectus forms a part.
General
Our charter provides that we may issue up to 50,000,000 shares of common stock, $0.001 par value per share, including (i) 49,000,000 shares of Class A common stock and (ii) 1,000,000 shares of Class B common stock, and up to 50,000,000 shares of preferred stock, $0.001 par value per share. Under Maryland law, our stockholders are not generally liable for our debts or obligations. Our charter authorizes our board of directors to amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue with the approval of a majority of our entire board of directors and without stockholder approval.
As of the date of this prospectus, 508,065 shares of our Class B common stock were issued and outstanding, held by five holders of record, and no shares of our Class A common stock or preferred stock were issued and outstanding. Immediately preceding and subject to the closing of this offering, the shares of our Class B common stock issued and outstanding immediately before this offering will automatically convert into that number of shares of Class A common stock equal to 15% of the shares of our Class A common issued in this offering (including shares to be issued upon the full exercise of the underwriters’ over-allotment option). To the extent the underwriters’ over-allotment is not exercised in full, our founding stockholders will forfeit such amount of our Class A common stock to maintain the number of shares of Class A common stock issuable upon conversion of Class B common stock at 15% of the shares of Class A common stock in this offering (including any exercise of the underwriters’ over-allotment option). Accordingly, upon the closing of this offering 10,062,500 shares of our Class A common stock will be outstanding (assuming no exercise of the underwriters' over-allotment option and the corresponding forfeiture of 196,875 shares of Class A common stock issued to our founding stockholders) and no shares of our Class B common stock will be issued and outstanding. If the underwriters’ over-allotment option is exercised in full, upon the closing of this offering (including such over-allotment option), 11,571,875 shares of our Class A common stock will be issued and outstanding and no shares of our Class B common stock will be issued and outstanding.
Class A Common Stock
All of the shares of our Class A common stock offered by this prospectus will be duly authorized, validly issued, fully paid and non-assessable. Subject to the preferential rights, if any, of holders of any other class or series of our stock and to the provisions of our charter regarding the restrictions on ownership and transfer of our stock, holders of outstanding shares of common stock are entitled to receive dividends on such shares of common stock out of assets legally available therefor if, as and when authorized by our board of directors and declared by us, and the holders of outstanding shares of common stock are entitled to share ratably in our assets legally available for distribution to our stockholders in the event of our liquidation, dissolution or winding up after payment of or adequate provision for all our known debts and liabilities.
Subject to the provisions of our charter regarding the restrictions on ownership and transfer of our stock and except as may otherwise be specified in the terms of any class or series of stock, each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors, and the holders of shares of common stock will possess the exclusive voting power. A plurality of the votes cast in the election of directors is sufficient to elect a director and there is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of common stock can elect all of the directors then standing for election, and the holders of the remaining shares will not be able to elect any directors. Notwithstanding the foregoing, for so long as any shares of Class B common stock shall remain outstanding, we may not, without the prior vote or written consent of the holders of a majority of the shares of Class B common stock then outstanding, voting separately as a single class, amend, alter or repeal any provision of our charter, if such amendment, alteration or repeal would alter or change the powers, preferences or relative, participating, optional or other or special rights of the Class B common stock. Following the consummation of this offering, we do not intend to issues shares of our Class B common stock in the future.
Holders of shares of common stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any securities of our company. Subject to the provisions of our charter regarding the restrictions on ownership and transfer of our stock, shares of common stock will have equal dividend, liquidation and other rights.
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Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless declared advisable by the board of directors and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all the votes entitled to be cast on the matter. Our charter provides for approval of these matters by the affirmative vote of holders of shares entitled to cast a majority of all the votes entitled to be cast on the matter.
Also, our operating assets are held by our subsidiaries and these subsidiaries may be able to merge or sell all or substantially all of their assets without the approval of our stockholders.
Class B Common Stock
In connection with the initial issuance of shares of our Class B common stock, we entered into restricted stock purchase agreements with each of our founding stockholders. Pursuant to the restricted stock agreements, we issued an aggregate of 508,065 shares of our Class B common stock for a total purchase price of $508. Upon the closing of this offering, such shares of Class B common stock will automatically convert into an aggregate of 1,312,500 shares of our Class A common stock with a total value of approximately $26.3 million (or 1,509,375 shares of Class A common stock with a total value of approximately $30.2 million, if the underwriters’ over-allotment option is fully exercised), based on the initial public offering price set forth on the cover of this prospectus.
The restricted stock purchase agreements provide us with an option to repurchase such shares of Class B common stock (or the shares of Class A common stock issued upon conversion of the shares of Class B common stock upon consummation of this offering) for a period of 90 days if such purchaser ceases his affiliation with us as either a director, employee or consultant at a per share price equal to the lesser of (i) the fair market value of the shares at such time and (ii) the purchase price.
For so long as the purchaser remains affiliated with us as either a director, employee or consultant 25% of the shares will be released from our repurchase option on June 15, 2017. The remaining shares will be released from our repurchase option in equal monthly installments over the four-year period commencing on July 31, 2017, such that all shares will be released by July 31, 2021, subject to continued service as a director, employee or consultant. In the event of a change in control, as defined in the restricted stock purchase agreements, all shares shall be released from the repurchase option immediately prior to the change in control.
Our executive officers and directors may not transfer any shares of Class B common stock (or the shares of Class A common stock issued upon conversion of the shares of Class B common stock upon consummation of this offering) (or any interest therein) that remain subject to our repurchase option. Prior to the completion of this offering, we have a right of first refusal to purchase any shares of Class B common stock that have been released from our repurchase option that a purchaser proposes to transfer.
We do not intend to issue any additional shares of Class B common stock. Upon completion of this offering and the conversion of the outstanding shares of Class B common stock into shares of Class A common stock, we intend to reclassify the authorized and unissued shares of Class B common into shares of authorized and unissued shares of Class A common stock.
The above summary of the restrictions contained in the restricted stock purchase agreements is not complete and is qualified by reference to the form of restricted stock purchase agreement filed as an exhibit to the registration statement of which this prospectus forms a part.
Power to Reclassify Our Unissued Shares of Stock
Our charter authorizes our board of directors to classify and reclassify any unissued shares of common or preferred stock into other classes or series of stock, including one or more classes or series of stock that have priority with respect to voting rights, dividends or upon liquidation over our common stock, and authorize us to issue the newly-classified shares. Prior to the issuance of shares of each new class or series, our board of directors is required by Maryland law and by our charter to set, subject to the provisions of our charter regarding the restrictions on ownership and transfer of our stock, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Our board of directors may take these actions without stockholder approval unless stockholder approval is required by the terms of any other class of series of our stock or the rules of any stock exchange or automatic quotation system on which our securities may be listed or traded. Therefore, our board could authorize the issuance of shares of common or preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing a change in control or other transaction that might involve a premium price for shares of our common stock or otherwise be in the best interest of our stockholders. No shares of preferred stock are presently outstanding, and we have no present plans to issue any shares of preferred stock.
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Power to Increase or Decrease Authorized Shares of Stock and Issue Additional Shares of Common and Preferred Stock
We believe that the power of our board of directors to amend our charter to increase or decrease the number of authorized shares of our stock, to authorize us to issue additional authorized but unissued shares of common or preferred stock and to classify or reclassify unissued shares of common or preferred stock and thereafter to authorize us to issue such classified or reclassified shares of stock will provide us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs that might arise. The additional classes or series, as well as the additional shares of common stock, will be available for issuance without further action by our stockholders, unless such approval is required by the terms of any other class or series of our stock or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although our board of directors does not intend to do so, it could authorize us to issue a class or series of stock that could, depending upon the terms of the particular class or series, delay, defer or prevent a change in control or other transaction that might involve a premium price for shares of our common stock or otherwise be in the best interest of our stockholders.
Restrictions on Ownership and Transfer
In order for us to qualify as a REIT under the Internal Revenue Code of 1986, as amended, or the Code, shares of our stock must be owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year for which an election to be taxed as a REIT has been made) or during a proportionate part of a shorter taxable year. Also, under Section 856(h) of the Code, a REIT cannot be “closely held.” In this regard, not more than 50% of the value of the outstanding shares of stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made). See the section entitled “Material U.S. Federal Income Tax Considerations” in this prospectus for further discussion on this topic.
Our charter contains restrictions on the ownership and transfer of shares of our common stock and other outstanding shares of stock. The relevant sections of our charter provide that, after the completion of this offering and subject to the exceptions described below, no person or entity may own, or be deemed to own, by virtue of the applicable constructive ownership provisions of the Code, more than 9.8 % in value of the aggregate of our outstanding shares of stock or more than 9.8 % (in value or in number of shares, whichever is more restrictive) of any class or series of our shares of stock; we refer to these limitations as the “ownership limits.”
The constructive ownership rules under the Code are complex and may cause shares of stock owned actually or constructively by a group of related individuals or entities to be owned constructively by one individual or entity. As a result, the acquisition of less than 9.8 % in value of the aggregate of our outstanding shares of stock and 9.8 % (in value or in number of shares, whichever is more restrictive) of any class or series of our shares of stock (or the acquisition of an interest in an entity that owns, actually or constructively, shares of our stock by an individual or entity), could, nevertheless, cause that individual or entity, or another individual or entity, to violate the ownership limits.
Our board of directors may, upon receipt of certain representations, undertakings and agreements and in its sole discretion, exempt (prospectively or retroactively) any person from the ownership limits and establish a different limit, or excepted holder limit, for a particular person if the person’s ownership in excess of the ownership limits will not then or in the future result in us failing the “closely held” test under Section 856(h) of the Code (without regard to whether the person’s interest is held during the last half of a taxable year) or otherwise cause us to fail to qualify as a REIT. In order to be considered by our board of directors for exemption, a person also must not own, actually or constructively, an interest in one of our tenants (or a tenant of any entity which we own or control) that would cause us to own, actually or constructively, more than a 9.9% interest in the tenant unless the revenue derived by us from such tenant is sufficiently small that, in the opinion of our board of directors, rent from such tenant would not adversely affect our ability to qualify as a REIT. The person seeking an exemption must provide such representations and undertakings to the satisfaction of our board of directors that it will not violate these two restrictions. The person also must agree that any violation or attempted violation of these restrictions will result in the automatic transfer to a trust of the shares of stock causing the violation. As a condition of granting an exemption or creating an excepted holder limit, our board of directors may, but is not be required to, obtain an opinion of counsel or private ruling from the Service satisfactory to our board of directors with respect to our qualification as a REIT and may impose such other conditions or restrictions as it deems appropriate. In connection with this offering and related transactions, our board of directors will grant a waiver to Mr. Gold to own up to 11% of our outstanding shares of Class A common stock.
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In connection with granting an exemption from the ownership limits or establishing an excepted holder limit or at any other time, our board of directors may increase or decrease the ownership limits. Any decrease in the ownership limits will not be effective for any person whose percentage ownership of shares of our stock is in excess of such decreased limits until such person’s percentage ownership of shares of our stock equals or falls below such decreased limits (other than a decrease as a result of a retroactive change in existing law, which will be effective immediately), but any further acquisition of shares of our stock in excess of such percentage ownership will be in violation of the applicable limits. Our board of directors may not increase or decrease the ownership limits if, after giving effect to such increase or decrease, five or fewer persons could beneficially own or constructively own in the aggregate more than 49.9% in value of the shares of our stock then outstanding. Prior to any modification of the ownership limits, our board of directors may require such opinions of counsel, affidavits, undertakings or agreements as it may deem necessary or advisable in order to determine or ensure our qualification as a REIT.
Our charter further prohibits:
● | any person from beneficially or constructively owning, applying certain attribution rules of the Code, shares of our stock that would result in us failing the “closely held” test under Section 856(h) of the Code (without regard to whether the stockholder’s interest is held during the last half of a taxable year) or otherwise cause us to fail to qualify as a REIT; and |
● | any person from transferring shares of our stock if such transfer would result in shares of our stock to be beneficially owned by fewer than 100 persons (determined without reference to any rules of attribution). |
Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of our stock that will or may violate the ownership limits or any of the other foregoing restrictions on ownership and transfer of our stock will be required to immediately give written notice to us or, in the case of a proposed or attempted transaction, give at least 15 days’ prior written notice to us, and provide us with such other information as we may request in order to determine the effect of such transfer on our qualification as a REIT. The ownership limits and the other restrictions on ownership and transfer of our stock will not apply if our board of directors determines that it is no longer in our best interests to continue to qualify as a REIT or that compliance with the restrictions on ownership and transfer of our stock is no longer required in order for us to qualify as a REIT.
If any transfer of shares of our stock would result in shares of our stock to be beneficially owned by fewer than 100 persons, such transfer will be void from the time of such purported transfer and the intended transferee will acquire no rights in such shares. In addition, if any purported transfer of shares of our stock or any other event would otherwise result in:
● | any person violating the ownership limits or such other limit established by our board of directors; or |
● | our company to be “closely held” under Section 856(h) of the Code (without regard to whether the stockholder’s interest is held during the last half of a taxable year) or otherwise failing to qualify as a REIT, |
then that number of shares (rounded up to the nearest whole share) that would cause us to violate such restrictions will automatically be transferred to, and held by, a charitable trust for the exclusive benefit of one or more charitable organizations selected by us, and the intended transferee will acquire no rights in such shares. The transfer will be deemed to be effective as of the close of business on the business day prior to the date of the transfer in violation of the ownership limit or other event that results in the transfer to the charitable trust. A person who, but for the transfer of the shares to the charitable trust, would have beneficially or constructively owned the shares so transferred, or a “prohibited owner,” which, if appropriate in the context, also means any person who would have been the record owner of the shares that the prohibited owner would have so owned. If the transfer to the charitable trust as described above would not be effective, for any reason, to prevent violation of the applicable restriction on ownership and transfer contained in our charter, then our charter provides that the transfer of the shares will be void from the time of such purported transfer.
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Shares of stock transferred to a charitable trust are deemed offered for sale to us, or our designee, at a price per share equal to the lesser of (1) the price paid per share in the transaction that resulted in such transfer to the charitable trust (or, if the event that resulted in the transfer to the charitable trust did not involve a purchase of such shares of stock at market price, defined generally as the last reported sales price reported on the NYSE (or other applicable exchange), the market price per share of such stock on the day of the event which resulted in the transfer of such shares of stock to the charitable trust) and (2) the market price on the date we, or our designee, accept such offer. We may reduce the amount payable to the charitable trust by the amount of dividends and other distributions which have been paid to the prohibited owner and are owed by the prohibited owner to the charitable trust as described below. We may pay the amount of such reduction to the charitable trust for the benefit of the charitable beneficiary. We have the right to accept such offer until the trustee of the charitable trust has sold the shares held in the charitable trust as discussed below. Upon a sale to us, the interest of the charitable beneficiary in the shares sold terminates, and the charitable trustee must distribute the net proceeds of the sale to the prohibited owner.
Within 20 days of receiving notice from us of the transfer of the shares to the charitable trust, sell the shares to a person or entity designated by the charitable trustee who could own the shares without violating the ownership limits or the other restrictions on ownership and transfer of our stock described above. After that, the charitable trustee must distribute to the prohibited owner an amount equal to the lesser of (1) the price paid by the prohibited owner for the shares in the transaction that resulted in the transfer to the charitable trust (or, if the event that resulted in the transfer to the charitable trust did not involve a purchase of such shares at market price, the market price per share of such stock on the day of the event that resulted in the transfer to the charitable trust) and (2) the sales proceeds (net of commissions and other expenses of sale) received by the charitable trust for the shares. The charitable trustee may reduce the amount payable to the prohibited owner by the amount of dividends and other distributions which have been paid to the prohibited owner and are owed by the prohibited owner to the charitable trust. Any net sales proceeds in excess of the amount payable to the prohibited owner will be immediately paid to the charitable beneficiary, together with any dividends and other distributions thereon. In addition, if, prior to discovery by us that shares of stock have been transferred to a charitable trust, such shares of stock are sold by a prohibited owner, then such shares will be deemed to have been sold on behalf of the charitable trust and to the extent that the prohibited owner received an amount for or in respect of such shares that exceeds the amount that such prohibited owner was entitled to receive, such excess amount will be paid to the charitable trust upon demand by the charitable trustee. The prohibited owner will have no rights in the shares held by the charitable trust.
The charitable trustee will be designated by us and will be unaffiliated with us and with any prohibited owner. Prior to the sale of any shares by the charitable trust, the charitable trustee will receive, in trust for the charitable beneficiary, all distributions made by us with respect to such shares and may also exercise all voting rights with respect to such shares. Any dividend or other distribution paid prior to our discovery that shares of stock have been transferred to the charitable trust will be paid by the recipient to the charitable trust upon demand by the charitable trustee. These rights will be exercised for the exclusive benefit of the charitable beneficiary.
Subject to Maryland law, effective as of the date that the shares have been transferred to the charitable trust, the charitable trustee will have the authority, at the charitable trustee’s sole discretion:
● | to rescind as void any vote cast by a prohibited owner prior to our discovery that the shares have been transferred to the charitable trust; and |
● | to recast the vote in accordance with the desires of the charitable trustee acting for the benefit of the charitable beneficiary. |
However, if we have already taken irreversible action, then the charitable trustee may not rescind and recast the vote.
If our board of directors determines in good faith that a proposed transfer would violate the restrictions on ownership and transfer of our stock set forth in our charter, our board of directors may take such action as it deems advisable to refuse to give effect to or to prevent such transfer, including, but not limited to, causing us to redeem shares of stock, refusing to give effect to the transfer on our books or instituting proceedings to enjoin the transfer.
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Every owner of more than 5% (or such lower percentage as required by the Code or the regulations promulgated thereunder) of the outstanding shares of all classes or series of our stock, including common stock, will be required to give written notice to us within 30 days after the end of each taxable year stating the name and address of such owner, the number of shares of each class and series of our stock that the person beneficially owns and a description of the manner in which such shares are held. Each such owner will be required to provide to us such additional information as we may request in order to determine the effect, if any, of such beneficial ownership on our qualification as a REIT and to ensure compliance with the ownership limits. In addition, each stockholder will, upon demand, be required to provide to us such information as we may request, in good faith, in order to determine our qualification as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance.
Any certificates representing shares of our stock, or any written statements of information delivered in lieu of certificates, will bear a legend referring to the restrictions described above.
These restrictions on ownership and transfer of our stock could delay, defer or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for our Class A common stock is expected to be Computershare Trust Company, N.A.
Listing
We have filed an application to list our shares of Class A common stock on the NYSE under the symbol “IIPR.” There can be no assurance that our shares of Class A common stock will be approved for listing on the NYSE or any other securities exchange.
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CERTAIN
PROVISIONS OF MARYLAND
LAW AND OUR CHARTER AND BYLAWS
The following description of the terms of our stock and of certain provisions of Maryland law is only a summary. For a complete description, we refer you to the MGCL and to our charter and our bylaws, the forms of which are filed as exhibits to the registration statement of which this prospectus forms a part.
Our Board of Directors
Our charter and bylaws provide that the number of directors we have may be established only by our board of directors but may not be fewer than the minimum number required under the MGCL, which is one, and our bylaws provide that the number of our directors may not be more than 15. Because our board of directors has the power to amend our bylaws, it could modify the bylaws to change that range. Upon completion of this offering, subject to the terms of any class or series of preferred stock, vacancies on our board of directors may be filled only by a majority of the remaining directors, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will hold office for the remainder of the full term of the directorship in which the vacancy occurred and until his or her successor is duly elected and qualifies.
Except as may be provided with respect to any class or series of our stock, under the MGCL at each annual meeting of our stockholders, each of our directors will be elected by our stockholders to serve until the next annual meeting of our stockholders and until his or her successor is duly elected and qualifies. A plurality of the votes cast in the election of directors is sufficient to elect a director, and holders of shares of common stock will have no right to cumulative voting in the election of directors. Consequently, at each annual meeting of stockholders, the holders of a majority of the shares of common stock entitled to vote will be able to elect all of our directors at any annual meeting.
Removal of Directors
Our charter provides that, subject to the rights of holders of any class or series of our preferred stock to elect or remove one or more directors, a director may be removed only with cause and only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors. This provision, when coupled with the exclusive power of our board of directors to fill vacancies on our board of directors, precludes stockholders from (i) removing incumbent directors except with cause and upon a substantial affirmative vote and (ii) filling the vacancies created by such removal with their own nominees.
No Appraisal Rights
As permitted by the MGCL, our charter provides that stockholders will not be entitled to exercise appraisal rights unless a majority of our board of directors determines that appraisal rights apply, with respect to all or any classes or series of stock, to one or more transactions occurring after the date of such determination in connection with which stockholders would otherwise be entitled to exercise appraisal rights.
Dissolution
Our dissolution must be declared advisable by a majority of our board of directors and approved by the affirmative vote of stockholders entitled to cast not less than a majority of the votes entitled to be cast on such matter.
Exclusive Forum for Certain Litigation
Our bylaws provide that, unless we consent in writing to an alternative forum, the state and federal courts in Baltimore, Maryland are the exclusive forum for certain litigation, including (a) derivative actions on our behalf, (b) actions asserting claims of breach of any duty owed by any of our directors, officers or employees, (c) actions asserting a claim against us or any of our directors, officers or other employees arising under the MGCL, our bylaws or our charter and (d) actions governed by the internal affairs doctrine.
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Business Combinations
Under the MGCL, certain “business combinations” (including a merger, consolidation, statutory share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and an interested stockholder (defined generally as any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock or an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation) or an affiliate of such an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. Thereafter, any such business combination must generally be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (1) 80% of the votes entitled to be cast by holders of outstanding voting stock of the corporation and (2) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate or associate of the interested stockholder, unless, among other conditions, the corporation’s common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its shares. A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which the person otherwise would have become an interested stockholder. A Maryland corporation’s board of directors may provide that its approval is subject to compliance with any terms and conditions determined by it. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a Maryland corporation’s board of directors prior to the time that the interested stockholder becomes an interested stockholder.
Control Share Acquisitions
The MGCL provides that a holder of “control shares” of a Maryland corporation acquired in a “control share acquisition” has no voting rights with respect to the control shares except to the extent approved by the affirmative vote of at least two-thirds of the votes entitled to be cast on the matter, excluding shares of stock in the corporation in respect of which any of the following persons is entitled to exercise or direct the exercise of the voting power of such shares in the election of directors: (i) a person who makes or proposes to make a control share acquisition, (ii) an officer of the corporation or (iii) an employee of the corporation who is also a director of the corporation. “Control shares” are voting shares of stock which, if aggregated with all other such shares of stock owned by the acquirer, or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-tenth or more but less than one-third; (ii) one-third or more but less than a majority; or (iii) a majority or more of all voting power. Control shares do not include shares that the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. A “control share acquisition” means the acquisition of issued and outstanding control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses and delivering an “acquiring person statement” as described in the MGCL), may compel the board of directors to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.
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If voting rights are not approved at the meeting or if the acquiring person does not deliver an “acquiring person statement” as required by the statute, then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquirer or as of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition.
The control share acquisition statute does not apply to (i) shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (ii) acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock. There can be no assurance that such provision will not be amended or eliminated at any time in the future by our board of directors.
Subtitle 8
Subtitle 8 of Title 3 of the MGCL, or Subtitle 8, permits a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in the charter or bylaws, to any or all of five provisions of the MGCL which provide for:
· | a classified board; |
· | a two-thirds vote requirement for removing a director; |
· | a requirement that the number of directors be fixed only by vote of the directors; |
· | a requirement that a vacancy on the board of directors be filled only by the remaining directors in office and (if the board of directors is classified) for the remainder of the full term of the class of directors in which the vacancy occurred; and |
· | a majority requirement for the calling of a stockholder-requested special meeting of stockholders. |
Our charter provides that, at such time as we are able to make a Subtitle 8 election (which we expect to be upon the completion of this offering), vacancies on our board may be filled only by the remaining directors and for the remainder of the full term of the directorship in which the vacancy occurred. Through provisions in our charter and bylaws unrelated to Subtitle 8, we already (i) require the affirmative vote of stockholders entitled to cast not less than two-thirds of all of the votes entitled to be cast generally in the election of directors for the removal of any director from the board, only with cause, (ii) vest in the board of directors the exclusive power to fix the number of directorships and (iii) require, unless called by our chairman of the board, our chief executive officer or our board of directors, the written request of stockholders entitled to cast not less than a majority of all votes entitled to be cast at such a meeting to call a special meeting of our stockholders.
Meetings of Stockholders
Pursuant to our bylaws, a meeting of our stockholders for the election of directors and the transaction of any business will be held annually on a date and at the time and place set by our board of directors. The chairman of our board of directors, our chief executive officer or our board of directors may call a special meeting of our stockholders. Subject to the procedural requirements specified in our bylaws, a special meeting of our stockholders to act on any matter that may properly be brought before a meeting of our stockholders must also be called by our secretary upon the written request of the stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting on such matter and containing the information required by our bylaws. Only the matters set forth in the notice of special meeting may be considered and acted upon at such meeting.
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Amendment to Our Charter and Bylaws
Except for amendments to the provisions of our charter relating to the removal of directors, and the vote required to amend this provision (which must be advised by our board of directors and approved by the affirmative vote of stockholders entitled to cast not less than two-thirds of all the votes entitled to be cast on the election), our charter generally may be amended only if advised by our board of directors and approved by the affirmative vote of stockholders entitled to cast a majority of all of the votes entitled to be cast on the matter. As permitted by the MGCL, our charter contains a provision permitting our directors, without any action by our stockholders, to amend the charter to increase or decrease the aggregate number of shares of stock of any class or series that we have authority to issue.
Our board of directors has the exclusive power to adopt, alter or repeal any provision of our bylaws and to make new bylaws.
Advance Notice of Director Nominations and New Business
Our bylaws provide that, with respect to an annual meeting of stockholders, nominations of individuals for election to our board of directors and the proposal of other business to be considered by stockholders may be made only (i) pursuant to our notice of the meeting, (ii) by or at the direction of our board of directors or (iii) by a stockholder who was a stockholder of record both at the time of giving the notice required by our bylaws and at the time of the meeting, who is entitled to vote at the meeting on such business or in the election of such nominee and who has provided notice to us within the time period, and containing the information and other materials, specified by the advance notice provisions set forth in our bylaws.
With respect to special meetings of stockholders, only the business specified in our notice of meeting may be brought before the meeting. Nominations of individuals for election to our board of directors may be made only (i) by or at the direction of our board of directors or (ii) provided that the meeting has been called for the purpose of electing directors, by a stockholder who was a stockholder of record both at the time of giving notice and at the time of the special meeting, who is entitled to vote at the meeting in the election of such nominee and who has provided notice to us within the time period, and containing the information and other materials, specified by the advance notice provisions set forth in our bylaws.
Action by Stockholders
Our charter provides that stockholder action can be taken at an annual or special meeting of stockholders and by consent in lieu of a meeting if such consent is approved unanimously. These provisions, combined with the requirements of our bylaws regarding advance notice of nominations and other business to be considered at a meeting of stockholders and the calling of a stockholder-requested special meeting of stockholders, may have the effect of delaying consideration of a stockholder proposal.
Anti-Takeover Effect of Certain Provisions of Maryland Law and of Our Charter and Bylaws
The provisions of the MGCL, our charter and our bylaws described above including, among others, the restrictions on ownership and transfer of our stock, the exclusive power of our board of directors to fill vacancies on the board and the advance notice provisions of our bylaws could delay, defer or prevent a change in control or other transaction that might involve a premium price for shares of our common stock or otherwise be in the best interests of our stockholders. Likewise, if our board of directors were to opt in to the classified board or other provisions of Subtitle 8 of Title 3 of the MGCL or if our board of directors were to opt in to the control share acquisition of the MGCL, these provisions of the MGCL could have similar anti-takeover effects.
Indemnification and Limitation of Directors’ and Officers’ Liability
Maryland law permits a Maryland corporation to include in its charter a provision eliminating the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty that was established by a final judgment and was material to the cause of action. Our charter contains a provision that eliminates the liability of our directors and officers to the maximum extent permitted by Maryland law.
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The MGCL requires us (unless our charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service in that capacity. The MGCL permits us to indemnify our present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened to be made a party by reason of their service in those or other capacities unless it is established that:
· | act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty; |
· | the director or officer actually received an improper personal benefit in money, property or services; or |
· | in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. |
Under the MGCL, we may not indemnify a director or officer in a suit by us or in our right in which the director or officer was adjudged liable to us or in a suit in which the director or officer was adjudged liable on the basis that personal benefit was improperly received. Nevertheless, a court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct or was adjudged liable on the basis that personal benefit was improperly received. However, indemnification for an adverse judgment in a suit by us or in our right, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses.
In addition, the MGCL permits us to advance reasonable expenses to a director or officer upon our receipt of:
· | written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by us; and |
· | a written undertaking by the director or officer or on the director’s or officer’s behalf to repay the amount paid or reimbursed by us if it is ultimately determined that the director or officer did not meet the standard of conduct. |
Our charter authorizes us to obligate ourselves and our bylaws obligate us, to the fullest extent permitted by Maryland law in effect from time to time, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to:
· | any present or former director or officer who is made or threatened to be made a party to or witness in the proceeding by reason of his or her service in that capacity; or |
· | any individual who, while a director or officer of our company and at our request, serves or has served as a director, officer, partner, manager, member or trustee of another corporation, REIT, partnership, limited liability company, joint venture, trust, employee benefit plan or any other enterprise and who is made or threatened to be made a party to or witness in the proceeding by reason of his or her service in that capacity. |
Our charter and bylaws also permit us to indemnify and advance expenses to any individual who served any predecessor of our company, in any of the capacities described above and any employee or agent of our company or a predecessor of our company.
We expect to enter into indemnification agreements with each of our executive officers and directors that provide for indemnification to the maximum extent permitted by Maryland law.
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Insofar as the foregoing provisions permit indemnification of directors, officers or persons controlling us for liability arising under the Securities Act, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
REIT Qualification
Our charter provides that our board of directors may authorize us to revoke or otherwise terminate our REIT election, without approval of our stockholders, if it determines that it is no longer in our best interests to attempt to, or continue to, qualify as a REIT. Our charter also provides that our board of directors may determine that compliance with any restriction or limitation on ownership and transfer of our stock is no longer required for us to qualify as a REIT.
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SHARES ELIGIBLE FOR FUTURE SALE
General
Prior to this offering, there has been no public market for our Class A common stock, and an active public trading market for our Class A common stock may not develop or be sustained after this offering. Future sales of significant amounts of our common stock, including shares issued in the public market after this offering, or the anticipation of those sales, could adversely affect the public market prices prevailing from time to time and could impair our ability to raise capital through sales of our equity securities. We have applied to have our Class A common stock listed on the NYSE under the symbol “IIPR.”
Upon the closing of this offering, and after giving effect to the issuance of the shares of Class A common stock offered in this offering, the expected issuance of 27,500 shares of Class A common stock under the Incentive Plan and the issuance of 1,312,500 shares of Class A common stock upon conversion of the outstanding shares of Class B common stock, we will have outstanding an aggregate of 10,090,000 shares of Class A common stock (11,599,375 shares if the underwriters exercise in full their option to purchase up to an additional 1,312,500 shares). In addition, upon completion of this offering, 972,500 shares of Class A common stock will be reserved for future issuance under the Incentive Plan.
Of these shares, the 8,750,000 shares sold in this offering (10,062,500 shares if the underwriters exercise their option to purchase additional shares in full) will be freely tradable without restriction or further registration under the Securities Act, subject to the limitations on ownership set forth in our charter, except for any shares purchased in this offering by our “affiliates,” as that term is defined in Rule 144 under the Securities Act.
The shares of Class A common stock owned by our affiliates will be “restricted securities,” as that term is defined in Rule 144 under the Securities Act and will further be subject to restrictions on transfer under the lock-up agreements described below. Following the expiration of these restrictions, these shares will become eligible for public sale if they are registered under the Securities Act or if they qualify for an exemption from registration under Rules 144 under the Securities Act, which is summarized below.
Rule 144
Affiliate Resales of Restricted Securities
In general, beginning 90 days after the effective date of the registration statement of which this prospectus forms a part, a person who is an affiliate of ours, or who was an affiliate at any time during the 90 days before a sale, who has beneficially owned shares of our common stock for at least six months would be entitled to sell in “broker’s transactions” or certain “riskless principal transactions” or to market makers, a number of shares within any three-month period that does not exceed the greater of:
● |
1% of the number of shares of our common stock then outstanding; or |
● | the average weekly trading volume in our common stock on the NYSE during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. |
Affiliate resales under Rule 144 are also subject to the availability of current public information about us. In addition, if the number of shares being sold under Rule 144 by an affiliate during any three-month period exceeds 5,000 shares or has an aggregate sale price in excess of $50,000, the seller must file a notice on Form 144 with the SEC and the NYSE concurrently with either the placing of a sale order with the broker or the execution directly with a market maker.
Non-Affiliate Resales of Restricted Securities
In general, beginning 90 days after the effective date of the registration statement of which this prospectus forms a part, a person who is not an affiliate of ours at the time of sale, and has not been an affiliate at any time during the 90 days preceding a sale, and who has beneficially owned shares of our common stock for at least six months, is entitled to sell such shares subject only to the availability of current public information about us. If such person has held our shares for at least one year, such person can resell under Rule 144(b)(1) without regard to any Rule 144 restrictions, including the 90-day public company requirement and the current public information requirement.
Non-affiliate resales are not subject to the manner of sale, volume limitation or notice filing provisions of Rule 144.
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Grants Under the Incentive Plan
The Incentive Plan provides for the grant of incentive awards to our executive officers, directors, employees, and consultants. We expect to issue an aggregate of 13,750 shares of Class A common stock to each of Messrs. Sistek and Wolfe at the first meeting of the compensation committee of our board of directors upon completion of this offering, and intend to reserve an additional 972,500 shares of Class A common stock for future issuance under the Incentive Plan.
We intend to file with the SEC a registration statement on Form S-8 covering the shares of Class A common stock issuable under the Incentive Plan. Common stock covered by this registration statement, including any shares of common stock issuable upon the exercise of options or restricted stock, will be eligible for transfer or resale without restriction under the Securities Act unless held by affiliates.
Lock-up Agreements
We and each of our executive officers and directors have agreed with the underwriters not to offer, sell or transfer any common stock or any securities convertible into or exercisable or exchangeable for or repayable with common stock (including limited partnership interests in our Operating Partnership) or any rights to acquire common stock for 180 days after the date of this prospectus, without first obtaining the written consent of Ladenburg Thalmann & Co. Inc., the representative of the underwriters. Specifically, we and these other persons have agreed, with certain limited exceptions, not to directly or indirectly:
· | offer, pledge, sell or contract to sell any common stock; |
· | sell any option or contract to purchase any common stock; |
· | purchase any option or contract to sell any common stock; |
· | grant any option, right or warrant for the sale of any common stock; |
· | lend or otherwise transfer or dispose of any common stock; |
· | file or cause to be filed any registration statement related to the common stock; or |
· | enter into any swap or other agreement or transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of any common stock whether any such swap, agreement or transaction is to be settled by the delivery of shares of our common stock or other securities, in cash or otherwise. |
This lock-up provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition.
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OUR OPERATING PARTNERSHIP AND THE OPERATING PARTNERSHIP AGREEMENT
We have summarized the material terms and provisions of the Agreement of Limited Partnership of IIP Operating Partnership, LP, or the "Operating Partnership Agreement." This summary is not complete. For more detail, you should refer to the partnership agreement itself, a copy of which is filed as an exhibit to the registration statement of which this prospectus is a part. See the section entitled "Where You Can Find More Information." For purposes of this section, references to "we," "our, "us" and "our company" refer to Innovative Industrial Properties, Inc.
Our Operating Partnership is a Delaware limited partnership that was formed on June 20, 2016. We are the sole general partner of our Operating Partnership and, upon consummation of this offering, will own, directly or through a subsidiary, 100% of the partnership interests in our Operating Partnership. Until and unless partnership interests are issued to additional partners, our Operating Partnership is intended to be treated as an entity disregarded from our company for U.S. federal income tax purposes.
Description of Partnership Interests
Initially, our Operating Partnership will have two classes of partnership interests: general partnership interests and limited partnership interests. General partnership interests represent an interest as a general partner in our Operating Partnership and we, as general partner, will hold all such interests. In return for a nominal initial capital contribution, our Operating Partnership will issue to us all of the general partnership interests.
Limited partnership interests represent an interest as a limited partner in our Operating Partnership. Our Operating Partnership may issue, at the sole discretion of the General Partner, additional partnership interests and classes of partnership interests with rights different from, and superior to, those of general partnership interests and/or limited partnership interests.
Since our Operating Partnership will initially be classified as an entity disregarded from our company for U.S. federal income tax purposes, our Operating Partnership’s assets, income and losses will be treated as our assets, income and losses. See the section entitled “Material U.S. Federal Income Tax Considerations — Taxation of Our Operating Partnership.”
Management of our Operating Partnership
Our Operating Partnership is organized as a Delaware limited partnership pursuant to the terms of the Operating Partnership Agreement. We are the general partner of our Operating Partnership and expect to conduct substantially all of our business through it. Pursuant to the Operating Partnership Agreement, we, as the general partner, will have full, exclusive and complete responsibility and discretion in the management and control of the partnership.
Indemnification
To the extent permitted by law, the Operating Partnership Agreement will provide for indemnification of us when acting in good faith and in the best interests of our Operating Partnership in our capacity as general partner. It also will provide for indemnification of directors, officers and other persons that we may designate under the same conditions, and subject to the same restrictions, applicable to the indemnification of officers, directors, employees and stockholders under our charter. See the section entitled “Certain Provisions of Maryland Law and Our Charter and Bylaws—Indemnification and Limitation of Directors’ and Officers’ Liability.”
Issuance of Additional Units
As general partner of our Operating Partnership, we will be able to cause our Operating Partnership to issue additional units representing general and/or limited partnership interests. A new issuance may include preferred units, which may have rights which are different than, and/or superior to, those of general partnership interests and limited partnership interests.
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Capital Contributions
The Operating Partnership Agreement will provide that, if our Operating Partnership requires additional funds at any time, or from time to time, in excess of funds available to it from prior borrowings, operating revenue or capital contributions, we, as general partner, have the right to raise additional funds required by our Operating Partnership by causing it to borrow the necessary funds from third parties on such terms and conditions as we deem appropriate. As an alternative to borrowing funds required by our Operating Partnership, we may contribute the amount of such required funds as an additional capital contribution.
Liquidation
Upon the liquidation of our Operating Partnership, after payment of debts and obligations, any remaining assets of the partnership will be distributed to partners pro rata in accordance with their relative percentage interest ownership.
Distributions and Allocations
Distributions will be made, and all items of net income, net loss and any other individual items of income, gain, loss or deduction of our Operating Partnership will be allocated to the general partner and the limited partner based on their relative percentage interest ownership.
Term
Our Operating Partnership will continue in full force and effect until December 31, 2099 or until sooner dissolved and terminated upon (i) our election to dissolve the Partnership; (ii) the entry of a decree of judicial dissolution of our Operating Partnership; or (iii) by operation of law.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
This section summarizes the material U.S. federal income tax considerations that you, as a prospective investor, may consider relevant in connection with the acquisition, ownership and disposition of our common stock and our election to be taxed as a REIT. As used in this section, the terms “we” and “our” refer solely to Innovative Industrial Properties, Inc. and not any subsidiaries or other lower-tier entities or affiliates, except as otherwise indicated.
This discussion does not exhaust all possible tax considerations and does not provide a detailed discussion of any state, local or foreign tax considerations. Nor does this discussion address all aspects of U.S. federal income taxation that may be relevant to particular investors in view of their personal investment or tax circumstances, or to certain types of investors that are subject to special treatment under the U.S. federal income tax laws, such as insurance companies, tax-exempt organizations, financial institutions, regulated investment companies, broker-dealers, partnerships and other pass-through entities and trusts, persons holding our stock on behalf of other persons as nominees, persons who receive our stock as compensation, persons subject to the alternative minimum tax, persons holding our stock as part of a hedge, straddle or other risk reduction, constructive sale or conversion transaction, non-U.S. individuals and foreign corporations (except to the limited extent discussed below under “—Taxation of Non-U.S. Holders”) and other persons subject to special tax rules. Moreover, this summary assumes that our stockholders hold our common stock as a “capital asset” for U.S. federal income tax purposes, which generally means property held for investment.
The statements in this section are based on the current U.S. federal income tax laws, including the Code, the Treasury Regulations, rulings and other administrative interpretations and practices of the Service, and judicial decisions, all as currently in effect, and all of which are subject to differing interpretations or to change, possibly with retroactive effect. This discussion is for general purposes only and is not tax advice. We cannot assure you that the Service would not assert, or that a court would sustain, a position contrary to any of the tax consequences described below. Moreover, we cannot assure you that new laws, interpretations of law, or court decisions, any of which may take effect retroactively, will not cause any statement in this section to be inaccurate.
The U.S. federal income tax treatment of holders of our common stock depends, in some instances, on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. In addition, the tax consequences to any particular stockholder of holding our common stock will depend on the stockholder’s particular tax circumstances. We urge you to consult your own tax advisors regarding the U.S. federal, state, local, foreign, and other tax consequences of the acquisition, ownership and disposition of our common stock and of our election to be taxed as a REIT.
Taxation of Our Company
We were incorporated on June 15, 2016 as a Maryland corporation. We intend to elect to be taxed and to operate in a manner that will allow us to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2016. Our qualification as a REIT will depend upon our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our stock. We believe that we will be organized and will operate in such a manner as to qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner. However, no assurances can be provided regarding our qualification as a REIT because such qualification depends on our ability to satisfy numerous asset, income, stock ownership and distribution tests described below, the satisfaction of which will depend, in part, on our operating results.
The sections of the Code and Treasury Regulations relating to qualification, operation and taxation as a REIT are highly technical and complex. The following discussion sets forth only the material aspects of those sections. This summary is qualified in its entirety by the applicable Code provisions and the related Treasury Regulations and administrative and judicial interpretations thereof.
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In connection with this offering, Foley & Lardner LLP will render an opinion that, commencing with our taxable year ending December 31, 2016, we will be organized in conformity with the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws, and our proposed method of operation will enable us to satisfy the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws for our taxable year ending December 31, 2016 and thereafter. You should be aware that Foley & Lardner LLP’s opinion will be based on the U.S. federal income tax laws governing qualification as a REIT as of the date of such opinion, which will be subject to change, possibly on a retroactive basis, will not be binding on the Service or any court, and will speak only as of the date issued. In addition, Foley & Lardner’s opinion will be based on customary assumptions and will be conditioned upon certain representations made by us as to factual matters, including representations regarding the nature of our assets and the future conduct of our business. Moreover, our qualification and taxation as a REIT will depend on our ability to meet, on a continuing basis, through actual results, certain qualification tests set forth in the U.S. federal income tax laws. Those qualification tests involve, among other things, the percentage of our gross income that we earn from specified sources, the percentage of our assets that fall within specified categories, the diversity of our stock ownership and the percentage of our earnings that we distribute. Foley & Lardner LLP will not review our compliance with those tests on a continuing basis. Accordingly, we cannot assure you that the actual results of our operations for any particular taxable year will satisfy such requirements. Foley & Lardner LLP’s opinion will not foreclose the possibility that we may have to use one or more of the REIT savings provisions described below, which may require us to pay a material excise or penalty tax (and interest) in order to maintain our REIT qualification. For a discussion of the tax consequences of our failure to maintain our qualification as a REIT, see the section entitled “—Failure to Qualify” below.
If we qualify as a REIT, we generally will not be subject to U.S. federal income tax on the taxable income that we distribute to our stockholders because we will be entitled to a deduction for dividends that we pay. Such tax treatment avoids the “double taxation,” or taxation at both the corporate and stockholder levels, that generally results from owning stock in a corporation. In general, income generated by a REIT is taxed only at the stockholder level if such income is distributed by the REIT to its stockholders. However, we will be subject to U.S. federal income tax in the following circumstances:
· | We will be subject to U.S. federal corporate income tax on any REIT taxable income, including net capital gain, that we do not distribute to our stockholders during, or within a specified time period after, the calendar year in which the income is earned. |
· | We may be subject to corporate “alternative minimum tax.” |
· | We will be subject to tax, at the highest U.S. federal corporate income tax rate, on net income from the sale or other disposition of property acquired through foreclosure (“foreclosure property”) that we hold primarily for sale to customers in the ordinary course of business, and other non-qualifying income from foreclosure property. |
· | We will be subject to a 100% tax on net income from “prohibited transactions,” which are, in general, sales or other dispositions of property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business. |
· | If we fail to satisfy one or both of the 75% gross income test or the 95% gross income test, as described below under “—Gross Income Tests,” but nonetheless maintain our qualification as a REIT because we meet certain other requirements, we will be subject to a 100% tax on: |
o | the greater of the amount by which we fail the 75% gross income test or the 95% gross income test, in either case, multiplied by |
o | a fraction intended to reflect our profitability. |
· | If we fail to distribute during a calendar year at least the sum of: (1) 85% of our REIT ordinary income for the year, (2) 95% of our REIT capital gain net income for the year, and (3) any undistributed taxable income required to be distributed from earlier periods, then we will be subject to a 4% nondeductible excise tax on the excess of the required distribution over the sum of (a) the amount we actually distributed; and (b) the amounts we retained and upon which we paid income tax at the corporate level. |
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· | If we fail any of the asset tests, other than a de minimis failure of the 5% asset test, the 10% vote test or the 10% value test, as described below under “—Asset Tests,” as long as (1) the failure was due to reasonable cause and not to willful neglect, (2) we file a description of each asset that caused such failure with the Service, and (3) we dispose of the assets causing the failure or otherwise comply with the asset tests within six months after the last day of the quarter in which we identify such failure, we will pay a tax with respect to such failure equal to the greater of $50,000 or the highest U.S. federal corporate income tax rate (currently 35%) multiplied by the net income from the nonqualifying assets during the period in which we failed to satisfy the asset tests. |
· | If we fail to satisfy one or more requirements for REIT qualification, other than the gross income tests and the asset tests, and such failure is due to reasonable cause and not to willful neglect, we will be required to pay a penalty of $50,000 for each such failure. |
· | We will be subject to a 100% excise tax on transactions with a TRS that are not conducted on an arm’s-length basis. |
· | We may be required to pay monetary penalties to the Service in certain circumstances, including if we fail to meet recordkeeping requirements intended to monitor our compliance with rules relating to the composition of a REIT’s stockholders, as described below in “—Requirements for Qualification.” |
· | If we acquire any asset from a C corporation, or a corporation that generally is subject to full corporate-level tax, in a merger or other transaction in which we acquire a basis in the asset that is determined by reference either to the C corporation’s basis in the asset or to another asset, we will pay tax at the highest U.S. federal corporate income tax rate applicable if we recognize gain on the sale or disposition of the asset during the 10-year period after we acquire the asset. The amount of gain on which we will pay tax generally is the lesser of: |
o | the amount of gain that we recognize at the time of the sale or disposition, and |
o | the amount of gain that we would have recognized if we had sold the asset at the time we acquired it. |
· | The earnings of our subsidiary entities that are C corporations, including TRSs, will be subject to U.S. federal corporate income tax. |
In addition, we may be subject to a variety of taxes, including payroll taxes and state, local and foreign income, property and other taxes on our assets and operations. We also could be subject to tax in situations and on transactions not presently contemplated.
Requirements for Qualification as a REIT
A REIT is a corporation, trust or association that satisfies each of the following requirements:
(1) | It is managed by one or more trustees or directors; | |
(2) | Its beneficial ownership is evidenced by transferable shares of stock, or by transferable shares or certificates of beneficial interest; | |
(3) | It would be taxable as a domestic corporation, but for Sections 856 through 860 of the Code, i.e. , the REIT provisions; | |
(4) | It is neither a financial institution nor an insurance company subject to special provisions of the U.S. federal income tax laws; | |
(5) | At least 100 persons are beneficial owners of its stock or ownership shares or certificates (determined without reference to any rules of attribution); |
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(6) | Not more than 50% in value of its outstanding stock or shares of beneficial interest are owned, directly or indirectly, by five or fewer individuals, which the U.S. federal income tax laws define to include certain entities, during the last half of any taxable year; | |
(7) | It elects to be a REIT, or has made such election for a previous taxable year, and satisfies all relevant filing and other administrative requirements established by the Service that must be met to qualify to be taxed as a REIT for U.S. federal income tax purposes; | |
(8) | It uses a calendar year for U.S. federal income tax purposes and complies with the recordkeeping requirements of the U.S. federal income tax laws; | |
(9) | It meets certain other requirements described below, regarding the sources of its gross income, the nature and diversification of its assets and the distribution of its income; | |
(10) | It has no undistributed earnings and profits from any non-REIT taxable year at the close of any taxable year. |
We must satisfy requirements 1 through 4, and 8 during our entire taxable year and must satisfy requirement 5 during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Requirements 5 and 6 apply to us beginning with our 2016 taxable year. If we comply with certain requirements for ascertaining the beneficial ownership of our outstanding stock in a taxable year and have no reason to know that we violated requirement 6, we will be deemed to have satisfied requirement 6 for that taxable year. For purposes of determining stock ownership under requirement 6, an “individual” generally includes a supplemental unemployment compensation benefits plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes. An “individual,” however, generally does not include a trust that is a qualified employee pension or profit sharing trust under the U.S. federal income tax laws, and beneficiaries of such a trust will be treated as holding our stock in proportion to their actuarial interests in the trust for purposes of requirement 6.
We believe that we will issue sufficient stock with enough diversity of ownership to allow us to satisfy requirements 5 and 6 above. In addition, our charter provides for restrictions regarding the ownership and transfer of shares of our capital stock. The restrictions in our charter are intended, among other things, to assist us in satisfying requirements 5 and 6 described above. These restrictions, however, may not ensure that we will be able to satisfy such share ownership requirements in all cases. If we fail to satisfy these share ownership requirements, our qualification as a REIT may terminate.
To monitor compliance with the share ownership requirements, we generally will be required to maintain records regarding the actual ownership of our shares. To do so, we must demand written statements each year from the record holders of significant percentages of our shares pursuant to which the record holders must disclose the actual owners of the shares (i.e., the persons required to include our dividends in their gross income). We must maintain a list of those persons failing or refusing to comply with this demand as part of our records. We could be subject to monetary penalties if we fail to comply with these record-keeping requirements. If you fail or refuse to comply with the demands, you will be required by Treasury Regulations to submit a statement with your tax return disclosing your actual ownership of our shares and other information. In addition, we must satisfy all relevant filing and other administrative requirements that must be met to elect and maintain REIT status. We intend to comply with these requirements.
For purposes of requirement 8, we have adopted December 31 as our year end for U.S. federal income tax purposes, and thereby satisfy this requirement.
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Qualified REIT Subsidiaries. A “qualified REIT subsidiary” generally is a corporation, all of the stock of which is owned, directly or indirectly, by a REIT and that is not treated as a TRS. A corporation that is a “qualified REIT subsidiary” is treated as a division of the REIT that owns, directly or indirectly, all of its stock and not as a separate entity for U.S. federal income tax purposes. Thus, all assets, liabilities, and items of income, deduction, and credit of a “qualified REIT subsidiary” are treated as assets, liabilities, and items of income, deduction, and credit of the REIT that directly or indirectly owns the qualified REIT subsidiary. Consequently, in applying the REIT requirements described herein, the separate existence of any “qualified REIT subsidiary” that we own will be ignored, and all assets, liabilities, and items of income, deduction, and credit of such subsidiary will be treated as our assets, liabilities, and items of income, deduction, and credit.
Other Disregarded Entities and Partnerships. The following discussion summarizes certain U.S. federal income tax considerations applicable to our direct or indirect investments in our operating partnership and any subsidiary partnerships or limited liability companies that we form or acquire.
An unincorporated domestic entity, such as a partnership or limited liability company, that has a single owner, as determined under U.S. federal income tax laws, generally is not treated as an entity separate from its owner for U.S. federal income tax purposes. We own various direct and indirect interests in entities that are classified as partnerships and limited liability companies for state law purposes. Nevertheless, many of these entities currently are not treated as entities separate from their owners for U.S. federal income tax purposes because such entities are treated as having a single owner for U.S. federal income tax purposes. Consequently, the assets and liabilities, and items of income, deduction, and credit, of such entities will be treated as our assets and liabilities, and items of income, deduction, and credit, for U.S. federal income tax purposes, including the application of the various REIT qualification requirements. Initially, and until the admission of additional partners, if any, we expect our operating partnership to be classified as an entity disregarded from us for U.S. federal income tax purposes.
An unincorporated domestic entity with two or more owners, as determined under the U.S. federal income tax laws, generally is taxed as a partnership for U.S. federal income tax purposes. In the case of a REIT that is an owner in an entity that is taxed as a partnership for U.S. federal income tax purposes, the REIT is treated as owning its proportionate share of the assets of the entity and as earning its allocable share of the gross income of the entity for purposes of the applicable REIT qualification tests. Thus, our proportionate share of the assets and items of gross income of any partnership, joint venture, or limited liability company that is taxed as a partnership for U.S. federal income tax purposes is treated as our assets and items of gross income for purposes of applying the various REIT qualification tests. For purposes of the 10% value test (described in “—Asset Tests”), our proportionate share is based on our proportionate interest in the equity interests and certain debt securities issued by the entity. For all of the other asset and income tests, our proportionate share is based on our proportionate interest in the capital of the entity.
In the event that a disregarded subsidiary of ours ceases to be wholly-owned—for example, if any equity interest in the subsidiary is acquired by a person other than us or another disregarded subsidiary of ours—the subsidiary’s separate existence would no longer be disregarded for U.S. federal income tax purposes. Instead, the subsidiary would have multiple owners and would be treated as either a partnership or a taxable corporation. Such an event could, depending on the circumstances, adversely affect our ability to satisfy the various asset and gross income requirements applicable to REITs, including the requirement that REITs generally may not own, directly or indirectly, more than 10% of the total value or total voting power of the outstanding securities of another corporation. See “—Asset Tests” and “—Gross Income Tests.”
We may from time to time be a limited partner or non-managing member in a partnership or limited liability company. If a partnership or limited liability company in which we own an interest takes or expects to take actions that could jeopardize our status as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity. In addition, it is possible that a partnership or limited liability company could take an action which could cause us to fail a gross income or asset test, and that we would not become aware of such action in time to dispose of our interest in the partnership or limited liability company or take other corrective action on a timely basis. In that case, we could fail to qualify as a REIT unless we were entitled to relief, as described below.
Taxable REIT Subsidiaries. A REIT is permitted to own, directly or indirectly, up to 100% of the stock of one or more TRSs. The subsidiary and the REIT generally must jointly elect to treat the subsidiary as a TRS. However, a corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the securities is automatically treated as a TRS without an election. We generally may not own more than 10%, as measured by voting power or value, of the securities of a corporation that is not a qualified REIT subsidiary or a REIT unless we and such corporation elect to treat such corporation as a TRS. Generally, no more than 25% (20% for taxable years after 2017) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs.
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Unlike a qualified REIT subsidiary, the separate existence of a TRS is not ignored for U.S. federal income tax purposes and a TRS is a fully taxable corporation subject to U.S. federal corporate income tax on its earnings. We will not be treated as holding the assets of any TRS or as receiving the income earned by any TRS. Rather, we will treat the stock issued by any TRS as an asset and will treat any dividends paid to us from any TRS as income. This treatment may affect our compliance with the gross income tests and asset tests.
Restrictions imposed on REITs and their TRSs are intended to ensure that TRSs will be subject to appropriate levels of U.S. federal income taxation. These restrictions limit the deductibility of interest paid or accrued by a TRS to its parent REIT and impose a 100% excise tax on transactions between a TRS and its parent REIT or the REIT’s tenants that are not conducted on an arm’s-length basis, such as any redetermined rents, redetermined deductions, excess interest or redetermined TRS service income. In general, redetermined rents are rents from real property that are overstated as a result of any services furnished to any of our tenants by a TRS of ours, redetermined deductions and excess interest represent any amounts that are deducted by a TRS of ours for amounts paid to us that are in excess of the amounts that would have been deducted based on arm’s length negotiations, and redetermined TRS service income is income of a TRS that is understated as a result of services provided to us or on our behalf. Rents we receive will not constitute redetermined rents if they qualify for certain safe harbor provisions contained in the Code. Dividends paid to us from a TRS, if any, will be treated as dividend income received from a corporation. The foregoing treatment of TRSs may reduce the cash flow generated by us and our subsidiaries in the aggregate and our ability to make distributions to our stockholders and may affect our compliance with the gross income tests and asset tests.
A TRS generally may be used by a REIT to undertake indirectly activities that the REIT requirements might otherwise preclude the REIT from doing directly, such as the provision of noncustomary tenant services or other services that would give rise to income that would not qualify under the REIT rules, or the ownership of property held for sale to customers. See “—Gross Income Tests—Rents from Real Property” and “—Gross Income Tests—Prohibited Transactions.”
Gross Income Tests
We must satisfy two gross income tests annually to qualify and maintain our qualification as a REIT. First, at least 75% of our gross income for each taxable year must consist of defined types of income that we derive, directly or indirectly, from investments relating to real property or mortgage loans on real property or qualified temporary investment income. Qualifying income for purposes of the 75% gross income test generally includes:
· | rents from real property; |
· | interest on debt secured by mortgages on real property or on interests in real property, and interest on debt secured by mortgages on both real and personal property if the fair market value of such personal property does not exceed 15% of the total fair market value of all such property; |
· | dividends or other distributions on, and gain from the sale of, shares in other REITs; |
· | gain from the sale of real estate assets, other than gain from the sale of a debt instrument issued by a “publicly offered REIT” (i.e., a REIT that is required to file annual and periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934) to the extent not secured by real property or an interest in real property, or a nonqualified publicly offered REIT debt instrument as defined under Section 856(c)(5)(L)(ii) of the Code; |
· | income and gain derived from foreclosure property (as described below); |
· | income derived from a REMIC in proportion to the real estate assets held by the REMIC, unless at least 95% of the REMIC’s assets are real estate assets, in which case all of the income derived from the REMIC; and |
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· | income derived from the temporary investment of new capital that is attributable to the issuance of our shares or a public offering of our debt with a maturity date of at least five years and that we receive during the one-year period beginning on the date on which we received such new capital. |
Second, in general, at least 95% of our gross income for each taxable year must consist of income that is qualifying income for purposes of the 75% gross income test (except for income derived from the temporary investment of new capital), other types of interest and dividends, gain from the sale or disposition of stock or securities (including interest and gain from nonqualified publicly offered REIT debt instruments as defined under Section 856(c)(5)(L)(ii) of the Code) or any combination of these.
Certain income items do not qualify for either gross income test. Other types of income are excluded from both the numerator and the denominator in one or both of the gross income tests. For example, gross income from the sale of property that we hold primarily for sale to customers in the ordinary course of business, income and gain from “hedging transactions,” as defined in “—Hedging Transactions,” and gross income attributable to cancellation of indebtedness, or “COD,” income will be excluded from both the numerator and the denominator for purposes of both the 75% and 95% gross income tests. For purposes of the 75% and 95% gross income tests, we are treated as receiving our proportionate share of our operating partnership’s gross income. We will monitor the amount of our non-qualifying income and will seek to manage our investment portfolio to comply at all time with the gross income tests. The following paragraphs discuss the specific application of the gross income tests to us.
Dividends. Our share of any dividends received from any corporation (including dividends from any TRS that we may form, but excluding any REIT) in which we own an equity interest will qualify for purposes of the 95% gross income test but not for purposes of the 75% gross income test. Our share of any dividends received from any other REIT in which we own an equity interest, if any, will be qualifying income for purposes of both gross income tests.
Interest. The term “interest,” as defined for purposes of both gross income tests, generally excludes any amount that is based in whole or in part on the income or profits of any person. However, interest generally includes the following:
· | an amount that is based on a fixed percentage or percentages of receipts or sales; and |
· | an amount that is based on the income or profits of a debtor, as long as the debtor derives substantially all of its income from the real property securing the debt from leasing substantially all of its interest in the property, and only to the extent that the amounts received by the debtor would be qualifying “rents from real property” if received directly by a REIT. |
If a loan contains a provision that entitles a REIT to a percentage of the borrower’s gain upon the sale of the real property securing the loan or a percentage of the appreciation in the property’s value as of a specific date, income attributable to that loan provision will be treated as gain from the sale of the property securing the loan, which generally is qualifying income for purposes of both gross income tests, provided that the property is not inventory or dealer property in the hands of the borrower or the REIT.
Interest on debt secured by a mortgage on real property or on interests in real property, including, for this purpose, market discount, original issue discount, discount points, prepayment penalties, loan assumption fees, and late payment charges that are not compensation for services, generally is qualifying income for purposes of the 75% gross income test. However, if the loan is secured by real property and other property and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property securing the loan as of (i) the date the REIT agreed to originate or acquire the loan or (ii) as discussed below, in the event of a “significant modification,” the date we modified the loan, a portion of the interest income from such loan will not be qualifying income for purposes of the 75% gross income test, but will be qualifying income for purposes of the 95% gross income test. The portion of the interest income that will not be qualifying income for purposes of the 75% gross income test will be equal to the portion of the principal amount of the loan that is not secured by real property—that is, the amount by which the loan balance exceeds the applicable value of the real estate that secures the loan.
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Interest on debt secured by mortgages on real property or on interests in real property, including, for this purpose, prepayment penalties, loan assumption fees and late payment charges that are not compensation for services, generally is qualifying income for purposes of the 75% gross income test. Under the applicable Treasury Regulation (referred to as the “interest apportionment regulation”), if we receive interest income with respect to a mortgage loan that is secured by both real property and other property, and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date that we acquired the mortgage loan, the interest income will be apportioned between the real property and the other collateral, and our income from the arrangement will qualify for purposes of the 75% gross income test only to the extent that the interest is allocable to the real property. Even if a mortgage loan is not secured by real property, or is undersecured, the income that it generates may nonetheless qualify for purposes of the 95% gross income test. In Revenue Procedure 2014-51, the Service interpreted the “principal amount” of the loan for purposes of that test to be the face amount of the loan, despite the Code’s requirement that taxpayers treat any market discount (discussed below) as interest rather than principal. In the case of real estate mortgage loans secured by both real and personal property, if the fair market value of such personal property does not exceed 15% of the total fair market value of all property securing the loan, then the personal property securing the loan will be treated as real property for purposes of determining whether the interest income from such loan qualifies for purposes of the 75% gross income test.
Hedging Transactions. . From time to time, we may enter into hedging transactions with respect to one or more of our assets or liabilities. Our hedging activities may include entering into interest rate swaps, caps, and floors, options to purchase such items, and futures and forward contracts. Income and gain from “hedging transactions” will be excluded from gross income for purposes of both the 75% and 95% gross income tests. A “hedging transaction” means (1) any transaction entered into in the normal course of our trade or business primarily to manage the risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets, (2) any transaction entered into primarily to manage the risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% gross income test (or any property which generates such income or gain) or (3) any new transaction entered into to hedge the income or loss from a prior hedging transaction, where the property or indebtedness which was the subject of the prior hedging transaction was extinguished or disposed of. We are required to clearly identify any such hedging transaction before the close of the day on which it was acquired, originated, or entered into and to satisfy other identification requirements. To the extent that we hedge for other purposes, or to the extent that we do not properly identify a hedging transaction, the income from those transactions will likely be treated as non-qualifying income for purposes of both gross income tests. We intend to structure any hedging transactions in a manner that does not jeopardize our qualification as a REIT; however, no assurance can be given that our hedging activities will give rise to income that is excluded from gross income or qualifies for purposes of either or both of the gross income tests. We may conduct some or all of our hedging activities through a TRS or other corporate entity, the income from which may be subject to U.S. federal income tax, rather than by participating in the arrangements directly or through pass-through subsidiaries.
Rents from Real Property. To the extent that we acquire real property or an interest therein, rents we receive will qualify as “rents from real property” in satisfying the gross income requirements for a REIT described above only if the following conditions are met:
· | First, the amount of rent must not be based in whole or in part on the income or profits of any person. An amount received or accrued generally will not be excluded, however, from rents from real property solely by reason of being based on fixed percentages of receipts or sales. |
· | Second, rents we receive from a “related party tenant” will not qualify as rents from real property in satisfying the gross income tests unless the tenant is a TRS, at least 90% of the property is leased to unrelated tenants, the rent paid by the TRS is substantially comparable to the rent paid by the unrelated tenants for comparable space and the rent is not attributable to an increase in rent due to a modification of a lease with a “controlled TRS” (i.e., a TRS in which we own directly or indirectly more than 50% of the voting power or value of the stock). A tenant is a related party tenant if the REIT, or an actual or constructive owner of 10% or more of the REIT, actually or constructively owns 10% or more of the tenant. |
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· | Third, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable to the personal property will not qualify as rents from real property. |
· | Fourth, we generally must not operate or manage our real property or furnish or render services to our tenants, other than through an “independent contractor” who is adequately compensated and from whom we do not derive revenue. We may, however, provide services directly to tenants if the services are “usually or customarily rendered” in connection with the rental of space for occupancy only and are not considered to be provided for the tenants’ convenience. In addition, we may provide a minimal amount of “non-customary” services to the tenants of a property, other than through an independent contractor, as long as our income from the services does not exceed 1% of our income from the related property. Furthermore, we may own up to 100% of the stock of a TRS, which may provide customary and non-customary services to tenants without tainting our rental income from the related properties. |
If a portion of the rent that we receive from a property does not qualify as “rents from real property” because the rent attributable to personal property exceeds 15% of the total rent for a taxable year, the portion of the rent that is attributable to personal property will not be qualifying income for purposes of either the 75% or 95% gross income test. Thus, if such rent attributable to personal property, plus any other income that is non-qualifying income for purposes of the 95% gross income test, during a taxable year exceeds 5% of our gross income during the year, we would lose our REIT qualification. Further, the rent from a particular property does not qualify as “rents from real property” if (i) the rent is considered based on the income or profits of the tenant, (ii) the tenant either is a related party tenant or fails to qualify for the exceptions to the related party tenant rule for qualifying taxable REIT subsidiaries or (iii) we furnish non-customary services to the tenants of the property, or manage or operate the property, other than through a qualifying independent contractor or a taxable REIT subsidiary.
In addition to the rent, the tenants may be required to pay certain additional charges. To the extent that such additional charges represent reimbursements of amounts that we are obligated to pay to third parties such charges generally will qualify as “rents from real property.” To the extent such additional charges represent penalties for nonpayment or late payment of such amounts, such charges should qualify as “rents from real property.” However, to the extent that late charges do not qualify as “rents from real property,” they instead will be treated as interest that qualifies for the 95% gross income test.
Prohibited Transactions. A REIT will incur a 100% tax on the net income derived from any sale or other disposition of property, other than foreclosure property, that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. Any such income will be excluded from the application of the 75% and 95% gross income tests. Whether a REIT holds an asset “primarily for sale to customers in the ordinary course of a trade or business” depends on the facts and circumstances in effect from time to time, including those related to a particular asset. No assurance, however, can be given that the Service will not successfully assert a contrary position, in which case we would be subject to the prohibited transaction tax on the sale of those assets. A safe harbor to the characterization of the sale of property by a REIT as a prohibited transaction and the resulting imposition of the 100% prohibited transactions tax is available, however, if the following requirements are met:
· | the REIT has held the property for not less than two years; |
· | the aggregate expenditures made by the REIT, or any partner of the REIT, during the two-year period preceding the date of the sale that are includable in the basis of the property do not exceed 30% of the selling price of the property; |
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· | either (1) during the year in question, the REIT did not make more than seven property sales other than sales of foreclosure property or sales to which Section 1033 of the Code applies, (2) the aggregate adjusted bases of all such properties sold by the REIT during the year did not exceed 10% of the aggregate bases of all of the assets of the REIT at the beginning of the year, (3) the aggregate fair market value of all such properties sold by the REIT during the year did not exceed 10% of the aggregate fair market value of all of the assets of the REIT at the beginning of the year or (4) either, (a) the REIT satisfies the requirements of clause (2) applied by substituting “20%” for “10%” and the “3-year average adjusted bases percentage” (as defined in the Code) for the taxable year does not exceed 10%, or (b) the REIT satisfies the requirements of clause (3) applied by substituting “20%” for “10%” and the “3-year average fair market value percentage” (as defined in the Code) for the taxable year does not exceed 10%; |
· | in the case of property not acquired through foreclosure or lease termination, the REIT has held the property for at least two years for the production of rental income; and |
· | if the REIT has made more than seven property sales (excluding sales of foreclosure property) during the taxable year, substantially all of the marketing and development expenditures with respect to the property were made through an independent contractor from whom the REIT or a TRS derives no income. |
We will attempt to comply with the terms of the safe-harbor provisions in the federal income tax laws prescribing when an asset sale will not be characterized as a prohibited transaction. We cannot assure you, however, that we will be able to comply with the safe-harbor provisions or that we will avoid owning property that may be characterized as property held “primarily for sale to customers in the ordinary course of a trade or business.” We may hold and dispose of certain properties through a taxable REIT subsidiary if we conclude that the sale or other disposition of such property may not fall within the safe-harbor provisions. The 100% prohibited transactions tax will not apply to gains from the sale of property that is held through a taxable REIT subsidiary although such income will be taxed to the taxable REIT subsidiary at U.S. federal corporate income tax rates.
Foreclosure Property. We will be subject to tax at the maximum corporate rate on any income from foreclosure property, other than income that otherwise would be qualifying income for purposes of the 75% gross income test, less expenses directly connected with the production of that income. Gross income from foreclosure property will qualify, however, under the 75% and 95% gross income tests. Foreclosure property is any real property, including interests in real property, and any personal property incident to such real property:
· | that is acquired by a REIT as the result of the REIT having bid on such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default or default was imminent on a lease of such property or on indebtedness that such property secured; |
· | for which the related loan or lease was acquired by the REIT at a time when the default was not imminent or anticipated; and |
· | for which the REIT makes a proper election to treat the property as foreclosure property. |
A REIT will not be considered, however, to have foreclosed on a property where the REIT takes control of the property as a mortgagee-in-possession and cannot receive any profit or sustain any loss except as a creditor of the mortgagor. Property generally ceases to be foreclosure property at the end of the third taxable year following the taxable year in which the REIT acquired the property, or longer if an extension is granted by the Secretary of the U.S. Treasury. This grace period terminates and foreclosure property ceases to be foreclosure property on the first day:
· | on which a lease is entered into for the property that, by its terms, will give rise to income that does not qualify for purposes of the 75% gross income test (disregarding income from foreclosure property), or any amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after such day that will give rise to income that does not qualify for purposes of the 75% gross income test (disregarding income from foreclosure property); |
· | on which any construction takes place on the property, other than completion of a building or any other improvement, where more than 10% of the construction was completed before default became imminent; or |
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· | which is more than 90 days after the day on which the REIT acquired the property and the property is used in a trade or business that is conducted by the REIT, other than through an independent contractor from whom the REIT itself does not derive or receive any income. |
Failure to Satisfy Gross Income Tests . We intend to monitor our sources of income, including any nonqualifying income received by us, and manage our assets so as to ensure our compliance with the gross income tests. If we fail to satisfy one or both of the gross income tests for any taxable year, we nevertheless may qualify as a REIT for that year if we are entitled to qualify for relief under certain provisions of the U.S. federal income tax laws. Those relief provisions generally will be available if:
· | our failure to meet those tests is due to reasonable cause and not to willful neglect; and |
· | following such failure for any taxable year, a schedule of the sources of our income is filed with the Service in accordance with regulations prescribed by the Secretary of the U.S. Treasury. |
We cannot predict, however, whether any failure to meet these tests will qualify for the relief provisions. If these relief provisions are inapplicable to a particular set of circumstances involving us, we will not qualify as a REIT. As discussed above in the section entitled “—Taxation of Our Company,” even if the relief provisions apply, we would incur a 100% tax on the gross income attributable to the greater of the amount by which we fail the 75% gross income test or the 95% gross income test, multiplied, in either case, by a fraction intended to reflect our profitability.
Asset Tests
To qualify as a REIT, we also must satisfy the following asset tests at the end of each quarter of each taxable year.
First, at least 75% of the value of our total assets must consist of:
· | cash or cash items, including certain receivables and investments in money market funds; |
· | government securities; |
· | interests in real property, including leaseholds and options to acquire real property and leaseholds; |
· | interests in mortgage loans secured by real property; |
· | interests in mortgage loans secured by both real property and personal property if the fair market value of such personal property does not exceed 15% of the total fair market value of all such property; |
· | stock or shares of beneficial interest in other REITs; |
· | investments in stock or debt instruments during the one-year period following our receipt of new capital that we raise through equity offerings or public offerings of debt with at least a five-year term; |
· | personal property leased in connection with real property if the rent attributable to such personal property is not greater than 15% of the total rent received under the lease; |
· | debt instruments issued by “publicly offered REITs;” and |
· | regular or residual interests in a REMIC. However, if less than 95% of the assets of a REMIC consist of assets that are qualifying real estate-related assets under the U.S. federal income tax laws, determined as if we held such assets, we will be treated as holding directly our proportionate share of the assets of such REMIC. |
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Second, of our investments not included in the 75% asset class, the value of our interest in any one issuer’s securities (other than any TRS we may own) may not exceed 5% of the value of our total assets (the “5% asset test”).
Third, of our investments not included in the 75% asset class, we may not own more than 10% of the total voting power or 10% of the total value of any one issuer’s outstanding securities (the “10% vote test” and the “10% value test,” respectively).
Fourth, no more than 25% of the value of our total assets may consist of the securities of one or more TRSs.
Fifth, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total assets may consist of the securities of TRSs and other non-TRS taxable subsidiaries and other assets that are not qualifying assets for purposes of the 75% asset test (the “25% securities test”).
Sixth, not more than 25% of the value of our total assets may be represented by debt instruments of “publicly offered REITs” to the extent those debt instruments are not secured by real property or an interest in real property.
For purposes of these assets tests, we are treated as holding our proportionate share of our operating partnership’s assets. For purposes of the 5% asset test, the 10% vote test and the 10% value test, the term “securities” does not include stock in another REIT, equity or debt securities of a qualified REIT subsidiary or TRS, mortgage loans, or equity interests in a partnership. For purposes of the 10% value test, the term “securities” does not include:
· | “straight debt” securities, which is defined as a written unconditional promise to pay on demand or on a specified date a sum certain in money if (i) the debt is not convertible, directly or indirectly, into stock, and (ii) the interest rate and interest payment dates are not contingent on profits, the borrower’s discretion, or similar factors. “Straight debt” securities do not include any securities issued by a partnership or a corporation in which we or any “controlled TRS” hold non-” straight” debt securities that have an aggregate value of more than 1% of the issuer’s outstanding securities. However, “straight debt” securities include debt subject to the following contingencies |
o | a contingency relating to the time of payment of interest or principal, as long as either (i) there is no change to the effective yield of the debt obligation, other than a change to the annual yield that does not exceed the greater of 0.25% or 5% of the annual yield, or (ii) neither the aggregate issue price nor the aggregate face amount of the issuer’s debt obligations held by us exceeds $1 million and no more than twelve months of unaccrued interest on the debt obligations can be required to be prepaid; and |
· | a contingency relating to the time or amount of payment upon a default or prepayment of a debt obligation, as long as the contingency is consistent with customary commercial practice; |
· | any loan to an individual or an estate; |
· | any “section 467 rental agreement,” other than an agreement with a related party tenant; |
· | any obligation to pay “rents from real property;” |
· | certain securities issued by governmental entities that are not dependent in whole or in part on the profits of (or payments made by) a non-governmental entity; |
· | any security (including debt securities) issued by another REIT; |
· | any debt instrument of an entity treated as a partnership for U.S. federal income tax purposes in which we are a partner to the extent of our proportionate interest in the equity and certain debt securities issued by that partnership; or |
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· | any debt instrument of an entity treated as a partnership for U.S. federal income tax purposes not described in the preceding bullet points if at least 75% of the partnership’s gross income, excluding income from prohibited transactions, is qualifying income for purposes of the 75% gross income test described above in “—Gross Income Tests.” |
For purposes of the 10% value test, our proportionate share of the assets of a partnership is our proportionate interest in any securities issued by the partnership, without regard to the securities described in the last two bullet points above.
We intend that the assets that we will hold will satisfy the foregoing asset test requirements. We will not obtain, however, nor are we required to obtain under the U.S. federal income tax laws, independent appraisals to support our conclusions as to the value of our assets and securities or the real estate collateral for any mortgage loans that we may originate or acquire. Therefore, we cannot assure you that we will be able to satisfy the asset tests described above. We will monitor the status of our assets for purposes of the various asset tests and seek to manage our portfolio to comply at all times with such tests. No assurance, however, can be given that we will continue to be successful in this effort. In this regard, to determine our compliance with these requirements, we will have to value our investment in our assets to ensure compliance with the asset tests. Although we seek to be prudent in making these estimates, no assurances can be given that the Service might not disagree with these determinations and assert that a different value is applicable, in which case we might not satisfy the 75% asset test and the other asset tests and, thus, would fail to qualify as a REIT.
If we fail to satisfy the asset tests at the end of a calendar quarter, we will not lose our REIT qualification so long as:
· | we satisfied the asset tests at the end of the preceding calendar quarter; and |
· | the discrepancy between the value of our assets and the asset test requirements arose from changes in the market values of our assets and was not wholly or partly caused by the acquisition of one or more non-qualifying assets. |
If we did not satisfy the condition described in the second item, above, we still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose.
If we violate the 5% asset test, the 10% vote test or the 10% value test described above at the end of any calendar quarter, we will not lose our REIT qualification if (i) the failure is de minimis (up to the lesser of 1% of the total value of our assets or $10 million) and (ii) we dispose of assets or otherwise comply with the asset tests within six months after the last day of the quarter in which we identified such failure. In the event of a more than de minimis failure of any of the asset tests, as long as the failure was due to reasonable cause and not to willful neglect, we will not lose our REIT qualification if we (i) dispose of assets or otherwise comply with the asset tests within six months after the last day of the quarter in which we identified such failure, (ii) file a schedule with the Service describing the assets that caused such failure in accordance with regulations promulgated by the Secretary of the U.S. Treasury and (iii) pay a tax equal to the greater of $50,000 or the product of the highest U.S. federal corporate tax rate (currently, 35%) and the net income from the non-qualifying assets during the period in which we failed to satisfy the asset tests. If these relief provisions are inapplicable to a particular set of circumstances involving us, we will fail to qualify as a REIT.
We intend that the assets that we may hold will satisfy the foregoing asset test requirements. We will monitor the status of our assets and our future acquisition of assets to ensure that we comply with those requirements, but we cannot assure you that we will be successful in this effort. No independent appraisals will be obtained to support our estimates of and conclusions as to the value of our assets and securities, or in many cases, the real estate collateral for the mortgage loans that support our assets. Moreover, the values of some assets may not be susceptible to a precise determination. As a result, no assurance can be given that the Service will not contend that our ownership of securities and other assets violates one or more of the asset tests applicable to REITs.
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Distribution Requirements
Each taxable year, we must distribute dividends, other than capital gain dividends and deemed distributions of retained capital gain, to our stockholders in an aggregate amount at least equal to:
· | the sum of: |
· | 90% of our REIT taxable income computed without regard to the dividends paid deduction and our net capital gain, and |
· | 90% of our after-tax net income, if any, from foreclosure property, minus |
· | the sum of certain items of non-cash income. |
We must make such distributions in the taxable year to which they relate, or in the following taxable year if either (i) we declare the distribution before we timely file our U.S. federal income tax return for the year and pay the distribution on or before the first regular dividend payment date after such declaration or (ii) we declare the distribution in October, November or December of the taxable year, payable to stockholders of record on a specified day in any such month, and we actually pay the dividend before the end of January of the following year. The distributions under clause (i) are taxable to the stockholders in the year in which paid, and the distributions in clause (ii) are treated as paid on December 31 of the prior taxable year. In both instances, these distributions relate to our prior taxable year for purposes of the 90% distribution requirement.
In order for distributions to be counted as satisfying the annual distribution requirements for REITs other than “publicly offered” REITs, and to provide a REIT-level tax deduction for such REITs, the distributions must not be a “preferential dividend.” A distribution is not a preferential dividend if the distribution is (i) pro-rata among all outstanding shares within a particular class and (ii) in accordance with the preferences among different classes of shares as set forth in the REIT’s organizational documents. Such preferential dividend rules will not apply to our distributions if we qualify as a “publicly offered” REIT. We believe that we will be a “publicly offered” REIT.
We will pay U.S. federal income tax on taxable income, including net capital gain, that we do not distribute to stockholders. Furthermore, if we fail to distribute during a calendar year, or by the end of January following the calendar year in the case of distributions with declaration and record dates falling in the last three months of the calendar year, at least the sum of:
· | 85% of our REIT ordinary income for such year, |
· | 95% of our REIT capital gain income for such year, and |
· | any undistributed taxable income from prior periods. |
We will incur a 4% nondeductible excise tax on the excess of such required distribution over the amounts we actually distribute.
We may elect to retain and pay income tax on the net long term capital gain we recognize in a taxable year. See the section above entitled “—Taxation of U.S. Holders.” If we so elect, we will be treated as having distributed any such retained amount for purposes of the REIT distribution requirements and the 4% nondeductible excise tax described above.
We intend to make timely distributions in the future sufficient to satisfy the annual distribution requirements and to avoid corporate income tax and the 4% nondeductible excise tax. It is possible that, from time to time, we may experience timing differences between the actual receipt of cash, including distributions from our subsidiaries, and actual payment of deductible expenses and the inclusion of that income and deduction of such expenses in arriving at our REIT taxable income. As a result of the foregoing, we may have less cash than is necessary to make distributions to our stockholders that are sufficient to avoid corporate income tax and the 4% nondeductible excise tax imposed on certain undistributed income or even to meet the annual distribution requirements. In such a situation, we may need to borrow funds or issue additional stock, or, if possible, pay dividends consisting, in whole or in part, of our stock or debt securities.
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In order for distributions to be counted as satisfying the annual distribution requirement applicable to REITs and to provide us with a REIT-level tax deduction, the distributions must not be “preferential dividends.” A distribution is not a preferential dividend if the distribution is (1) pro rata among all outstanding shares within a particular class, and (2) in accordance with the preferences among different classes of stock as set forth in our organizational documents.
Under certain circumstances, we may be able to correct a failure to meet the distribution requirement for a year by paying “deficiency dividends” to our stockholders in a later year. We may include such deficiency dividends in our deduction for dividends paid for the earlier year. Although we may be able to avoid income tax on amounts distributed as deficiency dividends, we will be required to pay interest and may be required to pay a penalty to the Service based upon the amount of any deduction we take for deficiency dividends.
Recordkeeping Requirements
We must maintain certain records in order to qualify as a REIT. In addition, to avoid a monetary penalty, we must request, on an annual basis, information from our stockholders designed to disclose the actual ownership of our outstanding shares, and we must maintain a list of those persons failing or refusing to comply with such request as part of our records. A stockholder that fails or refuses to comply with such request is required by the Treasury Regulations to submit a statement with its tax return disclosing the actual ownership of our stock and other information. We intend to comply with these requirements.
Failure to Qualify as a REIT
If we fail to satisfy one or more requirements for REIT qualification, other than the gross income tests and the asset tests, we could avoid disqualification if our failure is due to reasonable cause and not to willful neglect and we pay a penalty of $50,000 for each such failure. In addition, there are relief provisions for a failure of the gross income tests and asset tests, as described in “—Gross Income Tests” and “—Asset Tests.”
If we fail to qualify as a REIT in any taxable year, and no relief provision applies, we would be subject to U.S. federal income tax and any applicable alternative minimum tax on our taxable income at regular corporate rates. In calculating our taxable income in a year in which we fail to qualify as a REIT, we would not be able to deduct amounts paid out to stockholders. In fact, we would not be required to distribute any amounts to stockholders in that year. In such event, to the extent of our current or accumulated earnings and profits, all distributions to stockholders would be taxable as ordinary income. Subject to certain limitations of the U.S. federal income tax laws, corporate stockholders might be eligible for the dividends received deduction and stockholders taxed at individual rates might be eligible for the reduced U.S. federal income tax rate of 20% on such dividends. Unless we qualified for relief under specific statutory provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. We cannot predict whether in all circumstances we would qualify for such statutory relief.
Taxation of Our Operating Partnership
Our operating partnership currently is disregarded as a separate entity for U.S. federal income tax purposes because it is wholly owned by Innovative Industrial Properties, Inc. We may issue limited partnership units of our operating partnership in the future to third party partners, at which time our operating partnership will be treated as a partnership for tax purposes
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Under the Code, a partnership generally is not subject to U.S. federal income tax, but is required to file a partnership tax information return each year. In general, the character of each partner’s share of each item of income, gain, loss, deduction, credit, and tax preference is determined at the partnership level. Each partner is then allocated a distributive share of such items in accordance with the partnership agreement and is required to take such items into account in determining such partner’s income. Each partner includes such amount in income for any taxable year of the partnership ending within or with the taxable year of the partner, without regard to whether the partner has received or will receive any cash distributions from the partnership. Cash distributions, if any, from a partnership to a partner generally are not taxable unless and to the extent they exceed the partner’s basis in its partnership interest immediately before the distribution. Any amounts in excess of such tax basis will generally be treated as a sale or exchange of such partner’s interest in the partnership.
As noted above, at such time as our operating partnership will be treated as a partnership for tax purposes, for purposes of the REIT income and asset tests, we will be treated as receiving or holding our proportionate share of our operating partnership’s income and assets, respectively. We control, and intend to continue to control, our operating partnership and intend to operate it consistently with the requirements for our qualification as a REIT.
The recently enacted Bipartisan Budget Act of 2015 changes the rules applicable to U.S. federal income tax audits of partnerships. Under the new rules (which generally are effective for taxable years beginning after December 31, 2017), among other changes and subject to certain exceptions, any audit adjustment to items of income, gain, loss, deduction, or credit of a partnership (and any partner’s distributive share thereof) is determined, and taxes, interest, or penalties attributable thereto are assessed and collected, at the partnership level. Although it is uncertain how these new rules will be implemented, it is possible that they could result in the Operating Partnership being required to pay additional taxes, interest and penalties as a result of an audit adjustment, and we could be required to bear the economic burden of those taxes, interest, and penalties even though we, as a REIT, may not otherwise have been required to pay additional corporate-level taxes as a result of the related audit adjustment. The changes created by these new rules are sweeping and in many respects dependent on the promulgation of future regulations or other guidance by the U.S. Treasury. Stockholders are urged to consult their tax advisors with respect to these changes and their potential impact on their investment in our common stock.
The discussion above assumes that our operating partnership is treated as a “partnership” for U.S. federal income tax purposes at such time as it is no longer disregarded as a separate entity for tax purposes. Generally, a domestic unincorporated entity with two or more partners is treated as a partnership for U.S. federal income tax purposes unless it affirmatively elects to be treated as a corporation. However, certain “publicly traded partnerships” are treated as corporations for U.S. federal income tax purposes. We intend to comply with one or more exceptions to treatment of our operating partnership as a corporation under the publicly traded partnership rules. Failure to qualify for such an exception would prevent us from qualifying as a REIT.
Taxation of U.S. Holders
The term “U.S. holder” means a beneficial owner of our shares of common stock that, for U.S. federal income tax purposes, is:
· | a citizen or resident of the United States; |
· | a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any of its States or the District of Columbia; |
· | an estate whose income is subject to U.S. federal income taxation regardless of its source; or |
· | any trust if (i) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (ii) it has a valid election in place to be treated as a U.S. person. |
If a partnership, entity or arrangement treated as a partnership for U.S. federal income tax purposes holds our shares of common stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership and certain determinations made at the partner level. If you are a partner in a partnership holding our shares of common stock, you should consult your tax advisor regarding the consequences of the purchase, ownership and disposition of our shares of common stock by the partnership.
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Taxation of Taxable U.S. Holders on Distributions on Shares. As long as we qualify as a REIT, a taxable U.S. holder must generally take into account as ordinary income distributions made out of our current or accumulated earnings and profits that we do not designate as capital gain dividends or retained long-term capital gain. Dividends paid to a U.S. holder will not qualify for the dividends received deduction generally available to corporations. In addition, dividends paid to a U.S. holder generally will not qualify for the 20% tax rate for “qualified dividend income.”
The maximum tax rate for qualified dividend income received by taxpayers taxed at individual rates is 20%. Qualified dividend income generally includes dividends paid to U.S. holders taxed at individual rates by domestic C corporations and certain qualified foreign corporations. Because we are not generally subject to U.S. federal income tax on the portion of our REIT taxable income distributed to our stockholders (see “—Taxation of Our Company” above), our dividends generally will not be eligible for the 20% rate on qualified dividend income.
As a result, our ordinary REIT dividends will be taxed at the higher tax rate applicable to ordinary income. Currently, the highest marginal individual income tax rate on ordinary income is 39.6%. However, the 20% tax rate for qualified dividend income will apply to our ordinary REIT dividends (i) attributable to dividends received by us from certain non-REIT corporations (e.g., dividends from any domestic TRSs), (ii) to the extent attributable to income upon which we have paid corporate income tax (e.g., to the extent that we distribute less than 100% of our taxable income) and (iii) attributable to income in the prior taxable year from the sales of “built-in gain” property acquired by us from C corporations in carryover basis transactions (less the amount of corporate tax on such income). In general, to qualify for the reduced tax rate on qualified dividend income, a U.S. holder must hold our shares for more than 60 days during the 121-day period beginning on the date that is 60 days before the date on which our shares of common stock become ex-dividend. Individuals, trusts and estates whose income exceeds certain thresholds are also subject to a 3.8% Medicare tax on dividends received from us. Dividends paid to a corporate U.S. stockholder will not qualify for the dividends received deduction generally available to corporations.
A U.S. holder generally will take into account distributions that we properly designate as capital gain dividends as long-term capital gain, to the extent that they do not exceed our actual net capital gain for the taxable year, without regard to the period for which the U.S. holder has held our shares of common stock. Dividends designated as capital gain dividends may not exceed our dividends paid for the taxable year, including dividends paid the following year that are treated as paid in the current year. A corporate U.S. holder may, however, be required to treat up to 20% of certain capital gain dividends as ordinary income. Net capital gain is generally taxable at a maximum U.S. federal income tax rate of 20%, in the case of U.S. stockholders who are individuals, and 35% for corporations. Capital gain dividends attributable to the sale of depreciable real property held for more than 12 months are subject to a 25% U.S. federal income tax rate for U.S. stockholder who are individuals, trusts or estates, to the extent of previously claimed depreciation deductions.
We may elect to retain and pay income tax on the net long-term capital gain that we recognize in a taxable year. In that case, to the extent we designate such amount on a timely notice to such stockholder, a U.S. holder would be taxed on its proportionate share of our undistributed long-term capital gain. The U.S. holder would receive a credit or refund for its proportionate share of the tax we paid. The U.S. holder would increase the basis in its shares of common stock by the amount of its proportionate share of our undistributed long-term capital gain, minus its share of the tax we paid.
A U.S. holder will not incur tax on a distribution in excess of our current and accumulated earnings and profits if the distribution does not exceed the adjusted basis of the U.S. holder’s shares of common stock. Instead, the distribution will reduce the adjusted basis of such shares of common stock. A U.S. holder will recognize a distribution in excess of both our current and accumulated earnings and profits and the U.S. holder’s adjusted basis in his or her shares of common stock as long-term capital gain, or short-term capital gain if the shares of common stock have been held for one year or less, assuming the shares of common stock are a capital asset in the hands of the U.S. holder. In addition, if we declare a distribution in October, November or December of any year that is payable to a U.S. holder of record on a specified date in any such month, such distribution shall be treated as both paid by us and received by the U.S. holder on December 31 of such year, provided that we actually pay the distribution during January of the following calendar year, as described in “—Distribution Requirements.”
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Stockholders may not include in their individual income tax returns any of our net operating losses or capital losses. Instead, these losses are generally carried over by us for potential offset against our future income.
Taxable distributions from us and gain from the disposition of our shares of common stock will not be treated as passive activity income and, therefore, a U.S. holder generally will not be able to apply any “passive activity losses,” such as losses from certain types of limited partnerships in which such U.S. holder is a limited partner, against such income. In addition, taxable distributions from us and gain from the disposition of our shares of common stock generally will be treated as investment income for purposes of the investment interest limitations. We will notify stockholders after the close of our taxable year as to the portions of the distributions attributable to that year that constitute ordinary income, return of capital and capital gain.
Taxation of Taxable U.S. Holders on the Disposition of Shares. In general, a U.S. holder who is not a dealer in securities must treat any gain or loss realized upon a taxable disposition of our shares of common stock as long-term capital gain or loss if the U.S. holder has held such shares of common stock for more than one year and otherwise as short-term capital gain or loss. In general, a U.S. holder will realize gain or loss in an amount equal to the difference between the sum of the fair market value of any property and the amount of cash received in such disposition and the U.S. holder’s adjusted tax basis. A holder’s adjusted tax basis generally will equal the U.S. holder’s acquisition cost, increased by the excess of net capital gain deemed distributed to the U.S. holder (discussed above) less tax deemed paid by such U.S. holder on such gains and reduced by any returns of capital. However, a U.S. holder must treat any loss upon a sale or exchange of shares of common stock held by such holder for six months or less as a long-term capital loss to the extent of capital gain dividends and any other actual or deemed distributions from us that such U.S. holder treats as long term capital gain. All or a portion of any loss that a U.S. holder realizes upon a taxable disposition of our shares of common stock may be disallowed if the U.S. holder purchases our shares of common stock (or substantially similar shares of common stock) within 30 days before or after the disposition.
Capital Gains and Losses. A taxpayer generally must hold a capital asset for more than one year for gain or loss derived from its sale or exchange to be treated as long-term capital gain or loss. The maximum tax rate on long-term capital gain applicable to U.S. holders taxed at individual rates is 20% for sales and exchanges of assets held for more than one year. The maximum tax rate on long-term capital gain from the sale or exchange of “section 1250 property,” or depreciable real property, is 25%, which applies to the lesser of the total amount of the gains or the accumulated depreciation on the Section 1250 property. Individuals, trusts and estates whose income exceeds certain thresholds are also subject to a 3.8% Medicare tax on gain from the sale of our shares of common stock.
With respect to distributions that we designate as capital gain dividends and any retained capital gain that we are deemed to distribute, we will designate whether such a distribution is taxable to U.S. holders taxed at individual rates at a 20% or 25% rate. The highest marginal individual income tax rate currently is 39.6%. Thus, the tax rate differential between capital gain and ordinary income for those taxpayers may be significant. In addition, the characterization of income as capital gain or ordinary income may affect the deductibility of capital losses, including capital losses recognized upon the disposition of our shares. A non-corporate taxpayer may deduct capital losses not offset by capital gains against its ordinary income only up to a maximum annual amount of $3,000. A non-corporate taxpayer may carry forward unused capital losses indefinitely. A corporate taxpayer must pay tax on its net capital gain at ordinary corporate rates (currently up to 35%). A corporate taxpayer may deduct capital losses only to the extent of capital gains, with unused losses being carried back three years and forward five years.
If a U.S. stockholder recognizes a loss upon a disposition of our stock in an amount that exceeds a prescribed threshold, it is possible that the provisions of Treasury regulations involving “reportable transactions” could apply, with a resulting requirement to separately disclose the loss-generating transaction to the IRS. These Treasury regulations are written quite broadly and apply to many routine and simple transactions. A reportable transaction currently includes, among other things, a sale or exchange of stock resulting in a tax loss in excess of (a) $10 million in any single year or $20 million in any combination of years in the case of stock held by a C corporation or by a partnership with only C corporation partners or (b) $2 million in any single year or $4 million in any combination of years in the case of stock held by any other partnership or an S corporation, trust or individual, including losses that flow through pass through entities to individuals. A taxpayer discloses a reportable transaction by filing IRS Form 8886 with its federal income tax return and, in the first year of filing, a copy of Form 8886 must be sent to the IRS’s Office of Tax Shelter Analysis. The penalty for failing to disclose a reportable transaction is generally $10,000 in the case of a natural person and $50,000 in any other case.
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Information Reporting Requirements and Withholding. We or the applicable withholding agent will report to U.S. holders and to the Service the amount and the tax character of distributions we pay during each calendar year, and the amount of tax we withhold, if any. Under the backup withholding rules, a U.S. holder may be subject to backup withholding at a rate of 28% with respect to distributions unless such holder:
· | is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact; or |
· | provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with the applicable requirements of the backup withholding rules. |
A U.S. holder who does not provide the applicable withholding agent with its correct taxpayer identification number also may be subject to penalties imposed by the Service. Any amount paid as backup withholding will be creditable against the U.S. holder’s income tax liability. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or credited against the U.S. holder’s U.S. federal income tax liability if certain required information is timely furnished to the Service. U.S. holders are urged to consult their own tax advisors regarding application of backup withholding to them and the availability of, and procedure for obtaining an exemption from, backup withholding. In addition, the applicable withholding agent may be required to withhold a portion of distributions to any U.S. holders who fail to certify their U.S. status.
Taxation of Non-U.S. Holders
The term “non-U.S. holder” means a beneficial owner of our shares of common stock that is not a U.S. holder or a partnership (or an entity or arrangement treated as a partnership for U.S. federal income tax purposes). The rules governing U.S. federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships and other foreign holders are complex. This section is only a summary of such rules. We urge non-U.S. holders to consult their tax advisors to determine the impact of U.S. federal, state and local income tax laws on ownership of our shares of common stock, including any reporting requirements.
A non-U.S. holder that receives a distribution from us that is not attributable to gain from our sale or exchange of “United States real property interests,” as defined below, and that we do not designate as a capital gain dividend or retained capital gain will recognize ordinary income to the extent that we pay the distribution out of our current or accumulated earnings and profits. A withholding tax equal to 30% of the gross amount of the distribution ordinarily will apply unless an applicable tax treaty reduces or eliminates the tax. If a distribution is treated as effectively connected with the non-U.S. holder’s conduct of a U.S. trade or business, the distribution will not incur the 30% withholding tax, but the non-U.S. holder generally will be subject to U.S. federal income tax on the distribution at graduated rates, in the same manner as U.S. holders are taxed on distributions and also may be subject to the 30% branch profits tax in the case of a corporate non-U.S. holder. In general, non-U.S. holders will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of our shares of common stock. It is expected that the applicable withholding agent will withhold U.S. income tax at the rate of 30% on the gross amount of any distribution that we do not designate as a capital gain distribution or retained capital gain and is paid to a non-U.S. holder unless either:
· | a lower treaty rate applies and the non-U.S. holder files with the applicable withholding agent an IRS Form W-8BEN or IRS Form W-8BEN-E evidencing eligibility for that reduced rate, or |
· | the non-U.S. holder files with the applicable withholding agent an IRS Form W-8ECI claiming that the distribution is effectively connected income. |
Capital gain dividends received or deemed received by a non-U.S. holder from us that are not attributable to gain from our sale or exchange of “United States real property interests,” as defined below, are generally not subject to U.S. federal income or withholding tax, unless either (1) the non-U.S. holder’s investment in our shares of common stock is effectively connected with a U.S. trade or business conducted by such non-U.S. holder (in which case the non-U.S. holder will be subject to the same treatment as U.S. holders with respect to such gain) or (2) the non-U.S. holder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has a “tax home” in the U.S. (in which case the non-U.S. holder will be subject to a 30% tax on the individual’s net capital gain for the year).
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A non-U.S. holder will not incur tax on a distribution on the shares of common stock in excess of our current and accumulated earnings and profits if the excess portion of the distribution does not exceed the adjusted tax basis of its shares of common stock. Instead, the excess portion of the distribution will reduce such non-U.S. holder’s adjusted tax basis of its shares of common stock. A non-U.S. holder will be subject to tax on a distribution that exceeds both our current and accumulated earnings and profits and the adjusted basis of its shares of common stock, if the non-U.S. holder otherwise would be subject to tax on gain from the sale or disposition of its shares of common stock, as described below. Because we generally cannot determine at the time we make a distribution whether the distribution will exceed our current and accumulated earnings and profits, it is expected that the applicable withholding agent normally will withhold tax on the entire amount of any distribution at the same rate applicable to withholding on a dividend. To the extent that we do not do so, we nevertheless may withhold at a rate of 15% on any portion of a distribution not subject to withholding at a rate of 30%. However, a non-U.S. holder may obtain a refund of amounts that the applicable withholding agent withheld if we later determine that a distribution in fact exceeded our current and accumulated earnings and profits.
For any year in which we qualify as a REIT, a non-U.S. holder may incur tax on distributions that are attributable to gain from our sale or exchange of “United States real property interests” under special provisions of the U.S. federal income tax laws known as “FIRPTA.” The term “United States real property interests” includes interests in real property and shares in corporations at least 50% of whose assets consist of interests in real property. Under the FIRPTA rules, a non-U.S. holder is taxed on distributions attributable to gain from sales of United States real property interests as if the gain were effectively connected with a U.S. business of the non-U.S. holder. A non-U.S. holder thus would be taxed on such a distribution at the normal capital gain rates applicable to U.S. holders, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of a nonresident alien individual. A non-U.S. corporate holder not entitled to treaty relief or exemption also may be subject to the 30% branch profits tax on such a distribution. Unless a non-U.S. holder qualifies for the exception described in the next paragraph, the applicable withholding agent must withhold 35% of any such distribution that we could designate as a capital gain dividend. A non-U.S. holder may receive a credit against such holder’s tax liability for the amount withheld.
Capital gain distributions on our shares of common stock that are attributable to our sale of real property will be treated as ordinary dividends, rather than as gain from the sale of a United States real property interest, if (i) our shares of common stock are “regularly traded” on an established securities market in the United States and (ii) the non-U.S. holder does not own more than 10% of our shares of common stock during the one-year period preceding the distribution date. As a result, non-U.S. holders generally would be subject to withholding tax on such capital gain distributions in the same manner as they are subject to withholding tax on ordinary dividends. We anticipate that our common stock will be treated as being regularly traded on an established securities market in the United States following this offering. If our common stock is not regularly traded on an established securities market in the United States or the non-U.S. holder owned more than 10% of our common stock at any time during the one-year period prior to the distribution, capital gain distributions that are attributable to our sale of real property would be subject to tax under FIRPTA. Moreover, if a non-U.S. holder disposes of our common stock during the 30-day period preceding a dividend payment, and such non-U.S. holder (or a person related to such non-U.S. holder) acquires or enters into a contract or option to acquire our common stock within 61 days of the 1st day of the 30 day period described above, and any portion of such dividend payment would, but for the disposition, be treated as a United States real property interest capital gain to such non-U.S. holder, then such non-U.S. holder will be treated as having United States real property interest capital gain in an amount that, but for the disposition, would have been treated as United States real property interest capital gain.
A non-U.S. holder generally will not incur tax under FIRPTA with respect to gain realized upon a disposition of our shares of common stock as long as we are not a United States real property holding corporation during a specified testing period. If at least 50% of a REIT’s assets are United States real property interests, then the REIT will be a United States real property holding corporation. We may be a United States real property holding corporation based on our investment strategy. In that case, gains from the sale of our shares of common stock by a non-U.S. holder could be subject to a FIRPTA tax. However, a non-U.S. holder generally would not incur tax under FIRPTA on gain from the sale of our shares of common stock if we were a “domestically controlled qualified investment entity.” A domestically controlled qualified investment entity includes a REIT in which, at all times during a specified testing period, less than 50% in value of its shares are held directly or indirectly by non-U.S. persons.
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If our common stock is regularly traded on an established securities market, an additional exception to the tax under FIRPTA will be available with respect to our common stock, even if we do not qualify as a domestically controlled qualified investment entity at the time the non-U.S. holder sells our common stock. Under that exception, the gain from such a sale by such a non-U.S. holder will not be subject to tax under FIRPTA if (i) our common stock is treated as regularly traded under applicable Treasury Regulations on an established securities market and (ii) the non-U.S. holder owned, actually or constructively, 10% or less of our common stock at all times during a specified testing period. As noted above, we anticipate that our common stock will be treated as being regularly traded on an established securities market following this offering. If the gain on the sale of our common stock were taxed under FIRPTA, a non-U.S. holder would be taxed on that gain in the same manner as U.S. holders, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals.
In addition, distributions to “qualified shareholders” (generally, certain non-U.S. publicly traded shareholders that meet certain record-keeping and other requirements) are exempt from FIRPTA, except to the extent owners of such qualified shareholders that are not also qualified shareholders own, actually or constructively, more than 10% of our capital stock. Furthermore, distributions to “qualified foreign pension funds,” or entities all of the interests of which are held by “qualified foreign pension funds,” are exempt from FIRPTA. Non-U.S. holders should consult their tax advisors regarding the application of these rules.
Backup withholding will generally not apply to payments of dividends made by us or our paying agents, in their capacities as such, to a non-U.S. holder provided that the non-U.S. holder furnishes to the applicable withholding agent the required certification as to its non-U.S. status, such as providing a valid IRS Form W-8BEN or W-8BEN-E or W-8ECI, or certain other requirements are met. Notwithstanding the foregoing, backup withholding may apply if the applicable withholding agent has actual knowledge, or reason to know, that the holder is a U.S. person that is not an exempt recipient. Payments of the net proceeds from a disposition or a redemption effected outside the United States by a non-U.S. holder made by or through a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, information reporting (but not backup withholding) generally will apply to such a payment if the broker has certain connections with the U.S. unless the broker has documentary evidence in its records that the beneficial owner is a non-U.S. holder and specified conditions are met or an exemption is otherwise established. Payment of the net proceeds from a disposition by a non-U.S. holder of shares of common stock made by or through the U.S. office of a broker is generally subject to information reporting and backup withholding unless the non-U.S. holder certifies under penalties of perjury that it is not a U.S. person and satisfies certain other requirements, or otherwise establishes an exemption from information reporting and backup withholding.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or credited against the non-U.S. holder’s U.S. federal income tax liability if certain required information is timely furnished to the Service. Non-U.S. holders are urged to consult their own tax advisors regarding application of backup withholding to them and the availability of, and procedure for obtaining an exemption from, backup withholding.
Legislative or Other Actions Affecting REITs
The present U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time. The REIT rules are constantly under review by persons involved in the legislative process and by the Service and the U.S. Treasury Department, which may result in statutory changes as well as revisions to regulations and interpretations. Additionally, several of the tax considerations described herein are currently under review and are subject to change. Prospective stockholders are urged to consult with their own tax advisors regarding the effect of potential changes to the U.S. federal tax laws on an investment in our shares of common stock.
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Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act, or FATCA, imposes a U.S. federal withholding tax on certain types of payments made to “foreign financial institutions” and certain other non-U.S. entities unless certain due diligence, reporting, withholding, and certification obligation requirements are satisfied. FATCA generally imposes a U.S. federal withholding tax at a rate of 30% on dividends on, and gross proceeds from the sale or other disposition of, our stock if paid to a foreign entity unless either (i) the foreign entity is a “foreign financial institution” that undertakes certain due diligence, reporting, withholding, and certification obligations, or in the case of a foreign financial institution that is a resident in a jurisdiction that has entered into an intergovernmental agreement to implement FATCA, the entity complies with the diligence and reporting requirements of such agreement, (ii) the foreign entity is not a “foreign financial institution” and identifies certain of its U.S. investors, or (iii) the foreign entity otherwise is excepted under FATCA. If we determine withholding is appropriate in respect of our common stock, we may withhold tax at the applicable statutory rate, and we will not pay any additional amounts in respect of such withholding. However, under delayed effective dates provided for in the Treasury Regulations and other IRS guidance, such required withholding will not begin until January 1, 2019 with respect to gross proceeds from a sale or other disposition of our common stock.
If withholding is required under FACTA on a payment, holders of our common stock that otherwise would not be subject to withholding (or that otherwise would be entitled to a reduced rate of withholding) generally will be required to seek a refund or credit from the IRS to obtain the benefit of such exemption or reduction (provided that such benefit is available). Stockholders should consult their own tax advisors regarding the effect of FATCA on an investment in our common stock.
State, Local and Foreign Taxes
We and/or our subsidiaries and common stockholders may be subject to taxation by various states, localities or foreign jurisdictions, including those in which we, our subsidiaries, or our common stockholders transact business, own property or reside. We or our subsidiaries may own properties located in numerous jurisdictions and may be required to file tax returns in some or all of those jurisdictions. The state, local and foreign tax treatment of us and our common stockholders may differ from the U.S. federal income tax treatment of us and our common stockholders described above. Consequently, common stockholders should consult their tax advisors regarding the application and effect of state, local and foreign income and other tax laws upon an investment in our shares of common stock.
We may be considered a “party in interest” within the meaning of the Employee Retirement Income Security Act of 1974, as amended , or ERISA, and a “disqualified person” under corresponding provisions of the Code with respect to certain employee benefit plans. Certain transactions between an employee benefit plan and a party in interest or disqualified person may result in “prohibited transactions” within the meaning of ERISA and the Code, unless such transactions are effected pursuant to an applicable exemption. Any employee benefit plan or other entity subject to such provisions of ERISA or the Code proposing to invest in our Class A common stock should consult with its legal counsel.
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Ladenburg Thalmann & Co. Inc. is acting as the representative of each of the underwriters named below. Subject to the terms and conditions set forth in an underwriting agreement among us, our Operating Partnership and the underwriters, we have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us, the number of shares of Class A common stock set forth opposite its name below.
Underwriter |
Number of
Shares |
|||
Ladenburg Thalmann & Co. Inc. | ||||
Total |
8,750,000 |
Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed, severally and not jointly, to purchase all of the shares of our Class A common stock sold under the underwriting agreement if any of these shares of our Class A common stock are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated.
We have agreed to indemnify the several underwriters against certain liabilities including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares of our Class A common stock, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares of our Class A common stock, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer’s certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
Commissions and Discounts
The representative has advised us that the underwriters propose initially to offer the shares of our Class A common stock to the public at the public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share. The underwriters may allow, and the dealers may reallow, a discount not in excess of $ per share to other dealers. After this initial public offering, the public offering price, concession or any other term of this offering may be changed.
The following table shows the public offering price, underwriting discount and proceeds, before expenses, to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.
Per
Share |
Without
Option |
With
Option |
||||||||||
Public offering price | $ | $ | $ | |||||||||
Underwriting discount | $ | $ | $ | |||||||||
Proceeds, before expenses, to us | $ | $ | $ |
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The estimated expenses of this offering payable by us, exclusive of the underwriting discount, are approximately $ . We have agreed to reimburse the underwriters for fees and expenses of the counsel up to $20,000 related to the review by FINRA of the terms of the sale of the shares of the Class A common stock in this offering and up to $5,000 related to the preparation of a “blue sky” memorandum.
Over-allotment Option
We have granted an option to the underwriters to purchase up to 1,312,500 additional shares of our Class A common stock at the public offering price, less the underwriting discount. The underwriters may exercise this option for 30 days from the date of this prospectus solely to cover any over-allotments. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional shares of our Class A common stock proportionate to that underwriter’s initial amount reflected in the above table.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial public offering price, up to ( %) shares of common stock offered by this prospectus for sale to our executive officers, directors, employees, business associates and certain other persons associated with us. These persons must commit to purchase from an underwriter or selected dealer at the same time as the general public. The number of shares available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. Any reserved shares purchased by our executive officers or directors in this offering will be subject to the lock-up agreements described below. We are not making loans to any of our directors, employees or other persons to purchase such shares.
Mr. Gold intends to purchase 150,000 shares of our Class A common stock in this offering at the public offering price. In addition, certain of our other officers and directors may purchase shares of our Class A common stock in this offering at the public offering price. No underwriting discount will be paid on the shares of Class A common stock purchased by Mr. Gold and our other executive officers and directors in this offering.
No Sales of Similar Securities
We and each of our executive officers and directors have agreed with the underwriters not to offer, sell or otherwise dispose of any common stock or any securities convertible into or exercisable or exchangeable for or repayable with common stock (including limited partnership interests in our Operating Partnership) or any rights to acquire common stock for a period of 180 days after the date of this prospectus, without first obtaining the written consent of Ladenburg Thalmann & Co. Inc., the representative of the underwriters. Specifically, we and these other persons have agreed, with certain limited exceptions, not to directly or indirectly:
· | offer, pledge, sell or contract to sell any common stock; |
· | sell any option or contract to purchase any common stock; |
· | purchase any option or contract to sell any common stock; |
· | grant any option, right or warrant for the sale of any common stock; |
· | lend or otherwise transfer or dispose of any common stock; |
· | file or cause to be filed any registration statement related to the common stock; or |
· | enter into any swap or other agreement or transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of any common stock whether any such swap, agreement or transaction is to be settled by the delivery of shares of our common stock or other securities, in cash or otherwise. |
This lock-up provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock, including limited partnership interests in our Operating Partnership. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition.
Listing on the NYSE
We have filed an application to list our shares of Class A common stock on the NYSE under the symbol “IIPR.” In order to meet the requirements for listing on that exchange, the underwriters will undertake to sell a minimum number of shares of our Class A common stock to a minimum number of beneficial owners as required by the NYSE.
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Determination of Offering Price
Prior to this offering, there has been no public market for our shares of Class A common stock. The initial public offering price will be determined through negotiations between us and the representative. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are
· | estimates of the business potential and earnings prospects of the company; |
· | the history of, and the prospects for, our company and the industry in which we compete; |
· | an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues; |
· | the present state of our development, and |
· | the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. |
An active trading market for the shares may not develop. It is also possible that after this offering the shares will not trade in the public market at or above the initial public offering price.
Discretionary Sales
The underwriters do not expect to sell more than 5% of the shares in the aggregate to accounts over which they exercise discretionary authority.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of our shares of Class A common stock is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our Class A common stock. However, the representative may engage in transactions that stabilize the price of the Class A common stock, such as bids or purchases to peg, fix or maintain that price.
In connection with this offering, the underwriters may purchase and sell our Class A common stock in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters of a greater number of shares of our Class A common stock than they are required to purchase in this offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ over-allotment option described above. The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing shares of our Class A common stock in the open market. In determining the source of shares of our Class A common stock to close out the covered short position, the underwriters will consider, among other things, the price of shares of our Class A common stock available for purchase in the open market as compared to the price at which they may purchase shares of our Class A common stock through the over-allotment option. “Naked” short sales are sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares of our Class A common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our Class A common stock in the open market after pricing that could adversely affect investors who purchase in this offering. Stabilizing transactions consist of various bids for or purchases of shares of our Class A common stock made by the underwriters in the open market prior to the completion of this offering.
The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representative has repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.
Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our Class A common stock or preventing or retarding a decline in the market price of our Class A common stock. As a result, the price of our Class A common stock may be higher than the price that might otherwise exist in the open market. The underwriters may conduct these transactions on the NYSE, in the over-the-counter market or otherwise.
Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our Class A common stock. In addition, neither we nor any of the underwriters make any representation that the representative will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
Electronic Offer, Sale and Distribution of Shares
In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail. In addition, the underwriters may facilitate Internet distribution for this offering to certain of their Internet subscription customers. The underwriters may allocate a limited number of shares of our Class A common stock for sale to their online brokerage customers. An electronic prospectus is available on the Internet website maintained by the underwriters. Other than the prospectus in electronic format, the information on the underwriters’ websites is not part of this prospectus.
129 |
Other Relationships
Some of the underwriters and their affiliates have in the past and may in the future engage in investment banking and other commercial dealings in the ordinary course of business with us or our affiliates and may in the future receive customary fees and commissions for these transactions.
In addition, in the ordinary course of their business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
Sales Outside the United States
No action has been or will be taken in any jurisdiction (except in the United States) that would permit a public offering of the Class A common stock, or the possession, circulation or distribution of this prospectus or any other material relating to us or the Class A common stock in any jurisdiction where action for that purpose is required. Accordingly, the Class A common stock may not be offered or sold, directly or indirectly, and neither of this prospectus nor any other offering material or advertisements in connection with the Class A common stock may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of any such country or jurisdiction.
Each of the underwriters may arrange to sell Class A common stock offered by this prospectus in certain jurisdictions outside the United States, either directly or through affiliates, where they are permitted to do so.
Certain legal matters in connection with this offering will be passed upon for us by Foley & Lardner LLP, Tampa, Florida.
Certain legal matters in connection with this offering will be passed upon for the underwriters by DLA Piper LLP (US).
The consolidated balance sheet as of September 30, 2016 included in this prospectus and in the registration statement have been so included in reliance on the report of BDO USA, LLP, an independent registered public accounting firm, appearing elsewhere herein and in the registration statement, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We maintain a website at www.innovativeindustrialproperties.com. Information contained on, or accessible through our website is not incorporated by reference into and does not constitute a part of this prospectus or any other report or documents we file with or furnish to the SEC.
130 |
We have filed with the SEC a Registration Statement on Form S-11, including exhibits, schedules and amendments thereto, of which this prospectus is a part, under the Securities Act with respect to the shares of our Class A common stock to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and exhibits and schedules to the registration statement. For further information with respect to our company and the shares of our Class A common stock to be sold in this offering, reference is made to the registration statement, including the exhibits and schedules thereto. Statements contained in this prospectus as to the contents of any contract or other document referred to in this prospectus are not necessarily complete and, where that contract or other document has been filed as an exhibit to the registration statement, each statement in this prospectus is qualified in all respects by the exhibit to which the reference relates. Copies of the registration statement, including the exhibits and schedules to the registration statement, may be examined without charge at the public reference room of the SEC, 100 F Street, N.E., Washington, D.C. 20549. Information about the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0300. Copies of all or a portion of the registration statement can be obtained from the public reference room of the SEC upon payment of prescribed fees. Our SEC filings, including our registration statement, are also available to you, free of charge, on the SEC’s website, www.sec.gov.
AS A RESULT OF THIS OFFERING, WE WILL BECOME SUBJECT TO THE INFORMATION AND PERIODIC REPORTING REQUIREMENTS OF THE EXCHANGE ACT AND WILL FILE PERIODIC REPORTS AND OTHER INFORMATION WITH THE SEC. THESE PERIODIC REPORTS AND OTHER INFORMATION WILL BE AVAILABLE FOR INSPECTION AND COPYING AT THE SEC’S PUBLIC REFERENCE FACILITIES AND THE WEBSITE OF THE SEC REFERRED TO ABOVE.
131 |
INDEX TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS AND AUDITED CONSOLIDATED BALANCE SHEET
Innovative Industrial Properties, Inc.
F- 1 |
Innovative Industrial Properties, Inc.
Unaudited Pro Forma Consolidated Financial Statements
Innovative Industrial Properties, Inc. (together with its consolidated subsidiaries, the "Company," "we," "our" or "us") is a Maryland corporation that was formed on June 15, 2016. On August 22, 2016 and amended on September 16, 2016, the Company signed a definitive purchase agreement, in a sale leaseback transaction, to acquire one 127,000-square foot industrial property (the “Initial Property”) located in New York for a purchase price of approximately $30 million. The acquisition will be funded from the net proceeds of the Company’s planned $175 million underwritten initial public offering of shares of Class A common stock. The net proceeds of the initial public offering will be contributed to IIP Operating Partnership, LP, a Delaware limited partnership (the “Operating Partnership”), in exchange for limited partnership interests in the Operating Partnership. No debt will be issued or assumed in connection with the acquisition of the Initial Property.
The following unaudited pro forma consolidated financial statements are based on our historical audited consolidated balance sheet as of September 30, 2016, included elsewhere in the prospectus.
The unaudited pro forma consolidated balance sheet as of September 30, 2016 gives effect to the completion of the initial public offering, the Company’s acquisition of the Initial Property and the entry into the related lease agreement , and the payment of a consulting fee and reimbursement of other costs to IGP Advisers, LLC (a related party) from the net proceeds of the initial public offering, as if the closing of the offering and the acquisition of the Initial Property occurred on September 30, 2016. The unaudited pro forma consolidated statements of operations for the year ended December 31, 2015 and the nine months ended September 30, 2016 give effect to the completion of the initial public offering, the Company's acquisition of the Initial Property and the entry into the related lease agreement , the payment of a consulting fee and reimbursement of other costs to IGP Advisers, LLC from the net proceeds of the initial public offering , as if the completion of the offering and the acquisition of the Initial Property had occurred on January 1, 2015.
We have based the unaudited pro forma adjustments on available information and assumptions that we believe are reasonable. The following unaudited pro forma consolidated financial statements are presented for informational purposes only, and are not necessarily indicative of future results of operations or financial condition and should not be viewed as indicative of future results of operations or financial condition. The unaudited pro forma consolidated balance sheet is not necessarily indicative of what our actual financial position would have been as of September 30, 2016 assuming the offering, the acquisition of the Initial Property and related lease back had all been completed on September 30, 2016. The unaudited pro forma consolidated statements of operations are also not necessarily indicative of what our actual results of operations would have been for the year ended December 31, 2015 and for the nine months ended September 30, 2016 assuming the offering and the acquisition of the Initial Property and related leaseback were completed on January 1, 2015. In addition, the unaudited pro forma consolidated financial statements do not include any general and administrative expenses expected to be incurred to operate as a public company as such expenses are not yet known or factually supportable. The unaudited pro forma consolidated statements of operations also assume that the Company qualified and elected to be taxed as a real estate investment trust and therefore, no income taxes have been provided for the periods presented.
The unaudited pro forma consolidated financial statements should be read in conjunction with (i) the historical audited consolidated balance sheet of the Company and related notes thereto, and other financial information pertaining to the Company, including "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this prospectus and (ii) the "Risk Factors" and “Forward-Looking Statements" sections in this prospectus.
F- 2 |
Innovative Industrial Properties, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
September 30, 2016
Historical |
Adjustments
Related to the Offering |
Adjustments
Related to the Acquisition of the Initial Property |
As
Adjusted for
the Offering and Acquisition of Initial Property |
|||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 508 | $ | 161,200,000 | (1) | $ | (30,050,000 | ) (2) | $ | 132,712,982 | ||||||
(550,000 | ) (1) | 2,112,474 | (3) | |||||||||||||
Property escrow deposit | 375,000 | — | (375,000 | ) (2) | — | |||||||||||
Real estate investments | ||||||||||||||||
Buildings | — | — | 22,450,000 | (2) | 22,450,000 | |||||||||||
Land | — | — | 7,600,000 | (2) | 7,600,000 | |||||||||||
Total real estate investments | — | — | 30,050,000 | 30,050,000 | ||||||||||||
Total assets | $ | 375,508 | $ | 160,650,000 | $ | 1,737,474 | $ | 162,762,982 | ||||||||
Liabilities and stockholder’s equity | ||||||||||||||||
Liabilities: | ||||||||||||||||
Security deposit | $ | — | $ | — | $ | 2,112,474 | (3) | $ | 2,112,474 | |||||||
Due to IGP Advisers, LLC | 375,000 | — | (375,000 | ) (2) | — | |||||||||||
Total liabilities | 375,000 | — | 1,737,474 | 2,112,474 | ||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock,
$0.001 par value
50,000,000 shares authorized; none outstanding |
— | — | — | — | ||||||||||||
Class A common stock; par value $0.001 per share, 49,000,000 shares authorized; none issued and outstanding, historical, and 10,062,500 issued and outstanding, as adjusted | — | 10,063 | (1) | — | 10,063 | |||||||||||
Class B common stock, par value $0.001 per share, 1,000,000 shares authorized, 508,065 issued and outstanding, historical, and none issued and outstanding, as adjusted | 508 | (508 | ) (1) | — | — | |||||||||||
Additional paid-in-capital | — | 161,190,445 | (1) | — | 161,190,445 | |||||||||||
Accumulated deficit | — | (550,000 | ) (1) | — | (550,000 | ) | ||||||||||
Total stockholders’ equity | 508 | 160,650,000 | — | 160,650,508 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 375,508 | $ | 160,650,000 | $ | 1,737,474 | $ | 162,762,982 |
See notes to unaudited pro forma consolidated financial statements.
F- 3 |
Innovative Industrial Properties, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 2015
Historical
(4) |
Adjustments
Related to the Offering |
Adjustments
Related to the Acquisition of the Initial Property |
As
Adjusted for
the Offering and Acquisition of Initial Property |
|||||||||||||
Revenues: | ||||||||||||||||
Rental income | $ | — | $ | — | $ 5,628,169 | (5) | $ | 5,628,169 | ||||||||
Total revenues | — | — | 5,628,169 | 5,628,169 | ||||||||||||
Expenses: | ||||||||||||||||
Depreciation and amortization | — | — | 641,429 | (6) | 641,429 | |||||||||||
General and administrative | — | — | (8) | — | — | |||||||||||
Total expenses | — | — | 641,429 | 641,429 | ||||||||||||
Net income | $ | — | $ | — | $ | 4,986,740 | $ | 4,986,740 | ||||||||
Pro forma net income per share | $ | — | $ | — | $ | 2.51 | ||||||||||
Pro forma weighted average shares outstanding | 1,987,769 | (7) |
See notes to unaudited pro forma consolidated financial statements.
F- 4 |
Innovative Industrial
Properties, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the Nine Months Ended September 30, 2016
Historical
(4) |
Adjustments
Related to the Offering |
Adjustments
Related to the Acquisition of the Initial Property |
As
Adjusted for the
Offering and Acquisition of Initial Property |
|||||||||||||
Revenues: | ||||||||||||||||
Rental income | $ | — | $ | — | $ 4,221,127 | (5) | $ | 4,221,127 | ||||||||
Total revenues | — | — | 4,221,127 | 4,221,127 | ||||||||||||
Expenses: | ||||||||||||||||
Depreciation and amortization | — | — | 481,072 | (6) | 481,072 | |||||||||||
General and administrative | — | — | (8) | — | — | |||||||||||
Total expenses | — | — | 481,072 | 481,072 | ||||||||||||
Net income | $ | — | $ | — | $ | 3,740,055 | $ | 3,740,055 | ||||||||
Pro forma net income per share | $ | — | $ | — | $ | 1.88 | ||||||||||
Pro forma weighted average shares outstanding | 1,987,769 | (7) |
See notes to unaudited pro forma consolidated financial statements .
F- 5 |
Innovative Industrial
Properties, Inc.
Notes to Unaudited Pro Forma Consolidated Financial Statements
Adjustments to the Unaudited Pro Forma Consolidated Balance Sheet
The adjustments to the unaudited pro forma consolidated balance sheet as of September 30, 2016 are as follows:
(1) Represents (i) the Company’s issuance of 8,750,000 shares of Class A common stock for an aggregate of $175 million, less aggregate underwriting discounts and commissions of $12.25 million and estimated offering costs of $1.55 million, for net offering proceeds of $161.2 million, and (ii) costs of $550,000 paid to IGP Advisers, LLC (a related party), consisting of a consulting fee of $500,000 and a reimbursement of estimated costs of $50,000 (which includes organizational costs) previously paid by IGP Advisers, LLC on behalf of the Company. The consulting fee is being paid for services rendered to assist the Company in completing the initial public offering. Pursuant to the terms of the consulting agreement between the Company and IGP Advisers, LLC, the consulting fee increases by $3,300 for each day that the closing of the initial public offering occurs after November 15, 2016 (this potential increase is not reflected on the unaudited pro forma consolidated balance sheet and would further reduce cash and cash equivalents).
Upon completion of the offering, all of the 508,065 outstanding shares of Class B common stock will automatically convert into 1,312,500 shares of Class A common stock (assuming that the underwriters’ over-allotment option to purchase additional shares of Class A common stock is not exercised), which represents 15% of the total number of shares of Class A common stock issued in the Company’s initial public offering and approximately 13% of our total outstanding shares of Class A common stock immediately following the offering. Upon completion of the offering, we intend to award an aggregate of 27,500 restricted shares of Class A common stock to two of our executive officers under the Company’s 2016 Omnibus Incentive Plan. These 27,500 restricted shares are not reflected in outstanding shares.
(2) Represents the purchase price for the Initial Property of $30 million plus $50,000 of estimated transaction costs. The Company will enter into a triple net lease with the seller upon acquisition and this transaction will be an asset acquisition for accounting purposes. For asset acquisitions, the purchase price allocation is based upon the relative fair values of all assets acquired and acquisition costs are capitalized as incurred. The relative fair values are based upon information received by the Company to date as a result of pre-acquisition due diligence. The final accounting after acquisition will likely differ from the amounts reflected in the unaudited pro forma consolidated financial statements. Such differences will likely result in operating results and financial condition different than that reflected in the unaudited pro forma consolidated financial statements. There can be no assurance that such differences will not be material. IGP Advisers, LLC has advanced a $375,000 property escrow deposit on behalf of the Company, which is applied against the purchase price of the Initial Property, and reimbursed to IGP Advisers, LLC upon completion of the offering.
(3) Represents an initial security deposit of $2,112,474 that is contractually required to be paid by the tenant in the lease agreement for the Initial Property.
Adjustments to the Unaudited Pro Forma Consolidated Statement of Operations
The adjustments to the unaudited pro forma consolidated statements of operations for the year ended December 31, 2015 and for the nine months ended September 30, 2016 are as follows:
(4) The Company was formed on June 15, 2016. There were no results of operations for the Company for the period from inception to September 30, 2016.
(5) Represents the rental revenue, including property management fees, that is contractually required to be paid by the tenant, pursuant to the lease agreement for the Initial Property that will be executed upon the acquisition of the Initial Property. The amounts represent all “Rent,” as defined in the lease agreement, reflected on a straight-line rent basis. Straight-line rent included in rental revenues was $462,351 and $229,760 for the year ended December 31, 2015 and the nine months ended September 30, 2016, respectively.
F- 6 |
(6) Represents depreciation of buildings, calculated using the straight-line method, useful remaining lives of approximately 35 years.
(7) Represents the denominator in computing pro forma net income per share, which should include only those shares of Class A common stock whose proceeds are being reflected in pro forma adjustments in the unaudited pro forma consolidated statements of operations, such as proceeds used for acquisitions and offering costs. In the pro forma consolidated statements of income, uses of proceeds from the initial public offering are as follows: (i) $30 million to acquire the Initial Property; (ii) $50,000 of costs to complete the acquisition of the Initial Property; (iii) $1.55 million of estimated offering costs; and (iv) $550,000 of payments to IGP Advisers, LLC. The pro forma weighted average shares outstanding assumes (i) the issuance of 1,728,495 shares of Class A common stock at $20.00 per share, which provides sufficient cash (net of underwriting discounts and commissions) to purchase the Initial Property and pay offering and other costs; and (ii) the conversion of 508,065 shares of Class B common stock into 259,274 shares of Class A common stock (which is 15% of the shares of Class A common stock assumed to be issued in the initial public offering). The 8,074,731 additional shares of Class A common stock issued in the initial public offering and related transactions are excluded for purposes of the calculations of the pro forma net income per share (assuming that the underwriters’ over-allotment option to purchase additional shares of Class A common stock is not exercised and that no restricted shares are awarded).
(8) We expect annual costs for items such as legal, accounting, insurance, public company reporting, stockholder relations, public relations, travel, office rent, compensation, director fees and other general and administrative expenses associated with operating a public company to be between $5 million and $6 million. This estimate is based on management’s previous experience in managing public real estate investment trusts and is not reflected in the pro forma consolidated statements of income.
F- 7 |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Innovative Industrial Properties, Inc.
San Diego, California
We have audited the accompanying consolidated balance sheet of Innovative Industrial Properties, Inc. (the “Company”) as of September 30, 2016. This consolidated financial statement is the responsibility of the Company’s management. Our responsibility is to express an opinion on this consolidated financial statement based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether this consolidated financial statement is free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statement, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents fairly, in all material respects, the consolidated financial position of Innovative Industrial Properties, Inc. at September 30, 2016, in conformity with accounting principles generally accepted in the United States of America.
/s/BDO USA, LLP
Costa Mesa, California
October 17, 2016
F- 8 |
INNOVATIVE INDUSTRIAL PROPERTIES, INC.
CONSOLIDATED BALANCE SHEET
September 30, 2016
Assets | ||||
Cash | $ | 508 | ||
Property escrow deposit | 375,000 | |||
Total assets | $ | 375,508 | ||
Liabilities and stockholders’ equity | ||||
Liabilities | ||||
Due to IGP Advisers, LLC, a related party | $ | 375,000 | ||
Stockholders’ equity: | ||||
Preferred stock , par value $0.001 per share, 50,000,000 shares authorized, no shares issued and outstanding | — | |||
Common stock, par value $0.001 per share, 50,000,000 shares authorized, 508,065 Class B shares issued and outstanding | 508 | |||
Total liabilities and stockholders’ equity | $ | 375,508 |
The accompanying notes are an integral part of this consolidated balance sheet.
F- 9 |
INNOVATIVE INDUSTRIAL PROPERTIES, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
September 30, 2016
1. | Organization |
Innovative Industrial Properties, Inc. (“IIP”, “the Company”, “we”, “us”, and “our”), formerly known as Innovative Greenhouse Properties, Inc., incorporated in Maryland on June 15, 2016, was formed to own specialized industrial real estate assets primarily leased to tenants in the regulated medical-use cannabis industry.
The Company has no assets other than cash and a property escrow deposit. The property escrow deposit was paid by a related party on behalf of the Company (see Note 6). We have not yet commenced operations.
IIP Operating Partnership LP, a Delaware limited partnership (the “Operating Partnership”), which was formed on June 20, 2016, is a wholly-owned subsidiary of the Company. The Company is the sole general partner of the Operating Partnership and plans to conduct substantially all of its business through the Operating Partnership.
The consolidated balance sheet of Innovative Industrial Properties, Inc. was prepared from our books and records to present a fair statement as of the date presented.
2. | Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements |
Basis of Presentation. The consolidated balance sheet includes all of the accounts of the Company as of September 30, 2016, presented in accordance with U.S. generally accepted accounting principles.
Federal Income Taxes. We intend to elect and to operate our business so as to qualify, and to be taxed, as a real estate investment trust, or REIT, for U.S. federal income tax purposes, commencing with our taxable year ending D e cember 31, 2016. Under the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable income. Assuming our dividends equal or exceed our taxable net income, we generally will not be required to pay federal corporate income taxes on such income.
Use of Estimates. The preparation of the consolidated financial statement in conformity with U.S. generally accepted accounting principles requires management to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statement. Actual results may differ materially from these estimates and assumptions.
Acquisition of Real Estate Properties. Upon acquisition of property, we allocate the purchase price of the properties in accordance with the guidance issued by the Financial Accounting Standards Board (“FASB”) under FASB Accounting Standard Codification 805 – Business Combinations based upon the fair value of the assets acquired and liabilities assumed, which generally consists of land, buildings, site improvements, and furniture and fixtures. We allocate the purchase price to the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant.
If the acquisition does not meet the definition of a business, we record the acquisition as an asset acquisition. For asset acquisitions, the purchase price allocation is based upon the relative fair values of all assets acquired and liabilities assumed. For transactions that are business combinations, acquisition costs are expensed as incurred and restructuring costs that do not meet the definition of a liability at the acquisition date are expensed in periods subsequent to the acquisition date. For transactions that are an asset acquisition, acquisition costs are capitalized as incurred.
Contingent Organization, Offering and Transaction Costs. IGP Advisers, LLC (“IGP Advisers”), a company that is owned by Alan D. Gold, our executive chairman, Paul E. Smithers, our president, chief executive officer and a director nominee, and Gregory J. Fahey, our chief accounting officer, is funding our organization, certain offering and transaction costs. Organization costs incurred by the Company will be expensed. Offering costs incurred will be recorded to stockholders' equity as a reduction to additional paid-in capital. Transaction costs incurred by the Company will be accounted for as discussed above in Acquisition of Real Estate Properties. The Company has not recorded any organization, offering or transaction costs because such costs are not the Company’s liability unless and until the successful completion of the Company’s initial public offering has occurred (see Note 5). Through September 30, 2016, on behalf of the Company, IGP Advisers has incurred offering costs of $162,000, organization costs of $34,000 and transaction costs of $8,000 (see Note 8). In addition, $595,000 of offering costs have been incurred by the Company and are contingently payable upon the successful completion of the offering and are expected to be paid out of the offering proceeds.
F- 10 |
Depreciation and Amortization. We are required to make subjective assessments as to the estimated useful lives of our depreciable assets. We consider the period of future benefit of the assets to determine the appropriate estimated useful lives. Depreciation of our assets is charged to expense on a straight-line basis over the estimated useful lives. We depreciate the building and improvements over estimated useful lives ranging from 30 to 40 years.
We estimate the value of furniture and fixtures based on the assets’ depreciated replacement cost. We depreciate the fair value allocated to furniture and fixtures over estimated useful lives ranging from three to six years.
Provision for Impairment. Another significant judgment must be made as to if, and when, impairment losses should be taken on our properties when events or a change in circumstances indicate that the carrying amount of the asset may not be recoverable. A provision is made for impairment if estimated future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property. Key inputs that we utilize in this analysis include projected rental rates, estimated holding periods, historical sales and releases, capital expenditures, and property sales capitalization rates.
Revenue Recognition and Accounts Receivable . We intend to lease our properties under triple-net leases, an arrangement under which the tenant maintains the property while paying us rent. We anticipate that all leases will be accounted for as operating leases. Under this method, leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term. Any rental revenue contingent upon a tenant’s sales is recognized only after the tenant exceeds their sales breakpoint. Rental increases based upon changes in the consumer price index are recognized only after the changes in the indexes have occurred and are then applied according to the lease agreements. Contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses are included in tenant reimbursements in the period when such costs are incurred.
Recent Accounting Pronouncements.
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASU 2016-02”). Under this new standard the large majority of operating leases are expected to remain classified as operating leases, and lessors should continue to recognize lease income for those leases on a generally straight-line basis over the lease term. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018 using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the pending adoption of ASU 2016-02 on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation; Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The FASB issued ASU 2016-09 to simplify several aspects of the accounting for share-based payment transactions, including classification of awards as either equity or liabilities, estimation of forfeitures, and classification on the statement of cash flows. ASU 2016-09 is effective for interim and annual periods beginning after December 15, 2016, and early adoption is permitted. ASU 2016-09 is not expected to have a material impact on our consolidated financial statements.
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 outlines a comprehensive model for companies to use in accounting for revenue arising from contracts with customers, and will apply to transactions such as the sale of real estate. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. ASU 2014-09 is not expected to have a material impact on our consolidated financial statements.
3. | Common Stock |
The Company is authorized to issue up to 50,000,000 shares of common stock, par value $0.001 per share, consisting of (a) 49,000,000 shares of Class A common stock (the “Class A Common Stock”) and (b) 1,000,000 shares of Class B common stock (the “Class B Common Stock”). In June 2016, we issued 508,065 shares of Class B Common Stock for $508 to certain of our executive officers and directors. No Class A Common Stock has been issued.
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4. | Preferred Stock |
The Company is authorized to issue up to 50,000,000 shares preferred stock, par value $0.001 per share. No shares of preferred stock have been issued.
5. | Initial Public Offering |
The Company intends to offer for sale shares of Class A Common Stock through the filing of a registration statement on Form S-11 filed with the U.S. Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended. Upon completion of the initial public offering, all of our outstanding shares of Class B Common Stock will be converted to 15% of the Class A Common Stock issued in the public offering, which equates to approximately 13% the total outstanding shares of Class A Common Stock immediately following the offering.
6. | Property Acquisition |
On August 22, 2016 and as amended on September 16, 2016, we entered into a definitive purchase agreement to acquire a 127,000 square foot (unaudited) industrial property located in New York, (the “Initial Property”), for an aggregate purchase price of $30 million. The purchase price for the Initial Property was determined by negotiation with the seller after taking into consideration the expected annualized lease revenue, expected lease, operating history, age and condition of the property, and other relevant factors. The definitive agreement provides for a due diligence period during which we have the right to access and inspect the property and may terminate the agreement if we determine that the property does not meet our investment criteria. Following the diligence period, we have agreed to purchase the property “as is,” subject to all faults and conditions thereon. The closing of the purchase is subject to the completion of the initial public offering and customary closing conditions. The purchase agreement provides that closing is to occur within 30 days after the expiration of the due diligence period and the agreement is terminable at the option of either party thereafter. As required by the purchase agreement for the Initial Property, a $375,000 escrow deposit, to be credited against the total purchase price of the Initial Property, has been funded by IGP Advisers.
7. | Common Stock Incentive Plan |
In June 2016, our Board of Directors adopted our 2016 Omnibus Incentive Plan, or the 2016 Plan, to enable us to motivate, attract and retain the services of directors, employees and consultants considered essential to our long-term success. The 2016 Plan offers our directors, employees and consultants an opportunity to own our stock or rights that will reflect our growth, development and financial success. Under the terms of the 2016 Plan, the aggregate number of shares of our common stock subject to options, restricted stock, stock appreciation rights, restricted stock units and other awards, will be no more than 1,000,000 shares. The 2016 Plan has a term of ten years from the date it was adopted by our Board of Directors. The plan will become effective on the date on which the shares of the Company’s voting common stock are first sold to the public pursuant to an effective registration statement filed by the Company under the Securities Act of 1933, as amended.
8. | Subsequent Events |
The Company has updated its evaluation of subsequent events through October 17, 2016, the date the consolidated balance sheet is being issued.
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On October 17, 2016, we entered into a consulting agreement with IGP Advisers. Per the consulting agreement, upon the completion of the Company’s initial public offering, a consultant fee of $500,000 will be paid to IGP Advisers for services rendered to assist the Company in completing the offering. Per the consulting agreement, the fee increases by $3,300 for each day that the closing of the offering occurs after November 15, 2016. In the event that an initial public offering is not successful, a $5,000 fee will be due to IGP Advisers under this agreement.
On October 17, 2016, we entered into a funding agreement with IGP Advisers. Per the funding agreement, IGP Advisers formally agreed to continue funding costs incurred by the Company, prior to, on and after the date of the agreement. These costs include, but are not limited to, costs relating to the Company’s organization, fundraising and evaluation of potential properties for acquisition (collectively, “Costs”). Upon the completion of the Company’s initial public offering, IGP Advisers shall be entitled to reimbursement from the Company for the Costs. Prior to execution of the funding agreement, the Company and IGP Advisers had been operating with the understanding of the terms of the funding agreement. Through September 30, 2016, on behalf of the Company, IGP Advisers has incurred offering costs of $162,000, organization costs of $34,000 and transaction costs of $8,000 (see Note 2 - Contingent Organization, Offering and Transaction Costs). In addition, $595,000 of offering costs have been incurred by the Company and are contingently payable upon the successful completion of the offering and are expected to be paid out of the offering proceeds. In the event that an initial public offering is not successful, no amounts will be due to IGP Advisers under this agreement.
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Through and including , 2016 (the 25th day after the date of this prospectus), all dealers that effect transactions in shares of our Class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Class A Common Stock
PROSPECTUS
Ladenburg Thalmann
, 2016
PART
II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses (other than underwriting discounts and commissions) we will incur in connection with the issuance and distribution of the securities to be registered pursuant to this registration statement. All amounts other than the SEC registration fee and FINRA filing fee have been estimated.
Item 32. Sales to Special Parties.
On June 15, 2016, we issued 508,065 shares of our Class B common stock to certain of our executive officers and directors in connection with the initial capitalization of our company for an aggregate purchase price of $508. See the section entitled “Certain Relationships and Related Transactions.” The issuance of such shares was effected in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act and Regulation D thereunder.
Item 33. Recent Sales of Unregistered Securities
On June 15, 2016, we issued 508,065 shares of our Class B common stock to certain of our executive officers and directors in connection with the initial capitalization of our company for an aggregate purchase price of $508. See the section entitled “Certain Relationships and Related Transactions.” The issuance of such shares was effected in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act and Regulation D thereunder.
Item 34. Indemnification of Directors and Officers.
Maryland law permits a Maryland corporation to include in its charter a provision eliminating the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty that was established by a final judgment and was material to the cause of action. Our charter contains a provision that eliminates the liability of our directors and officers to the maximum extent permitted by Maryland law.
The MGCL requires us (unless our charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service in that capacity. The MGCL permits us to indemnify our present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened to be made a party by reason of their service in those or other capacities unless it is established that:
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· | act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty; |
· | the director or officer actually received an improper personal benefit in money, property or services; or |
· | in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. |
Under the MGCL, we may not indemnify a director or officer in a suit by us or in our right in which the director or officer was adjudged liable to us or in a suit in which the director or officer was adjudged liable on the basis that personal benefit was improperly received. Nevertheless, a court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct or was adjudged liable on the basis that personal benefit was improperly received. However, indemnification for an adverse judgment in a suit by us or in our right, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses.
In addition, the MGCL permits us to advance reasonable expenses to a director or officer upon our receipt of:
· | written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by us; and |
· | a written undertaking by the director or officer or on the director’s or officer’s behalf to repay the amount paid or reimbursed by us if it is ultimately determined that the director or officer did not meet the standard of conduct. |
Our charter authorizes us to obligate ourselves and our bylaws obligate us, to the fullest extent permitted by Maryland law in effect from time to time, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to:
· | any present or former director or officer who is made or threatened to be made a party to or witness in the proceeding by reason of his or her service in that capacity; or |
· | any individual who, while a director or officer of our company and at our request, serves or has served as a director, officer, partner, manager, member or trustee of another corporation, REIT, partnership, limited liability company, joint venture, trust, employee benefit plan or any other enterprise and who is made or threatened to be made a party to or witness in the proceeding by reason of his or her service in that capacity. |
Our charter and bylaws also permit us to indemnify and advance expenses to any individual who served any predecessor of our company, in any of the capacities described above and any employee or agent of our company or a predecessor of our company.
We expect to enter into indemnification agreements with each of our executive officers and directors that provide for indemnification to the maximum extent permitted by Maryland law.
Insofar as the foregoing provisions permit indemnification of directors, officers or persons controlling us for liability arising under the Securities Act, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
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Item 35. Treatment of Proceeds from Stock Being Registered.
None.
Item 36. Financial Statements and Exhibits
(a) | Financial Statements: |
The following financial statements of the Registrant are incorporated into this registration statement by reference:
(b) | Exhibits: |
The list of exhibits filed with or incorporated by reference in this Registration Statement is set forth in the Exhibit Index following the signature page herein.
Item 37. Undertakings
(a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to provide to the underwriters at the closing, as specified in the underwriting agreement, certificates in such denomination and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
(c) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(ii) For the purposes determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form S-11 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in San Diego, state of California, on the 17th day of October, 2016.
INNOVATIVE INDUSTRIAL PROPERTIES, INC. | ||
By: | /s/ Paul E. Smithers | |
Paul E. Smithers | ||
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
NAME | CAPACITY | DATE | ||
/s/ Alan D. Gold | Executive Chairman | October 17, 2016 | ||
Alan D. Gold | ||||
/s/ Paul E. Smithers | President and Chief Executive Officer (Principal Executive Officer) | October 17, 2016 | ||
Paul E. Smithers | ||||
/s/ Robert M. Sistek | Chief Financial Officer and Executive Vice President, Investments (Principal Financial Officer) | October 17, 2016 | ||
Robert M. Sistek | ||||
/s/ Gregory J. Fahey |
Chief Accounting Officer and Treasurer (Principal Accounting Officer) | October 17, 2016 | ||
Gregory J. Fahey | ||||
/s/ Gary A. Kreitzer | Director | October 17, 2016 | ||
Gary A. Kreitzer |
S- 1 |
EXHIBIT INDEX
The following exhibits are included in this registration statement on Form S-11 (and are numbered in accordance with Item 601 of Regulation S-K).
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Exhibit 3.1
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
INNOVATIVE INDUSTRIAL PROPERTIES, INC.
FIRST: Innovative Industrial Properties, Inc., a Maryland corporation, desires to amend and restate its charter as currently in effect and as hereinafter amended.
SECOND: The following provisions are all the provisions of the charter currently in effect and as hereinafter amended:
ARTICLE I
NAME
The name of the corporation is Innovative Industrial Properties, Inc. (the “ Company ”).
ARTICLE II
PURPOSES AND POWERS
The purposes for which the Company is formed are to engage in any lawful act or activity (including, without limitation or obligation, qualifying and engaging in business as a real estate investment trust under Sections 856 through 860, or any successor sections, of the Internal Revenue Code of 1986, as amended (the “ Code ”)), for which corporations may be organized under the MGCL and the general laws of the State of Maryland as now or hereafter in force.
ARTICLE III
RESIDENT AGENT AND PRINCIPAL OFFICE
The address of the Company’s registered office in the State of Maryland is 7 St. Paul Street, Suite 820, Baltimore, Maryland 21202, and the name of the Company's registered agent at such address is CSC-Lawyers Incorporating Service Company. The address of the Company’s principal office in the State of Maryland is c/o CSC-Lawyers Incorporating Service Company, 7 St. Paul Street, Suite 820, Baltimore, Maryland 21202. The Company may have such other offices and places of business within or outside the State of Maryland as the Board may from time to time determine.
ARTICLE IV
DEFINITIONS
As used in the Charter, the following terms shall have the following meanings unless the context otherwise requires:
“ BOARD ” means the Board of Directors of the Company.
“ BYLAWS ” means the Bylaws of the Company, as amended from time to time.
“ CHARTER ” means the charter of the Company, as amended from time to time.
“ CLASS A COMMON STOCK ” shall have the meaning as provided in Section 5.1 herein.
“ CLASS B COMMON STOCK ” shall have the meaning as provided in Section 5.1 herein.
“ CODE ” shall have the meaning as provided in Article II herein.
“ COMMON STOCK ” shall have the meaning as provided in Section 5.1 herein.
“ COMPANY ” shall have the meaning as provided in Article I herein.
“ CONVERTED CLASS A COMMON STOCK ” shall have the meaning as provided in Section 5.2(vi) herein.
“ DIRECTOR ” means a director of the Company.
“ DISTRIBUTIONS ” means any distributions (as such term is defined in Section 2-301 of the MGCL) pursuant to Section 5.2(iii) hereof, by the Company to owners of Shares, including distributions that may constitute a return of capital for federal income tax purposes.
“ ESCROW PERIOD ” shall have the meaning as provided in Section 5.2(vi) herein.
“ Initial Multiplier ” shall have the meaning as provided in Section 5.2(vi) herein.
“ IPO ” shall have the meaning as provided in Section 5.2(vi) herein.
“ MGCL ” means the Maryland General Corporation Law, as in effect from time to time.
“ OVER-ALLOTMENT OPTION ” shall have the meaning as provided in Section 5.2(vi) herein.
“ PERSON ” means an individual, corporation, partnership, limited liability company, estate, trust (including a trust qualified under Sections 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other legal entity and also includes a “group” as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and a group to which an Excepted Holder Limit (as defined in Section 5.7(i) hereof) applies.
“ PREFERRED STOCK ” shall have the meaning as provided in Section 5.1 herein.
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“ REIT ” means a real estate investment trust under the REIT Provisions of the Code.
“ REIT PROVISIONS OF THE CODE ” means Sections 856 through 860 of the Code and any successor or other provisions of the Code relating to real estate investment trusts (including provisions as to the attribution of ownership of beneficial interests therein) and the regulations promulgated thereunder.
“ SECURITIES ” means any of the following issued by the Company, as the text requires: Shares, any other stock, shares or other evidences of equity or beneficial or other interests, voting trust certificates, bonds, debentures, notes or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as “securities” or any certificates of interest, shares or participations in, temporary or interim certificates for, receipts for, guarantees of, or warrants, options or rights to subscribe to, purchase or acquire, any of the foregoing.
“ SHARES ” means shares of stock of the Company of any class or series, including Common Stock and Preferred Stock.
“ STOCKHOLDERS ” means the holders of record of the Shares as maintained in the books and records of the Company or its transfer agent.
ARTICLE V
STOCK
SECTION 5.1 AUTHORIZED SHARES . The total number of Shares that the Company shall have authority to issue, each with a par value of $0.001 per share, is 100,000,000 Shares, consisting of (a) 50,000,000 shares of common stock (the “ Common Stock ”), of which (i) 49,000,000 shares are designated as Class A Common Stock (the “ Class A Common Stock ”) and (ii) 1,000,000 shares are designated as Class B Common Stock (the “ Class B Common Stock ”), and (b) 50,000,000 shares of preferred stock (the “ Preferred Stock ”). The aggregate par value of all authorized shares of stock having par value is $100,000. If Shares of one (1) class of stock are classified or reclassified into Shares of another class of stock pursuant to Section 5.2(ii) or Section 5.3 of this Article V, the number of authorized Shares of the former class shall be automatically decreased and the number of Shares of the latter class shall be automatically increased, in each case by the number of Shares so classified or reclassified, as the case may be, so that the aggregate number of Shares of all classes that the Company has authority to issue shall not be more than the total number of Shares set forth in the first sentence of this Section 5.1. The Board, with the approval of a majority of the entire Board and without any action by the Stockholders, may amend the Charter from time to time to increase or decrease the aggregate number of Shares or the number of Shares of any class or series that the Company has authority to issue.
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SECTION 5.2 COMMON STOCK . The following is a description of the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of shares of Common Stock of the Company:
(i) COMMON STOCK SUBJECT TO TERMS OF PREFERRED STOCK . The shares of Common Stock shall be subject to the express terms of any series of Preferred Stock.
(ii) DESCRIPTION . Subject to Section 5.7 hereof and except as may otherwise be specified in the Charter, each share of Common Stock shall entitle the holder thereof to one vote. The Board may classify or reclassify any unissued shares of Common Stock (whether or not such shares have been previously classified or reclassified) from time to time into one or more classes or series of stock by setting or changing in any one or more respects the class and series designations of shares of capital stock or setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption of such shares of stock.
(iii) DISTRIBUTION RIGHTS . The Board from time to time may authorize the Company to declare and pay to Stockholders such dividends or other Distributions in cash or other assets of the Company or in Securities of the Company, including Shares of one class payable to holders of Shares of another class, or from any other source as the Board in its discretion shall determine. The Board shall endeavor to authorize the Company to declare and pay such dividends and other Distributions as shall be necessary for the Company to qualify as a REIT under the REIT Provisions of the Code unless the Board has determined, in its sole discretion, that qualification as a REIT is not in the best interests of the Company; provided, however, Stockholders shall have no right to any dividend or other Distribution unless and until authorized by the Board and declared by the Company. The exercise of the powers and rights of the Board pursuant to this section shall be subject to the provisions of any class or series of Shares at the time outstanding. The receipt by any Person in whose name any Shares are registered on the records of the Company or by his or her duly authorized agent shall be a sufficient discharge for all dividends or other Distributions payable or deliverable in respect of such Shares and from all liability to see to the application thereof.
(iv) RIGHTS UPON LIQUIDATION . In the event of any voluntary or involuntary liquidation, dissolution or winding up, or any distribution of the assets of the Company, the aggregate assets available for distribution to holders of shares of Common Stock shall be determined in accordance with applicable law. Each holder of shares of Common Stock of a particular class shall be entitled to receive, ratably with each other holder of shares of Common Stock of such class, that portion of such aggregate assets available for distribution ratably in proportion to the number of shares of Common Stock held by them (on an as-converted basis with respect to any outstanding shares of Class B Common Stock).
(v) VOTING RIGHTS . Except as may be provided otherwise in the Charter, and subject to the express terms of any class or series of Preferred Stock hereafter classified or reclassified, the holders of shares of Common Stock shall have the exclusive right to vote on all matters (as to which a common Stockholder shall be entitled to vote pursuant to applicable law) at all meetings of the Stockholders. Shares of Common Stock shall not have cumulative voting rights.
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(vi) CLASS B COMMON STOCK . Immediately preceding (and subject to) the closing of the Company’s initial public offering of shares of Class A Common Stock registered pursuant to the Securities Act of 1933, as amended (the “ IPO ”), each issued and outstanding share of Class B Common Stock shall automatically convert, without any further action by the holder of such shares, into such number of shares of Class A Common Stock as is equal to the initial multiplier as determined in accordance with the formula below (the “ Initial Multiplier ”):
(A*B)/C = Initial Multiplier
A = the maximum number of shares issuable in the IPO (including any shares of Class A Common Stock subject to the underwriters’ over-allotment option (the “ Over-Allotment Option ”)).
B = 0.15.
C = the total number of issued and outstanding shares of Class B Common Stock issued and outstanding immediately before the time of conversion.
Such shares of Class A Common Stock (the “ Converted Class A Common Stock ”) shall be held in escrow by the Company for thirty-one (31) days following the date of closing of the IPO (the “ Escrow Period ”) and shall be subject to forfeiture to the extent that less than all of the maximum number of shares of Class A Common Stock (including shares subject to the Over-Allotment Option) are actually issued in the IPO within thirty (30) days after the date of the closing of the IPO. In the event less than the maximum number of shares of Class A Common Stock are sold in the IPO, each holder of the converted shares of Class B Common Stock shall be deemed immediately, and without any further action by such holder, to have forfeited such number of shares of the Converted Class A Common Stock as would result in such holder owning, post-forfeiture, a number of shares of Converted Class A Common Stock equal to what such holder would have received if the Initial Multiplier had been based on the actual number of shares of Class A Common Stock issued in the IPO in lieu of the maximum number. As soon as practicable following the Escrow Period, the shares of Converted Class A Common Stock that were not forfeited shall be released from escrow by the Company. For so long as any shares of Class B Common Stock shall remain outstanding, the Company shall not, without the prior vote or written consent of the holders of a majority of the shares of Class B Common Stock then outstanding, voting separately as a single class, amend, alter or repeal any provision of this Charter, whether by merger, consolidation or otherwise, if such amendment, alteration or repeal would alter or change the powers, preferences or relative, participating, optional or other or special rights of the Class B Common Stock.
SECTION 5.3 PREFERRED STOCK . The Board may classify any unissued shares of Preferred Stock and reclassify any previously classified but unissued shares of Preferred Stock of any series from time to time, into one or more classes or series of Shares.
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SECTION 5.4 CLASSIFIED OR RECLASSIFIED SHARES . Prior to issuance of classified or reclassified Shares of any class or series, the Board by resolution shall: (a) designate that class or series to distinguish it from all other classes and series of Shares; (b) specify the number of Shares to be included in the class or series; (c) set or change, subject to the provisions of Section 5.7 and subject to the express terms of any class or series of Shares outstanding at the time, the preferences, conversion or other rights, voting powers (including the ability to grant exclusive voting rights on a Charter amendment that would alter contract rights, as expressly set forth in the Charter, only of the specified class or series of stock), restrictions, including without limitation, restrictions as to transferability, limitations as to dividends or other Distributions, qualifications and terms and conditions of redemption for each class or series; and (d) cause the Company to file articles supplementary with the State Department of Assessments and Taxation of Maryland. Any of the terms of any class or series of Shares set or changed pursuant to clause (c) of this Section 5.4 may be made dependent upon facts or events ascertainable outside the Charter (including determinations by the Board or other facts or events within the control of the Company) and may vary among holders thereof, provided that the manner in which such facts, events or variations shall operate upon the terms of such class or series of Shares is clearly and expressly set forth in the articles supplementary or other Charter document.
SECTION 5.5 STOCKHOLDERS’ CONSENT IN LIEU OF MEETING . Any action required or permitted to be taken at any meeting of the Stockholders may be taken without a meeting by consent, in writing or by electronic transmission, in any manner and by the vote permitted by the MGCL and set forth in the Bylaws.
SECTION 5.6 CHARTER AND BYLAWS . The rights of all Stockholders and the terms of all Shares are subject to the provisions of the Charter and the Bylaws. The Board shall have the exclusive power to adopt, alter or repeal any provision of the Bylaws and to make new Bylaws.
SECTION 5.7 RESTRICTIONS ON OWNERSHIP AND TRANSFER .
(i) DEFINITIONS . For purposes of this Section 5.7, the following terms shall have the following meanings:
“ AGGREGATE SHARE OWNERSHIP LIMIT ” means 9.8% (in value or number of Shares, whichever is more restrictive) of the aggregate of the outstanding Shares. The value and number of the outstanding Shares shall be determined by the Board in good faith, which determination shall be conclusive for all purposes hereof.
“ BENEFICIAL OWNERSHIP ” means ownership of Shares by a Person, whether the interest in the Shares is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms “Beneficial Owner,” “Beneficially Owns” and “Beneficially Owned” shall have the correlative meanings.
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“ BUSINESS DAY ” means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close.
“ CHARITABLE BENEFICIARY ” means one or more beneficiaries of the Trust as determined pursuant to Section 5.7(iii)(f), provided that each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.
“ CONSTRUCTIVE OWNERSHIP ” means ownership of Shares by a Person, whether the interest in the Shares is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. The terms “Constructive Owner,” “Constructively Owns” and “Constructively Owned” shall have the correlative meanings.
“ EXCEPTED HOLDER ” means a Stockholder for whom an Excepted Holder Limit is created by the Board pursuant to Section 5.7(ii)(g).
“ EXCEPTED HOLDER LIMIT ” means, provided that the affected Excepted Holder agrees to comply with the requirements established by the Board pursuant to Section 5.7(ii)(g), and subject to adjustment pursuant to Section 5.7(ii)(h), the percentage limit established by the Board pursuant to Section 5.7(ii)(g).
“ MARKET PRICE ” on any date means, with respect to any class or series of outstanding Shares, the Closing Price for such Shares on such date. The “ Closing Price ” on any date shall mean the last sale price for such Shares, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, for such Shares, in either case as reported on the principal national securities exchange on which such Shares are listed or admitted to trading or, if such Shares are not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the principal automated quotation system that may then be in use or, if such Shares are not quoted by any such system, the average of the closing bid and asked prices as furnished by a professional market maker making a market in such Shares selected by the Board or, in the event that no trading price is available for such Shares, the fair market value of the Shares, as determined in good faith by the Board.
“ NYSE ” means the New York Stock Exchange.
“OWNERSHIP LIMIT” means (i) with respect to shares of Common Stock, 9.8% (in value or number of Shares, whichever is more restrictive) of the outstanding shares of Common Stock of the Company; and (ii) with respect to any class or series of shares of Preferred Stock, 9.8% (in value or number of Shares, whichever is more restrictive) of the outstanding shares of such class or series of Preferred Stock of the Company. The number and value of the outstanding Shares of the Company shall be determined by the Board in good faith, which determination shall be conclusive for all purposes hereof. For purposes of determining the percentage ownership of Shares by any Person, Shares that may be acquired upon conversion, exchange or exercise of any Securities of the Company directly or constructively held by such Person, but not Shares issuable with respect to the conversion, exchange or exercise of Securities for the Company held by other Persons, shall be deemed to be outstanding prior to conversion, exchange or exercise.
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“ PROHIBITED OWNER ” means, with respect to any purported Transfer, any Person who, but for the provisions of Section 5.7, would Beneficially Own or Constructively Own Shares in violation of Section 5.7(ii)(a), and if appropriate in the context, shall also mean any Person who would have been the record owner of the Shares that the Prohibited Owner would have so owned.
“ RESTRICTION TERMINATION DATE ” means the first day on which the Board determines pursuant to Section 7.3 hereof that it is no longer in the best interests of the Company to attempt to, or continue to, qualify as a REIT or that compliance with the restrictions and limitations on Beneficial Ownership, Constructive Ownership and Transfers of Shares set forth herein is no longer required in order for the Company to qualify as a REIT.
“ TRANSFER ” means any issuance, sale, transfer, gift, assignment, devise or other disposition, as well as any other event that causes any Person to acquire Beneficial Ownership or Constructive Ownership of Shares or the right to vote or receive dividends on Shares, or any agreement to take any such actions or cause any such events, including (a) the granting or exercise of any option (or any disposition of any option), (b) any disposition of any Securities or rights convertible into or exchangeable for Shares or any interest in Shares or any exercise of any such conversion or exchange right and (c) Transfers of interests in other entities that result in changes in Beneficial or Constructive Ownership of Shares; in each case, whether voluntary or involuntary, whether owned of record, Constructively Owned or Beneficially Owned and whether by operation of law or otherwise. The terms “Transferring” and “Transferred” shall have the correlative meanings.
“ TRUST ” means any trust provided for in Section 5.7(iii)(a).
“ TRUSTEE ” means the Person unaffiliated with the Company and a Prohibited Owner that is appointed by the Company to serve as trustee of the Trust.
(ii) SHARES .
(a) OWNERSHIP LIMITATIONS . During the period commencing on the date that the Company elects to qualify for federal income tax treatment as a REIT and prior to the Restriction Termination Date, but subject to Section 5.8:
(I) BASIC RESTRICTIONS .
(A) (1) Except as set forth in any articles supplementary creating any class or series of Shares, no Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own Shares in excess of the Aggregate Share Ownership Limit, (2) no Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own Shares in Excess of the Ownership Limit, and (3) no Excepted Holder shall Beneficially Own or Constructively Own Shares in excess of the Excepted Holder Limit for such Excepted Holder.
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(B) No Person shall Beneficially or Constructively Own Shares to the extent that such Beneficial or Constructive Ownership of Shares would result in the Company being “closely held” within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise failing to qualify as a REIT (including, but not limited to, Beneficial or Constructive Ownership that would result in the Company owning (actually or Constructively) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by the Company from such tenant would cause the Company to fail to satisfy any of the gross income requirements of Section 856(c) of the Code).
(C) No Person shall Transfer any Shares if, as a result of the Transfer, the Shares would be Beneficially Owned by less than 100 Persons (determined without reference to the rules of attribution under Section 544 of the Code). Notwithstanding any other provisions contained herein (but subject to Section 5.8), any Transfer of Shares that, if effective, would result in Shares being Beneficially Owned by less than 100 Persons (determined under the principles of Section 856(a)(5) of the Code) shall be void ab initio , and the intended transferee shall acquire no rights in such Shares.
(II) TRANSFER IN TRUST . If any Transfer of Shares occurs which, if effective, would result in any Person Beneficially Owning or Constructively Owning Shares in violation of Section 5.7(ii)(a)(I)(A) or (B),
(A) then that number of Shares the Beneficial or Constructive Ownership of which otherwise would cause such Person to violate Section 5.7(ii)(a)(I)(A) or (B) (rounded up to the nearest whole share) shall be automatically transferred to a Trust for the benefit of a Charitable Beneficiary, as described in Section 5.7(iii), effective as of the close of business on the Business Day prior to the date of such Transfer, and such Person shall acquire no rights in such Shares; or
(B) if the transfer to the Trust described in clause (A) of this sentence would not be effective for any reason to prevent the violation of Section 5.7(ii)(a)(I)(A) or (B) then the Transfer of that number of Shares that otherwise would cause any Person to violate Section 5.7(ii)(a)(I)(A) or (B) shall be void ab initio , and the intended transferee shall acquire no rights in such Shares.
(III) To the extent that, upon a transfer of Shares pursuant to Section 5.7(ii)(a)(II), a violation of any provision of this Section 5.7 would nonetheless be continuing (for example, where the ownership of Shares by a single Trust would violate the 100 stockholder requirement applicable to REITs), then Shares shall be transferred to the number of Trusts, each having a distinct Trustee and one or more Charitable Beneficiaries that are distinct from those of each other Trust, such that there is not violation of any provisions of this Section 5.7.
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(b) REMEDIES FOR BREACH . If the Board or any duly authorized committee thereof shall at any time determine in good faith that a Transfer or other event has taken place that results in a violation of Section 5.7(ii)(a) or that a Person intends to acquire or has attempted to acquire Beneficial or Constructive Ownership of any Shares in violation of Section 5.7(ii)(a) (whether or not such violation is intended), the Board or a committee thereof shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or other event, including, without limitation, causing the Company to redeem Shares, refusing to give effect to such Transfer on the books of the Company or instituting proceedings to enjoin such Transfer or other event; provided, however, that any Transfer or attempted Transfer or other event in violation of Section 5.7(ii)(a) shall automatically result in the transfer to the Trust described above, and, where applicable, such Transfer (or other event) shall be void ab initio as provided above irrespective of any action (or non-action) by the Board or a committee thereof.
(c) NOTICE OF RESTRICTED TRANSFER . Any Person who acquires or attempts or intends to acquire Beneficial Ownership or Constructive Ownership of Shares that will or may violate Section 5.7(ii)(a)(I)(A) or (B) or any Person who would have owned Shares that resulted in a transfer to the Trust pursuant to the provisions of Section 5.7(ii)(a)(II) shall immediately give written notice to the Company of such event, or in the case of such a proposed or attempted transaction, give at least 15 days prior written notice, and shall provide to the Company such other information as the Company may request in order to determine the effect, if any, of such Transfer on the Company’s status as a REIT.
(d) OWNERS REQUIRED TO PROVIDE INFORMATION . Prior to the Restriction Termination Date:
(I) every owner of more than five percent (or such lower percentage as required by the Code or the Treasury Regulations promulgated thereunder) of the outstanding Shares, within 30 days after the end of each taxable year, shall give written notice to the Company stating the name and address of such owner, the number of Shares Beneficially Owned and a description of the manner in which such Shares are held. Each such owner shall provide to the Company such additional information as the Company may request in order to determine the effect, if any, of such Beneficial Ownership on the Company’s status as a REIT and to ensure compliance with the Aggregate Share Ownership Limit and the Ownership Limit; and
(II) each Person who is a Beneficial or Constructive Owner of Shares and each Person (including the stockholder of record) who is holding Shares for a Beneficial Owner or a Constructive Owner shall provide to the Company such information as the Company may request, in good faith, in order to determine the Company’s status as a REIT and to comply with requirements of any taxing authority or governmental authority or to determine such compliance.
(e) REMEDIES NOT LIMITED . Subject to Section 7.3 hereof, nothing contained in this Section 5.7(ii)(e) shall limit the authority of the Board to take such other action as it deems necessary or advisable to protect the Company and the interests of its stockholders in preserving the Company’s status as a REIT.
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(f) AMBIGUITY . In the case of an ambiguity in the application of any of the provisions of this Section 5.7(ii), Section 5.7(iii), or any definition contained in Section 5.7(i), the Board shall have the power to determine the application of the provisions of this Section 5.7(ii) or Section 5.7(iii) or any such definition with respect to any situation based on the facts known to it. In the event Section 5.7(ii) or (iii) requires an action by the Board and the Charter fails to provide specific guidance with respect to such action, the Board shall have the power to determine the action to be taken so long as such action is not contrary to the provisions of Section 5.7. Absent a decision to the contrary by the Board (which the Board may make in its sole and absolute discretion), if a Person would have (but for the remedies set forth in Section 5.7(ii)(b)) acquired Beneficial Ownership or Constructive Ownership of Shares in violation of Section 5.7(ii)(a), such remedies (as applicable) shall apply first to the Shares which, but for such remedies, would have been Beneficially Owned or Constructively Owned (but not actually owned) by such Person, pro rata among the Persons who actually own such Shares based upon the relative number of the Shares held by each such Person.
(g) EXCEPTIONS .
(I) Subject to Section 5.7(ii)(a)(I)(B), the Board, in its sole discretion, may (prospectively or retroactively) exempt a Person from the Aggregate Share Ownership Limit or the Ownership Limit, as the case may be, and may establish or increase an Excepted Holder Limit for such Person if:
(A) the Board obtains such representations, covenants and undertakings from such Person as are reasonably necessary to ascertain that no individual’s Beneficial Ownership or Constructive Ownership of such Shares will violate Section 5.7(ii)(a)(I)(B);
(B) such Person does not, and represents that it will not, actually own or Constructively Own an interest in a tenant of the Company (or a tenant of any entity owned or controlled by the Company) that would cause the Company to actually own or Constructively Own more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in such tenant and the Board obtains such representations and undertakings from such Person as are reasonably necessary to ascertain this fact (for this purpose, a tenant from whom the Company (or an entity owned or controlled by the Company) derives (and is expected to continue to derive) a sufficiently small amount of revenue such that, in the opinion of the Board, rent from such tenant would not adversely affect the Company’s ability to qualify as a REIT, shall not be treated as a tenant of the Company); and
(C) such Person agrees that any violation or attempted violation of such representations or undertakings (or other action which is contrary to the restrictions contained in Section 5.7(ii)(a) through Section 5.7(ii)(f)) will result in such Shares being automatically transferred to a Trust in accordance with Section 5.7(ii)(A)(II) and Section 5.7(iii).
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(II) Prior to granting any exception pursuant to Section 5.7(ii)(g)(I), the Board may require a ruling from the Internal Revenue Service, or an opinion of counsel, in either case in form and substance satisfactory to the Board in its sole discretion, as it may deem necessary or advisable in order to determine or ensure the Company’s status as a REIT. Notwithstanding the receipt of any ruling or opinion, the Board may impose such conditions or restrictions as it deems appropriate in connection with granting such exception.
(III) Subject to Section 5.7(ii)(a)(I)(B), an underwriter, placement agent or initial purchaser that participates in a public offering, a private placement or private resale of Shares (or Securities convertible into or exchangeable for Shares) may Beneficially Own or Constructively Own Shares (or Securities convertible into or exchangeable for Shares) in excess of the Aggregate Share Ownership Limit, the Ownership Limit, or both such limits, but only to the extent necessary to facilitate such public offering, private placement or resale of such Shares and provided that the restrictions contained in Section 5.7(ii)(a)(I) will not be violated following the distribution by such underwriter, placement agent or initial purchaser of such Shares .
(h) CHANGE IN AGGREGATE SHARE OWNERSHIP LIMIT AND OWNERSHIP LIMIT . Subject to Section 5.7(ii)(a)(I)(B), the Board may from time to time increase or decrease the Aggregate Share Ownership Limit and the Ownership Limit; provided, however, that a decreased Aggregate Share Ownership Limit and/or Ownership Limit will not be effective for any Person whose Beneficial Ownership or Constructive Ownership of Shares is in excess of such decreased Aggregate Share Ownership Limit and/or Ownership Limit until such time as such Person’s Beneficial Ownership or Constructive Ownership of Shares equals or falls below the decreased Aggregate Share Ownership Limit and/or Ownership Limit, but until such time as such Person’s Beneficial Ownership or Constructive Ownership of Shares falls below such decreased Aggregate Share Ownership Limit and/or Ownership Limit any further acquisition or increase in Beneficial Ownership or Constructive Ownership of Shares will be in violation of the Aggregate Share Ownership Limit and/or Ownership Limit and, provided further, that the new Aggregate Share Ownership Limit and/or Ownership Limit would not allow five or fewer Persons (taking into account all Excepted Holders) to Beneficially Own or Constructively Own more than 49.9% in value of the outstanding Shares.
(i) NOTICE TO STOCKHOLDERS UPON ISSUANCE OR TRANSFER . Upon issuance or Transfer of Shares prior to the Restriction Termination Date, the Company shall provide the recipient with a notice containing information about the Shares purchased or otherwise Transferred, in lieu of issuance of a share certificate, in a form substantially similar to the following:
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The securities of Innovative Industrial Properties, Inc. (the “Company”) are subject to restrictions on Beneficial and Constructive Ownership and Transfer for the purpose, among others, of the Company’s maintenance of its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the “Code”). Subject to certain further restrictions and except as expressly provided in the Company’s charter, (i) no Person may Beneficially or Constructively Own Shares in excess of 9.8% of the value of the total outstanding Shares or 9.8% (in value or in number of Shares, whichever is more restrictive) of any class or series of Shares unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (ii) no Person may Beneficially or Constructively Own Shares that would result in the Company being “closely held” under Section 856(h) of the Code or otherwise cause the Company to fail to qualify as a REIT; and (iii) any Transfer of Shares that, if effective, would result in the Shares being beneficially owned by fewer than 100 Persons (as determined under the principles of Section 856(a)(5) of the Code) shall be void ab initio and the intended transferee shall acquire no rights in such Shares. Any Person who Beneficially or Constructively Owns or attempts to Beneficially or Constructively Own Shares which causes or will cause a Person to Beneficially or Constructively Own Shares in excess or in violation of the above limitations must immediately notify the Company in writing (or, in the case of an attempted transaction, give at least 15 days prior written notice). If any of the restrictions on Transfer or ownership as set forth in (i) and (ii) above are violated, the Shares in excess or in violation of the above limitations will be automatically transferred to a Trustee of a Trust for the benefit of one or more Charitable Beneficiaries. In addition, the Company may redeem shares upon the terms and conditions specified by the Board in its sole discretion if the Board determines that ownership or a Transfer or other event may violate the restrictions described above. Furthermore, upon the occurrence of certain events, attempted Transfers in violation of the restrictions described above may be void ab initio . All capitalized terms in this notice have the meanings defined in the Company’s charter, as the same may be amended from time to time, a copy of which, including the restrictions on Transfer and ownership, will be furnished to each holder of Shares on request and without charge. Requests for such a copy may be directed to the Secretary of the Company at its principal office.
(iii) TRANSFER OF SHARES IN TRUST .
(a) OWNERSHIP IN TRUST . Upon any purported Transfer or other event described in Section 5.7(ii)(a)(III) that would result in a transfer of Shares to a Trust, such Shares shall be transferred to the Trustee as trustee of a Trust for the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to the Trustee shall be effective as of the close of business on the Business Day prior to the purported Transfer or other event that results in the transfer to the Trust pursuant to Section 5.7(ii)(a)(III). The Trustee shall be appointed by the Company and shall be a Person unaffiliated with the Company and any Prohibited Owner. Each Charitable Beneficiary shall be designated by the Company as provided in Section 5.7(iii)(f).
(b) STATUS OF SHARES HELD BY THE TRUSTEE . Shares held by the Trustee shall be issued and outstanding Shares. The Prohibited Owner shall have no rights in the shares held by the Trustee. The Prohibited Owner shall not benefit economically from ownership of any Shares held in trust by the Trustee, shall have no rights to dividends or other Distributions and shall not possess any rights to vote or other rights attributable to the Shares held in the Trust.
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(c) DIVIDEND AND VOTING RIGHTS . The Trustee shall have all voting rights and rights to dividends or other Distributions with respect to Shares held in the Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or other Distribution paid prior to the discovery by the Company that the Shares have been transferred to the Trustee shall be paid by the recipient of such dividend or other Distribution to the Trustee upon demand and any dividend or other Distribution authorized but unpaid shall be paid when due to the Trustee. Any dividend or other Distribution so paid to the Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no voting rights with respect to shares held in the Trust and, subject to Maryland law, effective as of the date that the Shares have been transferred to the Trustee, the Trustee shall have the authority (at the Trustee’s sole discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior to the discovery by the Company that the Shares have been transferred to the Trustee and (ii) to recast such vote in accordance with the desires of the Trustee acting for the benefit of the Charitable Beneficiary; provided, however, that if the Company has already taken irreversible corporate action, then the Trustee shall not have the authority to rescind and recast such vote. Notwithstanding the provisions of this Section 5.7, until the Company has received notification that Shares have been transferred into a Trust, the Company shall be entitled to rely on its stock transfer and other stockholder records for purposes of preparing lists of Stockholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes of Stockholders.
(d) SALE OF SHARES BY TRUSTEE . Within 20 days of receiving notice from the Company that Shares have been transferred to the Trust, the Trustee shall sell the Shares held in the Trust to a person, designated by the Trustee, whose ownership of the Shares will not violate the ownership limitations set forth in Section 5.7(ii)(a)(I) or (II). Upon such sale, the interest of the Charitable Beneficiary in the Shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary as provided in this Section 5.7(iii)(d). The Prohibited Owner shall receive the lesser of (1) the price paid by the Prohibited Owner for the Shares or, if the Prohibited Owner did not give value for the Shares in connection with the event causing the Shares to be held in the Trust (e.g., in the case of a gift, devise or other such transaction), the Market Price of the Shares on the day of the event causing the Shares to be held in the Trust and (2) the price per Share received by the Trustee from the sale or other disposition of the Shares held in the Trust. The Trustee may reduce the amount payable to the Prohibited Owner by the amount of dividends and other Distributions which have been paid to the Prohibited Owner and are owed by the Prohibited Owner to the Trustee pursuant to Section 5.7(iii)(c). Any net sales proceeds in excess of the amount payable to the Prohibited Owner shall be immediately paid to the Charitable Beneficiary. If, prior to the discovery by the Company that Shares have been transferred to the Trustee, such Shares are sold by a Prohibited Owner, then (i) such Shares shall be deemed to have been sold on behalf of the Trust and (ii) to the extent that the Prohibited Owner received an amount for such Shares that exceeds the amount that such Prohibited Owner was entitled to receive pursuant to this Section 5.7, such excess shall be paid to the Trustee upon demand.
(e) PURCHASE RIGHT IN STOCK TRANSFERRED TO THE TRUSTEE . Shares transferred to the Trustee shall be deemed to have been offered for sale to the Company, or its designee, at a price per Share equal to the lesser of (i) the price per Share in the transaction that resulted in such transfer to the Trust (or, in the case of a devise or gift, the Market Price at the time of such devise or gift) and (ii) the Market Price on the date the Company, or its designee, accepts such offer. The Company may reduce the amount payable to the Prohibited Owner by the amount of dividends and other Distributions which has been paid to the Prohibited Owner and is owed by the Prohibited Owner to the Trustee pursuant to Section 5.7(iii)(c). The Company may pay the amount of such reduction to the Trustee for the benefit of the Charitable Beneficiary. The Company shall have the right to accept such offer until the Trustee has sold the Shares held in the Trust pursuant to Section 5.7(iii)(d). Upon such a sale to the Company, the interest of the Charitable Beneficiary in the Shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner.
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(f) DESIGNATION OF CHARITABLE BENEFICIARIES . By written notice to the Trustee, the Company shall designate one or more nonprofit organizations to be the Charitable Beneficiary of the interest in the Trust such that (i) the Shares held in the Trust would not violate the restrictions set forth in Section 5.7(ii)(a)(I) or (II) in the hands of such Charitable Beneficiary and (ii) each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.
SECTION 5.8 SETTLEMENTS . Nothing in Section 5.7 shall preclude the settlement of any transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system. The fact that the settlement of any transaction occurs shall not negate the effect of any provision of Sections 5.7, and any transfer in such a transaction shall be subject to all of the provisions and limitations set forth in Section 5.7.
SECTION 5.9 SEVERABILITY . If any provision of Section 5.7 or any application of any such provision is determined to be void, invalid or unenforceable by any court having jurisdiction over the issue, the validity and enforceability of the remaining provisions of Section 5.7 shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court.
SECTION 5.10 ENFORCEMENT . The Company is authorized specifically to seek equitable relief, including injunctive relief, to enforce the provisions of Section 5.7.
SECTION 5.11 NON-WAIVER . No delay or failure on the part of the Company or the Board in exercising any right hereunder shall operate as a waiver of any right of the Company or the Board, as the case may be, except to the extent specifically waived in writing.
SECTION 5.12 PREEMPTIVE AND APPRAISAL RIGHTS . Except as may be provided by the Board in setting the terms of classified or reclassified Shares pursuant to Section 5.4 or as may otherwise be provided by contract approved by the Board, no holder of Shares shall, as such holder, have any preemptive right to purchase or subscribe for any additional Shares or any other security of the Company which it may issue or sell. Holders of Shares shall not be entitled to exercise any rights of an objecting stockholder provided for under Title 3, Subtitle 2 of the MGCL or any successor statute unless the Board, upon the affirmative vote of a majority of the Board, shall determine that such rights apply, with respect to all or any classes or series of Shares, to one or more transactions occurring after the date of such determination in connection with which holders of such Shares would otherwise be entitled to exercise such rights.
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ARTICLE VI
BOARD OF DIRECTORS
SECTION 6.1 NUMBER OF DIRECTORS . The number of Directors of the Company shall initially be two, which number may be increased or decreased from time to time only by the Board pursuant to the Bylaws; but shall never be less than the minimum required by the MGCL. The names of the initial Directors who shall serve until the first annual meeting of Stockholders and until their successors are duly elected and qualify are:
Alan D. Gold
Gary A. Kreitzer
The Board may increase the number of Directors and may fill any vacancy, whether resulting from an increase in the number of Directors or otherwise, on the Board in the manner provided in the Bylaws.
The Company elects, at such time as it becomes eligible under Section 3-802 of the MGCL to make the election provided for under Section 3-804(c) of the MGCL, that, except as may be provided by the Board in setting the terms of any class or series of shares of Preferred Stock, any and all vacancies on the Board may be filled only by the affirmative vote of a majority of the remaining Directors in office, even if the remaining Directors do not constitute a quorum, and any Director elected to fill a vacancy shall serve for the remainder of the full term of the directorship in which such vacancy occurred. No reduction in the number of Directors shall cause the removal of any Director from office prior to the expiration of his term.
SECTION 6.2 RESIGNATION OR REMOVAL . Any Director may resign by delivering notice to the Board, effective upon receipt by the Board of such notice or upon any future date specified in the notice. Subject to the rights of holders of one or more classes or series of shares of Preferred Stock, any Director or the entire Board may be removed from office at any time, but only for cause, and then only by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast generally in the election of Directors. For the purpose of this paragraph, “cause” shall mean, with respect to any particular Director, conviction of a felony or a final judgment of a court of competent jurisdiction holding that such director caused demonstrable, material harm to the Company through bad faith or active and deliberate dishonesty.
ARTICLE VII
POWERS OF THE BOARD OF DIRECTORS
SECTION 7.1 GENERAL . The business and affairs of the Company shall be managed under the direction of the Board. The Charter shall be construed with a presumption in favor of the grant of power and authority to the Board. Any construction of the Charter or determination made in good faith by the Board concerning its powers and authority hereunder shall be conclusive. The enumeration and definition of particular powers of the Board included in this Article VII shall in no way be limited or restricted by reference to or inference from the terms of this or any other provision of the Charter or construed or deemed by inference or otherwise in any manner to exclude or limit the powers conferred upon the Board under the general laws of the State of Maryland as now or hereafter in force.
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SECTION 7.2 AUTHORIZATION BY BOARD OF STOCK ISSUANCE . The Board may authorize the issuance from time to time of Shares of any class or series, whether now or hereafter authorized, or Securities or rights convertible into Shares of any class or series, whether now or hereafter authorized, for such consideration as the Board may deem advisable (or without consideration in the case of a stock split or stock dividend), subject to such restrictions or limitations, if any, as may be set forth in the MGCL, the Charter or the Bylaws.
SECTION 7.3 REIT QUALIFICATION . If the Company elects to qualify for federal income tax treatment as a REIT, the Board shall take such actions as are necessary or appropriate to preserve the status of the Company as a REIT; provided, however , if the Board determines that it is no longer in the best interests of the Company to continue to be qualified as a REIT, the Board may revoke or otherwise terminate the Company’s REIT election pursuant to Section 856(g) of the Code. The Board also may determine that compliance with any restriction or limitation on stock ownership and transfers set forth in Section 5.7 hereof is no longer required for REIT qualification.
SECTION 7.4 DETERMINATIONS BY BOARD . The determination as to any of the following matters, made by or pursuant to the direction of the Board consistent with the Charter, shall be final and conclusive and shall be binding upon the Company and every holder of Shares: the amount of the net income of the Company for any period and the amount of assets at any time legally available for the payment of dividends, redemption of Shares or the payment of other Distributions on Shares; the amount of paid-in surplus, net assets, other surplus, annual or other cash flow, funds from operations (and any variation thereof), net profit, net assets in excess of capital, undivided profits or excess of profits over losses on sales of assets; the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged); any interpretation or resolution of any ambiguity with respect to any provision of the Charter (including the terms, preferences, conversion or other rights, voting powers or rights, restrictions, limitations as to dividends or other Distributions, qualifications or terms or conditions of redemption of any class or series of Shares) or the Bylaws; the fair value, or any sale, bid or asked price to be applied in determining the fair value, of any asset owned or held by the Company or any Shares; the number of Shares of any class of the Company; any matter relating to the acquisition, holding and disposition of any assets by the Company; any interpretation of the terms and conditions of one or more of the agreements with any persons; or any other matter relating to the business and affairs of the Company or required or permitted by applicable law, the Charter or Bylaws or otherwise to be determined by the Board; provided , however , that any determination by the Board as to any of the preceding matters shall not render invalid or improper any action taken or omitted prior to such determination and no Director shall be liable for making or failing to make such a determination.
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ARTICLE VIII
EXTRAORDINARY ACTIONS
Except as specifically provided in Section 6.2 hereof (relating to removal of Directors) and in the last sentence of Article X, notwithstanding any provision of law permitting or requiring any action to be taken or approved by the affirmative vote of the holders of Shares entitled to cast a greater number of votes, any such action shall be effective and valid if declared advisable by the Board and taken or approved by the affirmative vote of holders of Shares entitled to cast a majority of all the votes entitled to be cast on the matter.
ARTICLE IX
LIABILITY OF STOCKHOLDERS, DIRECTORS AND OFFICERS
SECTION 9.1 LIMITATION OF DIRECTOR AND OFFICER LIABILITY; INDEMNIFICATION .
(a) To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of directors and officers of a corporation, no present or former Director or officer of the Company shall be liable to the Company or its Stockholders for money damages. Neither the amendment nor repeal of this Section 9.1(a), nor the adoption or amendment of any other provision of the Charter or Bylaws inconsistent with this Section 9.1(a), shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.
(b) The Company shall have the power, to the maximum extent permitted by Maryland law in effect from time to time, to obligate itself to indemnify, and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (i) any individual who is a present or former Director or officer of the Company or (ii) any individual who, while a Director or officer of the Company and at the request of the Company, serves or has served as a director, officer, partner, member, manager or trustee of another corporation, real estate investment trust, partnership, limited liability company, joint venture, trust, employee benefit plan or any other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his or her service in that capacity. The Company shall have the power, with the approval of the Board, to provide such indemnification and advancement of expenses to a person who served a predecessor of the Company in any of the capacities described in (i) or (ii) above and to any employee or agent of the Company or a predecessor of the Company.
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ARTICLE X
AMENDMENTS
The Company reserves the right from time to time to make any amendment to the Charter, now or hereafter authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in the Charter, of any outstanding Shares. All rights and powers conferred by the Charter on Stockholders, Directors and officers are granted subject to this reservation. Except as otherwise provided in the next sentence and except for those amendments permitted to be made without Stockholder approval under Maryland law or by specific provision in the Charter, any amendment to the Charter shall be valid only if declared advisable by the Board and approved by the affirmative vote of stockholders entitled to cast a majority of all the votes entitled to be cast on the matter. However, any amendment to the second sentence of Section 6.2 hereof or to this sentence of the Charter shall be valid only if declared advisable by the Board and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of all votes entitled to be cast on the matter.
THIRD: The amendment and restatement of the Charter as herein set forth has been duly advised by the Board of Directors and approved by the stockholders of the Company as required by law.
FOURTH: The current address of the principal office of the Company is as set forth in Article III of the foregoing amendment and restatement of the Charter.
FIFTH: The name and address of the Company’s current resident agent are as set forth in Article III of the foregoing amendment and restatement of the Charter.
SIXTH: The number of directors of the Company and the names of the directors currently in office are as set forth in Section 6.1 of Article VI of the foregoing amendment and restatement of the Charter.
SEVENTH: The foregoing amendment and restatement to the Charter of the Company does not increase the authorized capital stock of the Company.
EIGHTH: The undersigned acknowledges these Articles of Amendment and Restatement to be the corporate act of the Company and, as to all matters or facts required to be verified under oath, the undersigned acknowledges that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury.
[SIGNATURES ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, Innovative Industrial Properties, Inc. has caused these Articles of Amendment and Restatement to be signed in its name and on its behalf by its Chief Executive Officer, and attested by its Secretary, on this 17th day October, 2016.
INNOVATIVE INDUSTRIAL PROPERTIES, INC. | ||
By: | /s/ Paul E. Smithers | |
Paul E. Smithers, Chief Executive Officer and President | ||
Attest: | ||
By: | /s/ Brian J. Wolfe | |
Brian J. Wolfe, Secretary |
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Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
INNOVATIVE INDUSTRIAL PROPERTIES, INC.
Innovative Industrial Properties, Inc. (the “ Corporation ”) hereby adopts these Amended and Restated Bylaws (these “ Bylaws ”), which restate, amend and supersede the bylaws of the Corporation in their entirety as described below:
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE . The principal office of the Corporation in the State of Maryland shall be located at such place as the Board of Directors may designate.
Section 2. ADDITIONAL OFFICES . The Corporation may have additional offices, including a principal executive office, at such places as the Board of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE . All meetings of stockholders shall be held at the principal executive office of the Corporation or at such other place as shall be set in accordance with these Bylaws and stated in the notice of the meeting.
Section 2. ANNUAL MEETING . An annual meeting of stockholders for the election of directors and the transaction of any business within the powers of the Corporation shall be held on the date and at the time and place set by the Board of Directors.
Section 3. SPECIAL MEETINGS .
(a) General . Each of the chairman of the board, chief executive officer, president and Board of Directors may call a special meeting of stockholders. Except as provided in subsection (b)(4) of this Section 3, a special meeting of stockholders shall be held on the date and at the time and place set by the chairman of the board, chief executive officer, president or Board of Directors, whoever has called the meeting. Except as otherwise provided in the charter of the Corporation (the “ Charter ”), subject to subsection (b) of this Section 3, a special meeting of stockholders shall also be called by the secretary of the Corporation to act on any matter that may properly be considered at a meeting of stockholders upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast on such matter at such meeting.
(b) Stockholder-Requested Special Meetings .
(1) Any stockholder of record seeking to have stockholders request a special meeting shall, by sending written notice to the secretary (the “ Record Date Request Notice ”) by registered mail, return receipt requested, request the Board of Directors to fix a record date to determine the stockholders entitled to request a special meeting (the “ Request Record Date ”). The Record Date Request Notice shall set forth the purpose of the meeting and the matters proposed to be acted on at it, shall be signed by one or more stockholders of record as of the date of signature (or their agents duly authorized in a writing accompanying the Record Date Request Notice), shall bear the date of signature of each such stockholder (or such agent) and shall set forth all information relating to each such stockholder and each matter proposed to be acted on at the meeting that would be required to be disclosed in connection with the solicitation of proxies for the election of directors in an election contest (even if an election contest is not involved), or would otherwise be required in connection with such a solicitation, in each case pursuant to Regulation 14A (or any successor provision) under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the “ Exchange Act ”). Upon receiving the Record Date Request Notice, the Board of Directors may fix a Request Record Date. The Request Record Date shall not precede and shall not be more than ten days after the close of business on the date on which the resolution fixing the Request Record Date is adopted by the Board of Directors. If the Board of Directors, within ten days after the date on which a valid Record Date Request Notice is received, fails to adopt a resolution fixing the Request Record Date, the Request Record Date shall be the close of business on the tenth day after the first date on which a Record Date Request Notice is received by the secretary.
(2) In order for any stockholder to request a special meeting to act on any matter that may properly be considered at a meeting of stockholders, one or more written requests for a special meeting (collectively, the “ Special Meeting Request ”) signed by stockholders of record (or their agents duly authorized in a writing accompanying the request) as of the Request Record Date entitled to cast not less than a majority of all of the votes entitled to be cast on such matter at such meeting (the “ Special Meeting Percentage ”) shall be delivered to the secretary. In addition, the Special Meeting Request shall (a) set forth the purpose of the meeting and the matters proposed to be acted on at it (which shall be limited to those lawful matters set forth in the Record Date Request Notice received by the secretary), (b) bear the date of signature of each such stockholder (or such agent) signing the Special Meeting Request, (c) set forth (i) the name and address, as they appear in the Corporation’s books, of each stockholder signing such request (or on whose behalf the Special Meeting Request is signed), (ii) the class, series and number of all shares of stock of the Corporation which are owned (beneficially or of record) by each such stockholder and (iii) the nominee holder for, and number of, shares of stock of the Corporation owned beneficially but not of record by such stockholder, (d) be sent to the secretary by registered mail, return receipt requested, and (e) be received by the secretary within 60 days after the Request Record Date. Any requesting stockholder (or agent duly authorized in a writing accompanying the revocation of the Special Meeting Request) may revoke his, her or its request for a special meeting at any time by written revocation delivered to the secretary.
(3) The secretary shall inform the requesting stockholders of the reasonably estimated cost of preparing and mailing or delivering the notice of the meeting (including the Corporation’s proxy materials). The secretary shall not be required to call a special meeting upon stockholder request and such meeting shall not be held unless, in addition to the documents required by paragraph (2) of this Section 3(b), the secretary receives payment of such reasonably estimated cost prior to the preparation and mailing or delivery of such notice of the meeting.
(4) In the case of any special meeting called by the secretary upon the request of stockholders (a “ Stockholder-Requested Meeting ”), such meeting shall be held at such place, date and time as may be designated by the Board of Directors; provided , however, that the date of any Stockholder-Requested Meeting shall be not more than ninety (90) days after the record date for such meeting (the “ Meeting Record Date ”); and provided further that if the Board of Directors fails to designate, within ten days after the date that a valid Special Meeting Request is actually received by the secretary (the “ Delivery Date ”), a date and time for a Stockholder-Requested Meeting, then such meeting shall be held at 2:00 p.m., local time, on the 90 th day after the Meeting Record Date or, if such 90 th day is not a Business Day (as defined below), on the first preceding Business Day; and provided further that in the event that the Board of Directors fails to designate a place for a Stockholder-Requested Meeting within ten days after the Delivery Date, then such meeting shall be held at the principal executive office of the Corporation. In fixing a date for a Stockholder-Requested Meeting, the Board of Directors may consider such factors as it deems relevant, including, without limitation, the nature of the matters to be considered, the facts and circumstances surrounding any request for the meeting and any plan of the Board of Directors to call an annual meeting or a special meeting. In the case of any Stockholder-Requested Meeting, if the Board of Directors fails to fix a Meeting Record Date that is a date within thirty (30) days after the Delivery Date, then the close of business on the 30 th day after the Delivery Date shall be the Meeting Record Date. The Board of Directors may revoke the notice for any Stockholder-Requested Meeting in the event that the requesting stockholders fail to comply with the provisions of paragraph (3) of this Section 3(b).
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(5) If written revocations of the Special Meeting Request have been delivered to the secretary and the result is that stockholders of record (or their agents duly authorized in writing), as of the Request Record Date, entitled to cast less than the Special Meeting Percentage have delivered, and not revoked, requests for a special meeting on the matter to the secretary: (i) if the notice of meeting has not already been delivered, the secretary shall refrain from delivering the notice of the meeting and send to all requesting stockholders who have not revoked such requests written notice of any revocation of a request for a special meeting on the matter, or (ii) if the notice of meeting has been delivered and if the secretary first sends to all requesting stockholders who have not revoked requests for a special meeting on the matter written notice of any revocation of a request for the special meeting and written notice of the Corporation’s intention to revoke the notice of the meeting or for the chairman of the meeting to adjourn the meeting without action on the matter, (A) the secretary may revoke the notice of the meeting at any time before ten days before the commencement of the meeting or (B) the chairman of the meeting may call the meeting to order and adjourn the meeting without acting on the matter. Any request for a special meeting received after a revocation by the secretary of a notice of a meeting shall be considered a request for a new special meeting.
(6) The chairman of the board, chief executive officer, president or Board of Directors may appoint regionally or nationally recognized independent inspectors of elections to act as the agent of the Corporation for the purpose of promptly performing a ministerial review of the validity of any purported Special Meeting Request received by the secretary. For the purpose of permitting the inspectors to perform such review, no such purported Special Meeting Request shall be deemed to have been received by the secretary until the earlier of (i) five Business Days after actual receipt by the secretary of such purported request and (ii) such date as the independent inspectors certify to the Corporation that the valid requests received by the secretary represent, as of the Request Record Date, stockholders of record entitled to cast not less than the Special Meeting Percentage. Nothing contained in this paragraph (6) shall in any way be construed to suggest or imply that the Corporation or any stockholder shall not be entitled to contest the validity of any request, whether during or after such five Business Day period, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation).
(7) For purposes of these Bylaws, “ Business Day ” shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close
Section 4. NOTICE . Except as otherwise provided in the Charter, not less than ten (10) nor more than ninety (90) days before each meeting of stockholders, the secretary shall give to each stockholder entitled to vote at such meeting and to each stockholder not entitled to vote who is entitled to notice of the meeting notice in writing or by electronic transmission stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by any statute, the purpose for which the meeting is called, by mail, by presenting it to such stockholder personally, by leaving it at the stockholder’s residence or usual place of business, by electronic transmission, or by any other means permitted by Maryland law. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at the stockholder’s address as it appears on the records of the Corporation, with postage thereon prepaid. If transmitted electronically, such notice shall be deemed to be given when transmitted to the stockholder by an electronic transmission to any address or number of the stockholder at which the stockholder receives electronic transmissions. The Corporation may give a single notice to all stockholders who share an address, which single notice shall be effective as to any stockholder at such address, unless such stockholder objects to receiving such single notice or revokes a prior consent to receiving such single notice. Failure to give notice of any meeting to one or more stockholders, or any irregularity in such notice, shall not affect the validity of any meeting fixed in accordance with this Article II or the validity of any proceedings at any such meeting
Subject to Section 11(a) of this Article II, any business of the Corporation may be transacted at an annual meeting of stockholders without being specifically designated in the notice, except such business as is required by any statute to be stated in such notice. No business shall be transacted at a special meeting of stockholders except as specifically designated in the notice. The Corporation may postpone or cancel a meeting of stockholders by making a public announcement (as defined in Section 11(c)(3) of this Article II) of such postponement or cancellation prior to the meeting. Notice of the date, time and place to which the meeting is postponed shall be given not less than ten (10) days prior to such date and otherwise in the manner set forth in this Section 4.
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Section 5. ORGANIZATION AND CONDUCT . Every meeting of stockholders shall be conducted by an individual appointed by the Board of Directors to be chairman of the meeting or, in the absence of such appointment or appointed individual, by the chairman of the board or, in the case of a vacancy in the office or absence of the chairman of the board, by one of the following officers present at the meeting in the following order: the vice chairman of the board, if there is one, the chief executive officer, the president, the vice presidents in their order of rank and seniority, the secretary or, in the absence of such officers, a chairman chosen by the stockholders by the vote of a majority of the votes cast by stockholders present in person or by proxy. The secretary or, in the secretary’s absence, an assistant secretary or, in the absence of both the secretary and assistant secretaries, an individual appointed by the Board of Directors or, in the absence of such appointment, an individual appointed by the chairman of the meeting shall act as secretary. In the event that the secretary presides at a meeting of stockholders, an assistant secretary or, in the absence of all assistant secretaries, an individual appointed by the Board of Directors or the chairman of the meeting shall record the minutes of the meeting. The order of business and all other matters of procedure at any meeting of stockholders shall be determined by the chairman of the meeting. The chairman of the meeting may prescribe such rules, regulations and procedures and take such action as, in the discretion of the chairman and without any action by the stockholders, are appropriate for the proper conduct of the meeting, including, without limitation, (a) restricting admission to the time set for the commencement of the meeting; (b) limiting attendance at the meeting to stockholders of record of the Corporation, their duly authorized proxies and such other individuals as the chairman of the meeting may determine; (c) limiting participation at the meeting on any matter to stockholders of record of the Corporation entitled to vote on such matter, their duly authorized proxies and other such individuals as the chairman of the meeting may determine; (d) limiting the time allotted to questions or comments; (e) determining when and for how long the polls should be opened and when the polls should be closed; (f) maintaining order and security at the meeting; (g) removing any stockholder or any other individual who refuses to comply with meeting procedures, rules or guidelines as set forth by the chairman of the meeting; (h) concluding a meeting or recessing or adjourning the meeting, whether or not a quorum is present, to a later date and time and at a place announced at the meeting; and (i) complying with any state and local laws and regulations concerning safety and security. Unless otherwise determined by the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.
Section 6. QUORUM . At any meeting of stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at such meeting on any matter shall constitute a quorum; but this section shall not affect any requirement under any statute or the Charter for the vote necessary for the approval of any matter. If such quorum is not established at any meeting of the stockholders, the chairman of the meeting may adjourn the meeting sine die or from time to time to a date not more than 120 days after the original record date without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified.
The stockholders present either in person or by proxy, at a meeting which has been duly called and at which a quorum has been established, may continue to transact business until adjournment, notwithstanding the withdrawal from the meeting of enough stockholders to leave fewer than would be required to establish a quorum.
Section 7. VOTING . Except as otherwise provided in the Charter, a plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to elect a director. Each share may be voted for as many individuals as there are directors to be elected and for whose election the holder is entitled to vote. A majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required by statute or by the Charter. Unless otherwise provided by statute or by the Charter, each outstanding share, regardless of class, entitles the holder thereof to cast one (1) vote on each matter submitted to a vote at a meeting of stockholders. Voting on any question or in any election may be viva voce unless the chairman of the meeting shall order that voting be by ballot or otherwise.
Section 8. PROXIES . A holder of record of shares of stock of the Corporation may cast votes in person or by proxy executed by the stockholder or by the stockholder’s duly authorized agent in any manner permitted by law. Such proxy or evidence of authorization of such proxy shall be filed with the secretary of the Corporation before or at the meeting. No proxy shall be valid more than eleven (11) months after its date unless otherwise provided in the proxy.
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Section 9. VOTING OF STOCK BY CERTAIN HOLDERS . Stock of the Corporation registered in the name of a corporation, limited liability company, partnership, joint venture, trust or other entity, if entitled to be voted, may be voted by the president or a vice president, managing member, manager, general partner or trustee thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such stock pursuant to a bylaw or a resolution of the governing body of such corporation or other entity or agreement of the partners of a partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such stock. Any director or fiduciary may vote stock registered in the name of such person in the capacity of such director or fiduciary, either in person or by proxy.
Shares of stock of the Corporation directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time.
The Board of Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date, the time after the record date within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board of Directors considers necessary or desirable. On receipt by the Corporation of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the holder of record of the specified stock in place of the stockholder who makes the certification.
Section 10. INSPECTORS . The Board of Directors or the chairman of the meeting may appoint, before or at the meeting, one or more inspectors for the meeting and any successor to the inspector. Except as otherwise provided by the chairman of the meeting, the inspectors, if any, shall (i) determine the number of shares of stock represented at the meeting, in person or by proxy, and the validity and effect of proxies, (ii) receive and tabulate all votes, ballots or consents, (iii) report such tabulation to the chairman of the meeting, (iv) hear and determine all challenges and questions arising in connection with the right to vote, and (v) do such acts as are proper to fairly conduct the election or vote. Each such report shall be in writing and signed by the inspector or by a majority of them if there is more than one (1) inspector acting at such meeting. If there is more than one (1) inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof.
Section 11. ADVANCE NOTICE OF STOCKHOLDER NOMINEES FOR DIRECTOR AND OTHER STOCKHOLDER PROPOSALS.
(a) Annual Meetings of Stockholders .
(1) Nominations of individuals for election to the Board of Directors and the proposal of other business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation’s notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record both at the time of giving of notice by the stockholder as provided for in this Section 11(a) and at the time of the annual meeting, who is entitled to vote at the meeting in the election of each individual so nominated or on any such other business and who has complied with this Section 11(a).
(2) For any nomination or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 11, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation and any such other business must otherwise be a proper matter for action by the stockholders. To be timely, a stockholder’s notice shall set forth all information required under this Section 11 and shall be delivered to the secretary at the principal executive office of the Corporation not earlier than the 150 th day nor later than 5:00 p.m., Eastern Time, on the 120 th day prior to the first anniversary of the date of the proxy statement (as defined in Section 11(c)(3) of this Article II) for the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is advanced or delayed by more than thirty (30) days from the first anniversary of the date of the preceding year’s annual meeting, in order for notice by the stockholder to be timely, such notice must be so delivered not earlier than the 150 th day prior to the date of such annual meeting and not later than 5:00 p.m., Eastern Time, on the later of the 120 th day prior to the date of such annual meeting, as originally convened, or the tenth day following the day on which public announcement of the date of such meeting is first made. The public announcement of a postponement or adjournment of an annual meeting shall not commence a new time period for the giving of a stockholder’s notice as described above.
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(3) Such stockholder’s notice shall set forth:
(i) as to each individual whom the stockholder proposes to nominate for election or reelection as a director (each a “ Proposed Nominee ”), all information relating to the Proposed Nominee that would be required to be disclosed in connection with the solicitation of proxies for the election of the Proposed Nominee as a director in an election contest (even if an election contest is not involved), or would otherwise be required in connection with such solicitation, in each case pursuant to Regulation 14A (or any successor provision) under the Exchange Act (including the Proposed Nominee’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected);
(ii) as to any other business that the stockholder proposes to bring before the meeting, a description of such business, the stockholder’s reasons for proposing such business at the meeting and any material interest in such business of such stockholder or any Stockholder Associated Person (as defined below), individually or in the aggregate, including any anticipated benefit to the stockholder or the Stockholder Associated Person therefrom;
(iii) as to the stockholder giving the notice, any Proposed Nominee and any Stockholder Associated Person,
(A) the class, series and number of all shares of stock or other securities of the Corporation or any affiliate thereof (collectively, the “ Company Securities ”), if any, which are owned (beneficially or of record) by such stockholder, Proposed Nominee or Stockholder Associated Person, the date on which each such Company Security was acquired and the investment intent of such acquisition, and any short interest (including any opportunity to profit or share in any benefit from any decrease in the price of such stock or other security) in any Company Securities of any such person,
(B) the nominee holder for, and number of, any Company Securities owned beneficially but not of record by such stockholder, Proposed Nominee or Stockholder Associated Person,
(C) whether and the extent to which such stockholder, Proposed Nominee or Stockholder Associated Person, directly or indirectly (through brokers, nominees or otherwise), is subject to or during the last six (6) months has engaged in any hedging, derivative or other transaction or series of transactions or entered into any other agreement, arrangement or understanding (including any short interest, any borrowing or lending of securities or any proxy or voting agreement), the effect or intent of which is to (I) manage risk or benefit of changes in the price of (x) Company Securities or (y) any security of any entity that was listed in the Peer Group in the Stock Performance Graph in the most recent annual report to security holders of the Corporation (a “ Peer Group Company ”) for such stockholder, Proposed Nominee or Stockholder Associated Person or ( II ) increase or decrease the voting power of such stockholder, Proposed Nominee or Stockholder Associated Person in the Corporation or any affiliate thereof (or, as applicable, in any Peer Group Company) disproportionately to such person’s economic interest in the Company Securities (or, as applicable, in any Peer Group Company) and
(D) any substantial interest, direct or indirect (including, without limitation, any existing or prospective commercial, business or contractual relationship with the Corporation), by security holdings or otherwise, of such stockholder, Proposed Nominee or Stockholder Associated Person, in the Corporation or any affiliate thereof, other than an interest arising from the ownership of Company Securities where such stockholder, Proposed Nominee or Stockholder Associated Person receives no extra or special benefit not shared on a pro rata basis by all other holders of the same class or series;
(iv) as to the stockholder giving the notice, any Stockholder Associated Person with an interest or ownership referred to in clauses (ii) or (iii) of this paragraph (3) of this Section 11(a) and any Proposed Nominee,
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(A) the name and address of such stockholder, as they appear on the Corporation’s stock ledger, and the current name and business address, if different, of each such Stockholder Associated Person and any Proposed Nominee and
(B) the investment strategy or objective, if any, of such stockholder and each such Stockholder Associated Person who is not an individual and a copy of the prospectus, offering memorandum or similar document, if any, provided to investors or potential investors in such stockholder and each such Stockholder Associated Person;
(v) the name and address of any person who contacted or was contacted by the stockholder giving the notice or any Stockholder Associated Person about the Proposed Nominee or other business proposal prior to the date of such stockholder’s notice; and
(vi) to the extent known by the stockholder giving the notice, the name and address of any other stockholder supporting the nominee for election or reelection as a director or the proposal of other business on the date of such stockholder’s notice.
(4) Such stockholder’s notice shall, with respect to any Proposed Nominee, be accompanied by a certificate executed by the Proposed Nominee (i) certifying that such Proposed Nominee (a) is not, and will not become, a party to any agreement, arrangement or understanding with any person or entity other than the Corporation in connection with service or action as a director that has not been disclosed to the Corporation and (b) will serve as a director of the Corporation if elected; and (ii) attaching a completed Proposed Nominee questionnaire (which questionnaire shall be provided by the Corporation, upon request, to the stockholder providing the notice and shall include all information relating to the Proposed Nominee that would be required to be disclosed in connection with the solicitation of proxies for the election of the Proposed Nominee as a director in an election contest (even if an election contest is not involved), or would otherwise be required in connection with such solicitation, in each case pursuant to Regulation 14A (or any successor provision) under the Exchange Act and the rules thereunder, or would be required pursuant to the rules of any national securities exchange on which any securities of the Corporation are listed or over-the-counter market on which any securities of the Corporation are traded).
(5) Notwithstanding anything in this subsection (a) of this Section 11 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased, and there is no public announcement of such action at least 130 days prior to the first anniversary of the date of the proxy statement (as defined in Section 11(c)(3) of this Article II) for the preceding year’s annual meeting, a stockholder’s notice required by this Section 11(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive office of the Corporation not later than 5:00 p.m., Eastern Time, on the tenth day following the day on which such public announcement is first made by the Corporation.
(6) For purposes of this Section 11, “Stockholder Associated Person” of any stockholder shall mean (i) any person acting in concert with such stockholder, (ii) any beneficial owner of shares of stock of the Corporation owned of record or beneficially by such stockholder (other than a stockholder that is a depositary) and (iii) any person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such stockholder or such Stockholder Associated Person.
(b) Special Meetings of Stockholders . Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting. Nominations of individuals for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected only (i) by or at the direction of the Board of Directors or (ii) provided that the special meeting has been called in accordance with Section 3(a) of this Article II for the purpose of electing directors, by any stockholder of the Corporation who is a stockholder of record both at the time of giving of notice provided for in this Section 11 and at the time of the special meeting, who is entitled to vote at the meeting in the election of each individual so nominated and who has complied with the notice procedures set forth in this Section 11. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one (1) or more individuals to the Board of Directors, any stockholder may nominate an individual or individuals (as the case may be) for election as a director as specified in the Corporation’s notice of meeting, if the stockholder’s notice, containing the information required by paragraphs (a)(3) and (4) of this Section 11, is delivered to the secretary at the principal executive office of the Corporation not earlier than the 120 th day prior to such special meeting and not later than 5:00 p.m., Eastern Time, on the later of the 90 th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. The public announcement of a postponement or adjournment of a special meeting shall not commence a new time period for the giving of a stockholder’s notice as described above.
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(c) General .
(1) If information submitted pursuant to this Section 11 by any stockholder proposing a nominee for election as a director or any proposal for other business at a meeting of stockholders shall be inaccurate in any material respect, such information may be deemed not to have been provided in accordance with this Section 11. Any such stockholder shall notify the Corporation of any inaccuracy or change (within two (2) Business Days of becoming aware of such inaccuracy or change) in any such information. Upon written request by the secretary or the Board of Directors, any such stockholder shall provide, within five (5) Business Days of delivery of such request (or such other period as may be specified in such request), (A) written verification, satisfactory, in the discretion of the Board of Directors or any authorized officer of the Corporation, to demonstrate the accuracy of any information submitted by the stockholder pursuant to this Section 11, and (B) a written update of any information (including, if requested by the Corporation, written confirmation by such stockholder that it continues to intend to bring such nomination or other business proposal before the meeting) submitted by the stockholder pursuant to this Section 11 as of an earlier date. If a stockholder fails to provide such written verification or written update within such period, the information as to which written verification or a written update was requested may be deemed not to have been provided in accordance with this Section 11.
(2) Only such individuals who are nominated in accordance with this Section 11 shall be eligible for election by stockholders as directors, and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with this Section 11. The chairman of the meeting shall have the power to determine whether a nomination or any other business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with this Section 11.
(3) For purposes of this Section 11, “the date of the proxy statement” shall have the same meaning as “the date of the company’s proxy statement released to shareholders” as used in Rule 14a-8(e) promulgated under the Exchange Act, as interpreted by the United States Securities and Exchange Commission from time to time. “Public announcement” shall mean disclosure (i) in a press release reported by the Dow Jones News Service, Associated Press, Business Wire, PR Newswire or other widely circulated news or wire service or (ii) in a document publicly filed by the Corporation with the United States Securities and Exchange Commission pursuant to the Exchange Act.
(4) Notwithstanding the foregoing provisions of this Section 11, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 11. Nothing in this Section 11 shall be deemed to affect any right of a stockholder to request inclusion of a proposal in, or the right of the Corporation to omit a proposal from, any proxy statement filed by the Corporation with the United States Securities and Exchange Commission pursuant to Rule 14a-8 (or any successor provision) under the Exchange Act. Nothing in this Section 11 shall require disclosure of revocable proxies received by the stockholder or Stockholder Associated Person pursuant to a solicitation of proxies after the filing of an effective Schedule 14A by such stockholder or Stockholder Associated Person under Section 14(a) of the Exchange Act.
Section 12. STOCKHOLDERS’ CONSENT IN LIEU OF MEETING . Any action required or permitted to be taken at any meeting of stockholders may be taken without a meeting if a unanimous consent setting forth the action is given in writing or by electronic transmission by each stockholder entitled to vote on the matter and filed with the minutes of proceedings of the stockholders.
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Section 13. CONTROL SHARE ACQUISITION ACT . Notwithstanding any other provision of the Charter or these Bylaws, Title 3, Subtitle 7 of the Maryland General Corporation Law (the “ MGCL ”) (or any successor statute) shall not apply to any acquisition by any person of shares of stock of the Corporation. This section may be repealed, in whole or in part, at any time, whether before or after an acquisition of control shares and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any prior or subsequent control share acquisition.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS . The business and affairs of the Corporation shall be managed under the direction of its Board of Directors.
Section 2. NUMBER, TENURE AND RESIGNATION . At any regular meeting or at any special meeting called for that purpose, a majority of the entire Board of Directors may establish, increase or decrease the number of directors, provided that the number thereof shall never be less than the minimum number required by the MGCL or the Charter, nor more than fifteen (15), and further provided that the tenure of office of a director shall not be affected by any decrease in the number of directors. Any director of the Corporation may resign at any time by delivering his or her resignation to the Board of Directors, the chairman of the board or the secretary. Any resignation shall take effect immediately upon its receipt or at such later time specified in the resignation. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation.
Section 3. ANNUAL AND REGULAR MEETINGS . An annual meeting of the Board of Directors shall be held immediately after and at the same place as the annual meeting of stockholders, no notice other than this Bylaw being necessary. In the event such meeting is not so held, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors. The Board of Directors may provide, by resolution, the time and place for the holding of regular meetings of the Board of Directors without other notice than such resolution.
Section 4. SPECIAL MEETINGS . Special meetings of the Board of Directors may be called by or at the request of the chairman of the board, the chief executive officer, the president or a majority of the directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix any place as the place for holding any special meeting of the Board of Directors called by them. The Board of Directors may provide, by resolution, the time and place for the holding of special meetings of the Board of Directors without other notice than such resolution.
Section 5. NOTICE . Notice of any special meeting of the Board of Directors shall be delivered personally or by telephone, electronic mail, facsimile transmission, courier or United States mail to each director at his or her business or residence address. Notice by personal delivery, telephone, electronic mail or facsimile transmission shall be given at least twenty-four (24) hours prior to the meeting. Notice by United States mail shall be given at least three (3) days prior to the meeting. Notice by courier shall be given at least two (2) days prior to the meeting. Telephone notice shall be deemed to be given when the director or his or her agent is personally given such notice in a telephone call to which the director or his or her agent is a party. Electronic mail notice shall be deemed to be given upon transmission of the message to the electronic mail address given to the Corporation by the director. Facsimile transmission notice shall be deemed to be given upon completion of the transmission of the message to the number given to the Corporation by the director and receipt of a completed answer-back indicating receipt. Notice by United States mail shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. Notice by courier shall be deemed to be given when deposited with or delivered to a courier properly addressed. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be stated in the notice, unless specifically required by statute or these Bylaws.
Section 6. QUORUM . A majority of the directors shall constitute a quorum for transaction of business at any meeting of the Board of Directors, provided that, if less than a majority of such directors is present at such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, and provided further that if, pursuant to applicable law, the Charter or these Bylaws, the vote of a majority or other percentage of a particular group of directors is required for action, a quorum must also include a majority or such other percentage of such group.
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The directors present at a meeting which has been duly called and at which a quorum was established may continue to transact business until adjournment, notwithstanding the withdrawal from the meeting of enough directors to leave fewer than were required to establish a quorum.
Section 7. VOTING . The action of a majority of the directors present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable law, the Charter, or these Bylaws. If enough directors have withdrawn from a meeting to leave fewer than were required to establish a quorum but the meeting is not adjourned, the action of the majority of that number of directors necessary to constitute a quorum at such meeting shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable law, the Charter or these Bylaws.
Section 8. ORGANIZATION . At each meeting of the Board of Directors, the chairman of the board or, in the absence of the chairman, the vice chairman of the board, if any, shall act as chairman of the meeting. In the absence of both the chairman and vice chairman of the board, the chief executive officer or, in the absence of the chief executive officer, the president or, in the absence of the president, a director chosen by a majority of the directors present shall act as chairman of the meeting. The secretary or, in his or her absence, an assistant secretary of the Corporation or, in the absence of the secretary and all assistant secretaries, an individual appointed by the chairman of the meeting shall act as secretary of the meeting.
Section 9. TELEPHONE MEETINGS . Directors may participate in a meeting by means of a conference telephone or other communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.
Section 10. CONSENT BY DIRECTORS WITHOUT A MEETING . Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing or by electronic transmission to such action is given by each director and is filed with the minutes of proceedings of the Board of Directors.
Section 11. VACANCIES . If for any reason any or all the directors cease to be directors, such event shall not terminate the Corporation or affect these Bylaws or the powers of the remaining directors hereunder. Except as may be provided by the Board of Directors in setting the terms of any class or series of preferred stock, any vacancy on the Board of Directors may be filled only by a majority of the remaining directors, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy shall serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies.
Section 12. COMPENSATION . Directors shall not receive any stated salary for their services as directors but, by resolution of the Board of Directors, may receive compensation per year and/or per meeting and/or per visit to real property or other facilities owned or leased by the Corporation and for any service or activity they performed or engaged in as directors. Directors may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Board of Directors or of any committee thereof and for their expenses, if any, in connection with each property visit and any other service or activity they performed or engaged in as directors; but nothing herein contained shall be construed to preclude any directors from serving the Corporation in any other capacity and receiving compensation therefor.
Section 13. RELIANCE . Each director and officer of the Corporation shall, in the performance of his or her duties with respect to the Corporation, be entitled to rely on any information, opinion, report or statement, including any financial statement or other financial data, prepared or presented by an officer or employee of the Corporation whom the director or officer reasonably believes to be reliable and competent in the matters presented, by a lawyer, certified public accountant or other person, as to a matter which the director or officer reasonably believes to be within the person’s professional or expert competence, or with respect to a director, by a committee of the Board of Directors on which the director does not serve, as to a matter within its designated authority, if the director reasonably believes the committee to merit confidence.
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Section 14. RATIFICATION . The Board of Directors or the stockholders may ratify and make binding on the Corporation any action or inaction by the Corporation or its officers to the extent that the Board of Directors or the stockholders could have originally authorized the matter. Moreover, any action or inaction questioned in any stockholders’ derivative proceeding or any other proceeding on the ground of lack of authority, defective or irregular execution, adverse interest of a director, officer or stockholder, non-disclosure, miscomputation, the application of improper principles or practices of accounting or otherwise may be ratified, before or after judgment, by the Board of Directors or by the stockholders and, if so ratified, shall have the same force and effect as if the questioned action or inaction had been originally duly authorized, and such ratification shall be binding upon the Corporation and its stockholders and shall constitute a bar to any claim or execution of any judgment in respect of such questioned action or inaction.
Section 15. CERTAIN RIGHTS OF DIRECTORS AND OFFICERS . A director who is not also an officer of the Corporation shall have no responsibility to devote his or her full time to the affairs of the Corporation. Any director or officer, in his or her personal capacity or in a capacity as an affiliate, employee or agent of any other person, or otherwise, may have business interests and engage in business activities similar to, in addition to or in competition with those of or relating to the Corporation.
Section 16. EMERGENCY PROVISIONS . Notwithstanding any other provision in the Charter or these Bylaws, this Section 16 shall apply during the existence of any catastrophe, or other similar emergency condition, as a result of which a quorum of the Board of Directors under Article III of these Bylaws cannot readily be obtained (an “ Emergency ”). During any Emergency, unless otherwise provided by the Board of Directors, (i) a meeting of the Board of Directors or a committee thereof may be called by any director or officer by any means feasible under the circumstances; (ii) notice of any meeting of the Board of Directors during such an Emergency may be given less than twenty-four (24) hours prior to the meeting to as many directors and by such means as may be feasible at the time, including publication, television or radio; and (iii) the number of directors necessary to constitute a quorum shall be one-third of the entire Board of Directors.
ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATIONS . The Board of Directors may appoint from among its members committees, composed of one (1) or more directors, to serve at the pleasure of the Board of Directors.
Section 2. POWERS . The Board of Directors may delegate to committees appointed under Section 1 of this Article IV any of the powers of the Board of Directors, except as prohibited by law.
Section 3. MEETINGS . Notice of committee meetings shall be given in the same manner as notice for special meetings of the Board of Directors. A majority of the members of the committee shall constitute a quorum for the transaction of business at any meeting of the committee. The act of a majority of the committee members present at a meeting shall be the act of such committee. The Board of Directors may designate a chairman of any committee, and such chairman or, in the absence of a chairman, any two (2) members of any committee (if there are at least two (2) members of the committee) may fix the time and place of its meeting unless the Board shall otherwise provide. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint another director to act in the place of such absent member. Each committee shall keep minutes of its proceedings.
Section 4. TELEPHONE MEETINGS . Members of a committee of the Board of Directors may participate in a meeting by means of a conference telephone or other communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.
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Section 5. CONSENT BY COMMITTEES WITHOUT A MEETING . Any action required or permitted to be taken at any meeting of a committee of the Board of Directors may be taken without a meeting, if a consent in writing or by electronic transmission to such action is given by each member of the committee and is filed with the minutes of proceedings of such committee.
Section 6. VACANCIES . Subject to the provisions hereof, the Board of Directors shall have the power at any time to change the membership of any committee, to fill any vacancy, to designate an alternate member to replace any absent or disqualified member or to dissolve any such committee.
ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS . The officers of the Corporation shall include a president, a secretary and a treasurer and may include a chairman of the board, a vice chairman of the board, a chief executive officer, one or more vice presidents, a chief operating officer, a chief financial officer, one or more assistant secretaries and one or more assistant treasurers. In addition, the Board of Directors may from time to time elect such other officers with such powers and duties as it shall deem necessary or desirable. The officers of the Corporation shall be elected annually by the Board of Directors, except that the chief executive officer or president may from time to time appoint one or more vice presidents, assistant secretaries and assistant treasurers or other officers. Each officer shall serve until his or her successor is elected and qualifies or until his or her death, or his or her resignation or removal in the manner hereinafter provided. Any two (2) or more offices, except president and vice president, may be held by the same person. Election of an officer or agent shall not of itself create contract rights between the Corporation and such officer or agent.
Section 2. REMOVAL AND RESIGNATION . Any officer or agent of the Corporation may be removed, with or without cause, by the Board of Directors if in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer of the Corporation may resign at any time by delivering his or her resignation to the Board of Directors, the chairman of the board, the chief executive officer, the president or the secretary. Any resignation shall take effect immediately upon its receipt or at such later time specified in the resignation. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. Such resignation shall be without prejudice to the contract rights, if any, of the Corporation.
Section 3. VACANCIES . A vacancy in any office may be filled by the Board of Directors for the balance of the term.
Section 4. CHIEF EXECUTIVE OFFICER . The Board of Directors may designate a chief executive officer. In the absence of such designation, the chairman of the board shall be the chief executive officer of the Corporation. The chief executive officer shall have general responsibility for implementation of the policies of the Corporation, as determined by the Board of Directors, and for the management of the business and affairs of the Corporation. He or she may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of chief executive officer and such other duties as may be prescribed by the Board of Directors from time to time.
Section 5. CHIEF OPERATING OFFICER . The Board of Directors may designate a chief operating officer. The chief operating officer shall have the responsibilities and duties as determined by the Board of Directors or the chief executive officer.
Section 6. CHIEF FINANCIAL OFFICER . The Board of Directors may designate a chief financial officer. The chief financial officer shall have the responsibilities and duties as determined by the Board of Directors or the chief executive officer.
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Section 7. CHAIRMAN OF THE BOARD . The Board of Directors may designate from among its members a chairman of the board, who shall not, solely by reason of these Bylaws, be an officer of the Corporation. The Board of Directors may designate the chairman of the board as an executive or non-executive chairman. The chairman of the board shall preside over the meetings of the Board of Directors. The chairman of the board shall perform such other duties as may be assigned to him or her by these Bylaws or the Board of Directors.
Section 8. PRESIDENT . In the absence of a chief executive officer, the president shall in general supervise and control all of the business and affairs of the Corporation. In the absence of a designation of a chief operating officer by the Board of Directors, the president shall be the chief operating officer. He or she may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Board of Directors from time to time.
Section 9. VICE PRESIDENTS . In the absence of the president or in the event of a vacancy in such office, the vice president (or in the event there be more than one (1) vice president, the vice presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president; and shall perform such other duties as from time to time may be assigned to such vice president by the chief executive officer, the president or the Board of Directors. The Board of Directors may designate one (1) or more vice presidents as executive vice president, senior vice president or vice president for particular areas of responsibility.
Section 10. SECRETARY . The secretary shall (a) keep the minutes of the proceedings of the stockholders, the Board of Directors and committees of the Board of Directors in one (1) or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation; (d) keep a register of the post office address of each stockholder which shall be furnished to the secretary by such stockholder; (e) have general charge of the stock transfer books of the Corporation; and (f) in general perform such other duties as from time to time may be assigned to him or her by the chief executive officer, the president or the Board of Directors.
Section 11. TREASURER . The treasurer shall have the custody of the funds and securities of the Corporation, shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation, shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors and in general perform such other duties as from time to time may be assigned to him or her by the chief executive officer, the president or the Board of Directors. In the absence of a designation of a chief financial officer by the Board of Directors, the treasurer shall be the chief financial officer of the Corporation.
The treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and Board of Directors, at the regular meetings of the Board of Directors or whenever it may so require, an account of all his or her transactions as treasurer and of the financial condition of the Corporation.
Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS . The assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or treasurer, respectively, or by the chief executive officer, the president or the Board of Directors.
Section 13. COMPENSATION . The compensation of the officers shall be fixed from time to time by or under the authority of the Board of Directors and no officer shall be prevented from receiving such compensation by reason of the fact that he or she is also a director.
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ARTICLE VI
CONTRACTS, CHECKS AND DEPOSITS
Section 1. CONTRACTS . The Board of Directors may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document shall be valid and binding upon the Corporation when duly authorized or ratified by action of the Board of Directors and executed by an authorized person.
Section 2. CHECKS AND DRAFTS . All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or agent of the Corporation in such manner as shall from time to time be determined by the Board of Directors.
Section 3. DEPOSITS . All funds of the Corporation not otherwise employed shall be deposited or invested from time to time to the credit of the Corporation as the Board of Directors, the chief executive officer, the president, the chief financial officer or any other officer designated by the Board of Directors may determine.
ARTICLE VII
STOCK
Section 1. CERTIFICATES . Except as may be otherwise provided by the Board of Directors, stockholders of the Corporation are not entitled to certificates representing the shares of stock held by them. In the event that the Corporation issues shares of stock represented by certificates, such certificates shall be in such form as prescribed by the Board of Directors or a duly authorized officer, shall contain the statements and information required by the MGCL and shall be signed by the officers of the Corporation in any manner permitted by the MGCL. In the event that the Corporation issues shares of stock without certificates, to the extent then required by the MGCL, the Corporation shall provide to the record holders of such shares a written statement of the information required by the MGCL to be included on stock certificates. There shall be no differences in the rights and obligations of stockholders based on whether or not their shares are represented by certificates.
Section 2. TRANSFERS . All transfers of shares of stock shall be made on the books of the Corporation, by the holder of the shares, in person or by his or her attorney, in such manner as the Board of Directors or any officer of the Corporation may prescribe and, if such shares are certificated, upon surrender of certificates duly endorsed. The issuance of a new certificate upon the transfer of certificated shares is subject to the determination of the Board of Directors that such shares shall no longer be represented by certificates. Upon the transfer of any uncertificated shares, the Corporation shall provide to the record holders of such shares, to the extent then required by the MGCL, a written statement of the information required by the MGCL to be included on stock certificates.
The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by the laws of the State of Maryland.
Notwithstanding the foregoing, transfers of shares of any class or series of stock will be subject in all respects to the Charter and all of the terms and conditions contained therein.
Section 3. REPLACEMENT CERTIFICATE . Any officer of the Corporation may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, destroyed, stolen or mutilated, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, destroyed, stolen or mutilated; provided, however, if such shares have ceased to be certificated, no new certificate shall be issued unless requested in writing by such stockholder and the Board of Directors has determined that such certificates may be issued. Unless otherwise determined by an officer of the Corporation, the owner of such lost, destroyed, stolen or mutilated certificate or certificates, or his or her legal representative, shall be required, as a condition precedent to the issuance of a new certificate or certificates, to give the Corporation a bond in such sums as it may direct as indemnity against any claim that may be made against the Corporation.
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Section 4. FIXING OF RECORD DATE . The Board of Directors may set, in advance, a record date for the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or determining stockholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to make a determination of stockholders for any other proper purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than ninety (90) days and, in the case of a meeting of stockholders, not less than ten (10) days, before the date on which the meeting or particular action requiring such determination of stockholders of record is to be held or taken.
When a record date for the determination of stockholders entitled to notice of and to vote at any meeting of stockholders has been set as provided in this section, such record date shall continue to apply to the meeting if adjourned or postponed, except if the meeting is adjourned or postponed to a date more than 120 days after the record date originally fixed for the meeting, in which case a new record date for such meeting may be determined as set forth herein.
Section 5. STOCK LEDGER . The Corporation shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate stock ledger containing the name and address of each stockholder and the number of shares of each class held by such stockholder.
Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS . The Board of Directors may authorize the Corporation to issue fractional stock or authorize the issuance of scrip, all on such terms and under such conditions as it may determine. Notwithstanding any other provision of the Charter or these Bylaws, the Board of Directors may issue units consisting of different securities of the Corporation. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Corporation, except that the Board of Directors may provide that for a specified period securities of the Corporation issued in such unit may be transferred on the books of the Corporation only in such unit.
ARTICLE VIII
ACCOUNTING YEAR
The fiscal year of the Corporation shall end on December 31 st of each calendar year, unless otherwise determined by the Board of Directors by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION . Dividends and other distributions upon the stock of the Corporation may be authorized by the Board of Directors, subject to the provisions of law and the Charter. Dividends and other distributions may be paid in cash, property or stock of the Corporation, subject to the provisions of law and the Charter.
Section 2. CONTINGENCIES . Before payment of any dividends or other distributions, there may be set aside out of any assets of the Corporation available for dividends or other distributions such sum or sums as the Board of Directors may from time to time, in its absolute discretion, think proper as a reserve fund for contingencies, for equalizing dividends, for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors shall determine, and the Board of Directors may modify or abolish any such reserve.
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ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the Charter, the Board of Directors may from time to time adopt, amend, revise or terminate any policy or policies with respect to investments by the Corporation as it shall deem appropriate in its sole discretion.
ARTICLE XI
SEAL
Section 1. SEAL . The Board of Directors may authorize the adoption of a seal by the Corporation. The seal shall contain the name of the Corporation and the year of its incorporation and the words “Incorporated Maryland.” The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof.
Section 2. AFFIXING SEAL . Whenever the Corporation is permitted or required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word “(SEAL)” adjacent to the signature of the person authorized to execute the document on behalf of the Corporation.
ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES
To the maximum extent permitted by Maryland law in effect from time to time and the Charter, the Corporation shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, shall pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any individual who is a present or former director or officer of the Corporation and who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity or (b) any individual who, while a director or officer of the Corporation and at the request of the Corporation, serves or has served as a director, officer, partner, trustee, member or manager of another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity. The rights to indemnification and advance of expenses provided by the Charter and these Bylaws shall vest immediately upon election of a director or officer. The Corporation may, with the approval of its Board of Directors, provide such indemnification and advance for expenses to an individual who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation. The indemnification and payment or reimbursement of expenses provided in these Bylaws shall not be deemed exclusive of or limit in any way other rights to which any person seeking indemnification or payment or reimbursement of expenses may be or may become entitled under any bylaw, resolution, insurance, agreement or otherwise.
Neither the amendment nor repeal of this Article, nor the adoption or amendment of any other provision of the Charter or these Bylaws inconsistent with this Article, shall apply to or affect in any respect the applicability of the preceding paragraph with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.
ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice of a meeting is required to be given pursuant to the Charter or these Bylaws or pursuant to applicable law, a waiver thereof in writing or by electronic transmission, given by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice of such meeting, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.
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ARTICLE XIV
EXCLUSIVE FORUM FOR CERTAIN LITIGATION
Unless the Corporation consents in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, shall be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Corporation, (b) any action asserting a claim of breach of any duty owed by any director or officer or other employee of the Corporation to the Corporation or to the stockholders of the Corporation, (c) any action asserting a claim against the Corporation or any director or officer or other employee of the Corporation arising pursuant to any provision of the MGCL, the Charter or these Bylaws, or (d) any action asserting a claim against the Corporation or any director or officer or other employee of the Corporation that is governed by the internal affairs doctrine.
ARTICLE XV
AMENDMENT OF BYLAWS
The Board of Directors shall have the exclusive power to adopt, alter or repeal any provision of these Bylaws and to make new Bylaws.
* * *
THIS IS TO CERTIFY:
That I am the duly elected, qualified and acting Secretary of the Corporation and that the foregoing Amended and Restated Bylaws were adopted as the Bylaws of the Corporation as of 17 October, 2016 by the Board of Directors of the Corporation.
Dated: October 17, 2016
By: | /s/ Brian J. Wolfe | |
Brian J. Wolfe, Secretary |
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AGREEMENT OF LIMITED PARTNERSHIP
OF
IIP OPERATING PARTNERSHIP, LP
Dated as of October 4, 2016
Table of Contents
ARTICLE 1. DEFINED TERMS | 1 | ||
ARTICLE 2. ORGANIZATIONAL MATTERS | 4 | ||
2.1 | Formation; Intended Tax Treatment | 4 | |
2.2 | Name | 4 | |
2.3 | Registered Office and Agent; Principal Office | 4 | |
2.4 | Term | 4 | |
ARTICLE 3. PURPOSE | 5 | ||
3.1 | Purpose and Business | 5 | |
3.2 | Powers | 5 | |
ARTICLE 4. CAPITAL CONTRIBUTIONS | 5 | ||
4.1 | Capital Contributions of the Partners; Additional Funds | 5 | |
4.2 | Issuance of Additional Partnership Interests; Admission of Additional Limited Partners | 6 | |
4.3 | No Third-Party Beneficiary | 6 | |
ARTICLE 5. DISTRIBUTIONS AND ALLOCATIONS | 6 | ||
5.1 | Distributions and Allocations | 6 | |
ARTICLE 6. MANAGEMENT AND OPERATIONS OF BUSINESS | 6 | ||
6.1 | Management | 6 | |
6.2 | Certificate of Limited Partnership | 7 | |
6.3 | Indemnification | 7 | |
6.4 | Title to Partnership Assets | 7 | |
ARTICLE 7. BOOKS, RECORDS, ACCOUNTING AND REPORTS | 8 | ||
7.1 | Records and Accounting | 8 | |
7.2 | Fiscal Year | 8 |
ARTICLE 8. DISSOLUTION, LIQUIDATION AND TERMINATION | 8 | ||
8.1 | Dissolution | 8 | |
8.2 | Winding Up | 8 | |
8.3 | Termination of Partnership and Cancellation of Certificate of Limited Partnership | 9 | |
8.4 | Reasonable Time for Winding-Up | 9 | |
ARTICLE 9. GENERAL PROVISIONS | 9 | ||
9.1 | Binding Effect | 9 | |
9.2 | Creditors | 9 | |
9.3 | Waiver | 9 | |
9.4 | Counterparts | 9 | |
9.5 | Applicable Law | 9 | |
9.6 | Invalidity of Provisions | 10 | |
9.7 | Entire Agreement | 10 | |
9.8 | Merger | 10 |
EXHIBITS | ||
Exhibit A | – | Partners’ Contributions and Partnership Interests |
ii
AGREEMENT OF LIMITED PARTNERSHIP
OF
IIP OPERATING PARTNERSHIP, LP
THIS AGREEMENT OF LIMITED PARTNERSHIP OF IIP OPERATING PARTNERSHIP, LP dated as of the 4 th of October, 2016, is entered into between INNOVATIVE INDUSTRIAL PROPERTIES, INC., a Maryland corporation, as the General Partner, and INNOVATIVE INDUSTRIAL PROPERTIES, LLC, a Delaware limited liability company, as the Limited Partner.
WHEREAS, the General Partner formed IIP Operating Partnership, LP as a limited partnership on June 20, 2016 pursuant to the Act by filing a certificate of limited partnership with the Secretary of State of the State of Delaware (the “ Certificate ”).
WHEREAS, at formation Alan Gold was the initial limited partner of the Partnership and transferred, effective as of the date hereof, all of his limited partnership interests to Innovative Industrial Properties, LLC (the “ Limited Partner ”).
WHEREAS, the General Partner and the Limited Partner desire to enter into this Agreement of Limited Partnership to constitute the “partnership agreement” (within the meaning of the Act).
NOW THEREFORE, in consideration of the mutual covenants herein contained, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be bound, hereby agree as follows:
Article
1.
DEFINED TERMS
The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.
“ Act ” means the Delaware Revised Uniform Limited Partnership Act, as amended from time to time, and any successor to such statute.
“ Additional Limited Partner ” means a Person that has executed and delivered an additional limited partner signature page in the form attached hereto, has been admitted to the Partnership as a Limited Partner and that is shown as such on the books and records of the Partnership.
“ Affiliate ” means,
(a) with respect to any individual Person, any member of the Immediate Family of such Person or a trust established for the benefit of such member, or
(b) with respect to any Entity, any Person which, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, any such Entity. For purposes of this definition, “control,” when used with respect to a any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have meanings correlative to the foregoing
“ Agreement ” means this Agreement of Limited Partnership, as originally executed and as amended, supplemented or restated from time to time, as the context requires.
“ Articles of Incorporation ” means the General Partner’s Articles of Incorporation, filed with the Maryland State Department of Assessments and Taxation, or other organizational document governing the General Partner, as amended, supplemented or restated from time to time.
“ Capital Contribution ” means, with respect to any Partner, any cash, cash equivalents or the net value of property which such Partner contributes or is deemed to contribute to the Partnership.
“ Certificate ” has the meaning set forth in the Recitals.
“ Claims ” has the meaning set forth in Section 6.3 .
“ Code ” means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law.
“ Entity ” means any general partnership, limited partnership, corporation, joint venture, trust, business trust, real estate investment trust, limited liability company, limited liability partnership, cooperative or association.
“ GAAP ” means United States generally accepted accounting principles.
“ General Partner ” means Innovative Industrial Properties, Inc., a Maryland corporation, and any successor as general partner of the Partnership.
“ General Partner Interest ” means a Partnership Interest held by the General Partner, in its capacity as general partner. A General Partner Interest may be expressed as a number of Partnership Units.
“ Indemnitee ” means any trustee, manager, director or officer of the Partnership, the General Partner, or the Initial Limited Partner.
“ Initial Limited Partner ” shall mean Innovative Industrial Properties, LLC, a Delaware limited liability company.
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“ IRS ” shall mean the Internal Revenue Service of the United States (or any successor organization).
“ Limited Partner ” has the meaning set forth in the Recitals hereto and shall also include any Person who subsequently is admitted as a Limited Partner and named in Exhibit A , as such Exhibit may be amended from time to time, upon the execution and delivery by such Person of an additional limited partner signature page, in such Person’s capacity as a Limited Partner of the Partnership.
“ Limited Partner Interest ” means a Partnership Interest of a Limited Partner in the Partnership representing a fractional part of the Partnership Interests of all Partners and includes any and all benefits to which the holder of such a Partnership Interest may be entitled, as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest may be expressed as a number of Partnership Units.
“ Liquidating Events ” has the meaning set forth in Section 8.1 .
“ Net Income ” or “ Net Loss ” means, for each fiscal year or other applicable period in which the Partnership is treated as a partnership for federal income tax purposes, an amount equal to the Partnership’s taxable income or loss for such year or period as determined for federal income tax purposes by the General Partner.
“ Partner ” means the General Partner or a Limited Partner, and “Partners” means the General Partner and the Limited Partners collectively.
“ Partnership ” means the limited partnership formed under the Act and pursuant to this Agreement, and any successor thereto.
“ Partnership Interest ” means an ownership interest in the Partnership, which may be expressed as a number of Partnership Units.
“ Partnership Unit ” means a fractional, undivided share of the Partnership Interests of all Partners that are issued pursuant to this Agreement. The number of Partnership Units outstanding and the Percentage Interests in the Partnership represented by such Partnership Units are set forth in Exhibit A , as such Exhibit may be amended from time to time.
“ Percentage Interest ” means, as to a Partner, the fractional part of the Partnership Interests owned by such Partner and expressed as a percentage as specified in Exhibit A , as such Exhibit may be amended from time to time.
“ Person ” means an individual or Entity.
“ Regulations ” means the final, temporary or proposed income tax regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).
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Article
2.
ORGANIZATIONAL MATTERS
2.1 Formation; Intended Tax Treatment
The General Partner has formed the Partnership by filing the Certificate on June 20, 2016 in the office of the Delaware Secretary of State. The Partnership is a limited partnership organized pursuant to the provision of the Act and upon the terms and conditions set forth in this Agreement. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes. The General Partner and Limited Partner intend for the Partnership to be treated as an entity disregarded from the General Partner until such time as an Additional Limited Partner is admitted to the Partnership. It is expressly acknowledged and agreed that the Partnership shall not be dissolved and is not required to be wound up as a result of the transfer of all the limited partnership interests of Alan Gold, the initial sole limited partner of the limited partnership, as this Agreement hereby specifically provides for the admission of the Limited Partner after, and effective as of, the date Alan Gold ceased to be a limited partner.
2.2 Name
The name of the Partnership is IIP Operating Partnership, LP. The Partnership’s business may be conducted under any other name or names deemed advisable by the General Partner, including the name of the General Partner or any Affiliate thereof. The words “Limited Partnership”, “LP”, “Ltd.” or similar words, phrases or letters shall be included in the Partnership’s name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. The General Partner in its sole and absolute discretion may change the name of the Partnership and shall notify the Limited Partners of such change in the next regular communication to the Limited Partners.
2.3 Registered Office and Agent; Principal Office
The address of the registered office of the Partnership in the State of Delaware and the name and address of the registered agent for service of process on the Partnership in the State of Delaware is the Corporation Service Company, 2711 Centerville Road Suite 400, Wilmington, Delaware 19808. The principal office of the Partnership shall be 17190 Bernardo Center Drive, San Diego, CA 92128, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems advisable.
2.4 Term
The term of the Partnership shall commence on the date hereof and shall continue until December 31, 2099, unless the Partnership is dissolved sooner pursuant to the provisions of this Agreement or as otherwise provided by law.
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Article
3.
PURPOSE
3.1 Purpose and Business
(a) The purpose and nature of the business to be conducted by the Partnership is to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act, including to engage in the following activities:
(i) to acquire, hold, own, develop, construct, improve, maintain, operate, sell, lease, transfer, encumber, convey, exchange, and otherwise dispose of or deal with real and personal property of all kinds;
(ii) to enter into any partnership, joint venture, corporation, limited liability company, trust or other similar arrangement to engage in any of the foregoing;
(iii) to undertake such other activities as may be necessary, advisable, desirable or convenient to the business of the Partnership; and
(iv) to engage in such other ancillary activities as shall be necessary or desirable to effectuate the foregoing purposes.
(b) The Partnership shall have all powers necessary or desirable to accomplish the purposes enumerated.
3.2 Powers
(a) The Partnership is empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partnership.
(b) The General Partner also is empowered to do any and all acts and things necessary, appropriate or advisable to ensure that the Partnership will not be classified as a “publicly traded partnership” for the purposes of Section 7704 of the Code, including but not limited to imposing restrictions on exchanges of Partnership Units.
Article
4.
CAPITAL CONTRIBUTIONS
4.1 Capital Contributions of the Partners; Additional Funds
(a) The General Partner and the Limited Partner have made the Capital Contributions and own Partnership Units as set forth in Exhibit A .
(b) Except as otherwise may be expressly provided herein, the Partners shall have no obligation to make any additional Capital Contributions or provide any additional funding to the Partnership (whether in the form of loans, repayments of loans or otherwise).
5
(c) If, in the sole discretion of the General Partner, the Partnership requires additional funds at any time, or from time to time, the General Partner may cause the Partnership to borrow funds from third parties on such terms and conditions as the General Partner may deem appropriate, or the General Partner may contribute the amount of such required funds as an additional capital contribution.
4.2 Issuance of Additional Partnership Interests; Admission of Additional Limited Partners
(a) The General Partner is authorized to cause the Partnership to issue additional Partnership Interests (or options therefore) in the form of Partnership Units or other Partnership Interests in one or more series or classes, or in one or more series of any such class senior, on a parity with, or junior to the Partnership Units to any Persons at any time or from time to time, on such terms and conditions, as the General Partner shall establish in each case in its sole and absolute discretion subject to Delaware law.
(b) The General Partner may take such steps as it, in its sole and absolute discretion, deems necessary or appropriate to admit any Person as a Limited Partner of the Partnership or to issue any Partnership Interests, including amending the Certificate, Exhibit A or any other provision of this Agreement.
4.3 No Third-Party Beneficiary
No creditor or other third party having dealings with the Partnership shall have the right to enforce the right or obligations of any Partner to make Capital Contributions or loans or to pursue any other right or remedy hereunder or at law or in equity, it being understood and agreed that the provisions of this Agreement shall be solely for the benefit of, and may be enforced solely by, the parties hereto and their respective successors and assigns.
Article
5.
DISTRIBUTIONS AND ALLOCATIONS
5.1 Distributions and Allocations
Distributions will be made, and the net income, net loss and other Partnership items shall be allocated, to Partners, pro rata , in accordance with their respective Percentage Interests.
Article
6.
MANAGEMENT AND OPERATIONS OF BUSINESS
6.1 Management
The General Partner shall have full, complete and exclusive discretion to manage and control the business and affairs of the Partnership. The General Partner is authorized to execute, deliver and perform any and all agreements and transactions on behalf of the Partnership. The execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity. The General Partner may delegate any or all of its powers, rights and obligations hereunder, and may appoint, employ, contract or otherwise deal with any Person for the transaction of the business of the Partnership, which Person may, under supervision of the General Partner, perform any acts or services for the Partnership as the General Partner may approve.
6
6.2 Certificate of Limited Partnership
The General Partner has previously filed the Certificate with the Secretary of State of Delaware as required by the Act. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and any other state, or the District of Columbia, in which the Partnership may elect to do business or own property.
6.3 Indemnification
To the fullest extent permitted by Delaware law, the Partnership shall indemnify and hold harmless the General Partner and the Initial Limited Partner from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including attorneys’ fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative (collectively, “ Claims ”), that relate to the operations of the Partnership or the General Partner as set forth in this Agreement, in which the General Partner may be involved, or threatened to be involved, as a party or otherwise. In addition, to the extent permitted by Delaware law, the General Partner may cause the Partnership to indemnify and hold harmless an Indemnitee from and against any and all Costs arising from any and all Claims that relate to the operations of the Partnership or the General Partner as set forth in this Agreement, in which the Indemnitee may be involved, or threatened to be involved, as a party or otherwise. The indemnification provided herein shall be in addition to any other rights to which a Person who may be entitled to indemnification hereunder may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to any Person who has ceased to serve in such capacity unless otherwise provided in a written agreement pursuant to which such Person is indemnified. The provisions herein are for the benefit of the any Person to be indemnified hereunder and such Person’s heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons.
6.4 Title to Partnership Assets
Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner.
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Article
7.
BOOKS, RECORDS, ACCOUNTING AND REPORTS
7.1 Records and Accounting
The General Partner shall keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership’s business.
7.2 Fiscal Year
The fiscal year of the Partnership shall be the calendar year.
Article
8.
DISSOLUTION, LIQUIDATION AND TERMINATION
8.1 Dissolution
(a) The Partnership shall not be dissolved by the admission of Additional Limited Partners. Upon the withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership.
(b) The Partnership shall dissolve, and its affairs shall be wound up, only upon the first to occur of any of the following (each, a “ Liquidating Event ”):
(i) the expiration of its term as provided in Section 2.4 ;
(ii) an election to dissolve the Partnership made by the General Partner;
(iii) entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act; or
(iv) by operation of law.
8.2 Winding Up
Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. The General Partner shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership’s liabilities and property and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom shall be applied and distributed first, to the payment and discharge of all of the Partnership’s debts and liabilities to creditors; and the balance, if any, shall be distributed to all Partners in accordance with their respective Percentage Interests.
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8.3 Termination of Partnership and Cancellation of Certificate of Limited Partnership
Upon the completion of the liquidation of the Partnership’s assets, the Partnership shall be terminated, a certificate of cancellation shall be filed, and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the state of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken.
8.4 Reasonable Time for Winding-Up
A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect among the Partners during the period of liquidation.
Article
9.
GENERAL PROVISIONS
9.1 Binding Effect
This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.
9.2 Creditors
Other than as expressly set forth herein with respect to the Indemnities, none of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership.
9.3 Waiver
No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.
9.4 Counterparts
This Agreement may be executed (including by facsimile transmission) with counterpart signature pages or in counterparts, all of which together shall constitute one agreement binding on all of the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart.
9.5 Applicable Law
This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of laws thereof.
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9.6 Invalidity of Provisions
If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.
9.7 Entire Agreement
This Agreement contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes any other prior written or oral understandings or agreements among them with respect thereto.
9.8 Merger
The Partnership may merge with, or consolidate into, any Person or Entity in accordance with Section 17-211 of the Act.
[SIGNATURE PAGE FOLLOWS]
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Signature Page to Agreement of Limited Partnership of IIP Operating Partnership, LP, among the undersigned and the other parties thereto.
GENERAL PARTNER: | |||
INNOVATIVE INDUSTRIAL PROPERTIES, INC. | |||
By: | /s/ Brian Wolfe | ||
Name: | Brian Wolfe | ||
Title: | Secretary | ||
INITIAL LIMITED PARTNER: | |||
INNOVATIVE INDUSTRIAL PROPERTIES, LLC | |||
By: | /s/ Brian Wolfe | ||
Name: | Brian Wolfe | ||
Title: | Secretary |
11
Corporate/Limited Liability Company Additional Limited Partner Signature Page to Agreement of Limited Partnership of IIP Operating Partnership, LP, among the undersigned and the other parties thereto.
Dated: ____________ __, 20___ | [Name of Corporation/LLC] | |
By: | ||
Name: | ||
Title: |
12
Individual Additional Limited Partner Signature Page to Agreement of Limited Partnership of IIP Operating Partnership, LP, among the undersigned and the other parties thereto.
Dated: ____________ __, 20___ | |
13
Partnership Limited Partner Signature Page to Agreement of Limited Partnership of IIP Operating Partnership, LP, among the undersigned and the other parties thereto.
Dated: ____________ __, 20___ | [Name of LP] | |
By: | ||
Name: | ||
Title: |
14
Exhibit A
Partners’ Contributions and Partnership Interests
Name and Address of Partner | Type of Interest |
Capital
Contribution |
Number of Partnership
Units |
Percentage Interest | ||||||||||
INNOVATIVE INDUSTRIAL PROPERTIES, INC. | General Partnership | $ | 100 | 1000 | 1 | % | ||||||||
INNOVATIVE INDUSTRIAL PROPERTIES, LLC | Limited Partnership | $ | 9900 | 99000 | 99 | % | ||||||||
TOTAL | $ | 10000 | 100000 | 100 | % |
Exhibit 5.1
__________, 2016
FORM OF OPINION TO BE FILED
Innovative industrial properties, inc.
17190 Bernardo Center Drive
San Diego, California 92128
Re: | Registration Statement on Form S-11 |
Ladies and Gentlemen:
We are acting as counsel to Innovative Industrial Properties, Inc., a Maryland corporation (the “ Company ”), in connection with the registration under the Securities Act of 1933, as amended (the “ Securities Act ”), pursuant to a Registration Statement on Form S-11 (Registration No. 333-_______) (the “ Registration Statement ”) as filed with the Securities and Exchange Commission (the “ Commission ”), of the offering by the Company of shares of Class A Common Stock, $0.001 par value per share, of the Company (“ Common Stock ”), having a maximum aggregate offering price of $200,000,000 (the “ Offered Shares ”), all of which Offered Shares are to be sold by the Company pursuant to the proposed form of Underwriting Agreement among the Company and the underwriters named therein filed as Exhibit 1.1 to the Registration Statement (the “ Underwriting Agreement ”).
In connection with our representation of the Company, and as a basis for the opinion hereinafter set forth, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following documents (collectively, the “ Documents ”):
1. The Amended and Restated Articles of Incorporation of the Company (the “ Charter ”), certified as of _________, 2016, by the State Department of Assessments and Taxation of Maryland (the “ SDAT ”);
2. The Bylaws of the Company, certified as of the date hereof by the Secretary of the Company;
3. Resolutions adopted by the Board of Directors of the Company (the “ Board ”) relating to the registration, sale and issuance of the Offered Shares, certified as of the date hereof by the Secretary of the Company;
4. The form of certificate to be used by the Company to evidence the Offered Shares when and as issued, filed as Exhibit 4.1 to the Registration Statement;
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Innovative industrial properties, inc. __________, 2016 Page 2 |
5. A certificate of the SDAT as to the good standing of the Company, dated as of _________, 2016; and
6. A certificate executed by _________, Secretary of the Company, dated as of the date hereof.
In expressing the opinion set forth below, we have assumed the following:
1. Each individual executing any of the Documents, whether on behalf of such individual or another person, is legally competent to do so.
2. Each individual executing any of the Documents on behalf of a party (other than the Company) is duly authorized to do so.
3. Each of the parties (other than the Company) executing any of the Documents has caused to be duly and validly executed and delivered each of the Documents to which such party is a signatory, and such party’s obligations (including the Company’s) set forth therein are legal, valid and binding.
4. All Documents submitted to us as originals are authentic. All Documents submitted to us as certified or photostatic copies conform to the original documents. All signatures on all such Documents are genuine. All public records reviewed or relied upon by us or on our behalf are true and complete. All statements and information contained in the Documents are true and complete. There has been no oral or written modification or amendment to the Documents, or waiver of any provision of the Documents, by action or omission of the parties or otherwise.
5. The Offered Shares will not be issued or transferred in violation of any restriction or limitation on transfer or ownership of Shares (as defined in the Charter) contained in 5.7 of the Charter.
6. The Company will issue the Offered Shares in accordance with the resolutions of the Board and, prior to the issuance of any Offered Shares, the Company will have available for issuance, under the Charter, the requisite number of authorized but unissued shares of Common Stock. As of the date hereof, the Company has available for issuance, under the Charter, the requisite number of authorized but unissued shares of Common Stock for the issuance of the Offered Shares.
Based upon the foregoing, and subject to the assumptions, limitations and qualifications stated herein, it is our opinion that, upon issuance and delivery of the Offered Shares as contemplated by the resolutions of the Board and upon payment therefor pursuant to the terms of the Underwriting Agreement following effectiveness of the Registration Statement, the Offered Shares will be duly authorized, validly issued, fully paid and non-assessable.
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Innovative industrial properties, inc. __________, 2016 Page 3 |
The foregoing opinion is limited solely to the Maryland General Corporation Law, as amended, and we do not express any opinion herein concerning any other laws, statutes, ordinances, rules, or regulations. We express no opinion as to compliance with the securities (or “blue sky”) laws of the State of Maryland. The opinion expressed herein is subject to the effect of judicial decisions which may permit the introduction of parol evidence to modify the terms or the interpretation of agreements.
This opinion is issued as of the date hereof, and we assume no obligation to supplement this opinion if any applicable law changes after the date hereof or if we become aware of any fact that might change the opinion expressed herein after the date hereof. This opinion is limited to the matters set forth herein, and no other opinion should be inferred beyond the matters expressly stated.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of the name of our firm therein. In giving this consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the Securities Act.
Very truly yours, | |
Foley & Lardner LLP |
Exhibit 8.1
[ ] [●], 2016
Form of opinion to be filed
Via E-Mail and U.S. Mail
Innovative Industrial Properties, Inc.
17190 Bernardo Center Drive
San Diego, California 92128
Re: | Opinion of Foley & Lardner LLP as to Tax Matters |
Ladies and Gentlemen:
We have acted as counsel to Innovative Industrial Properties, Inc., a Maryland corporation (the “ Company ”), with respect to certain United States federal income tax matters in connection with the filing of its registration statement on Form S-11 (the “ Registration Statement ) with the Securities and Exchange Commission (the “ Commission ”) on the date hereof. In connection with the offering of common stock of the Company, par value $0.01 per share (the “ Stock ”), pursuant to the Company’s initial public offering, we have been asked to provide an opinion regarding (i) the classification of the Company as a real estate investment trust (“ REIT ”) under the Internal Revenue Code of 1986, as amended (the “ Code ”) 1 ; and (ii) the accuracy and fairness of the discussion in the Registration Statement under the caption “Material U.S. Federal Income Tax Considerations”. Capitalized terms not defined herein shall have the meanings ascribed to them in the Registration Statement.
In rendering our opinions, we have made such factual and legal examinations, including an examination of such statutes, regulations, records, certificates and other documents as we have considered necessary or appropriate, including, but not limited to, the following: (1) the Registration Statement (including exhibits thereto); (2) the Articles of Incorporation of the Company, as amended through the date hereof; and (3) the Agreement of Limited Partnership of IIP Operating Partnership, LP (the “ Operating Partnership ”), dated [__________], 2016, and any amendments thereto through the date hereof. The opinions set forth in this letter also are based on certain written factual representations and covenants made by an officer of the Company, in the Company’s own capacity and in its capacity as the general partner of the Operating Partnership, in a letter to us of even date herewith (the “ Officer’s Certificate ”) (collectively, the Officer’s Certificate, and the documents described in the immediately preceding sentence are referred to herein as the “ Transaction Documents ”).
1 Unless otherwise stated, all section references herein are to the Code.
Boston Brussels CHICAGO Detroit |
JACKSONVILLE LOS ANGELES MADISON MIAMI |
MILWAUKEE NEW YORK ORLANDO SACRAMENTO |
SAN DIEGO SAN FRANCISCO SHANGHAI SILICON VALLEY |
TALLAHASSEE TAMPA TOKYO WASHINGTON, D.C. |
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In our review, we have assumed, with the consent of the Company and the Operating Partnership, that (i) all of the factual representations, covenants and statements set forth in the Transaction Documents are true, complete and correct, (ii) all of the obligations imposed by any such documents on the parties thereto have been and will be performed or satisfied in accordance with their terms; (iii) the Company and the Operating Partnership each will be operated in the manner described in the relevant Transaction Documents; and (iv) the Company and the Operating Partnership have valid legal existences under the laws of the states in which they were formed and have operated in accordance with the laws of such states. We have, consequently, assumed and relied on your representations that the information presented in the Transaction Documents (including, without limitation, the Officer’s Certificate and the exhibits thereto) accurately and completely describe all material facts relevant to our opinion and that any representation of fact made “to the knowledge of” or similarly qualified is correct without such qualification. To the extent the representations and covenants speak to the intended ownership or operations of the Company, we have assumed that the Company will in fact be owned and operated in accordance with such stated intent. We have not undertaken any independent inquiry into, or verification of, these facts for the purpose of rendering this opinion. While we have reviewed all representations made to us to determine their reasonableness, we have no assurance that they are or will ultimately prove to be accurate. No facts have come to our attention, however, that would cause us to question the accuracy or completeness of such facts or representations in a material way. Our opinion is conditioned on the continuing accuracy and completeness of such representations, covenants and statements. Any material change or inaccuracy in the facts referred to, set forth, or assumed herein or in the Transaction Documents may affect our conclusions set forth herein.
We also have assumed the legal capacity of all natural persons, the genuineness of all signatures, the proper execution of all documents, the legal capacity of signatories, the authenticity of all documents submitted to us as originals, the conformity to originals of documents submitted to us as copies, and the authenticity of the originals from which any copies were made. For documents that have been provided to us in draft form, we have assumed that the final executed versions of such documents will not differ materially from such drafts.
In addition to the foregoing, in rendering the opinions set forth below, we note that the Company and the Operating Partnership will be engaged in the business of acquiring, owning, and managing specialized industrial properties that will be leased to state-licensed businesses that grow and cultivate medical-use cannabis on such properties. We further note that, as described in more detail in the Registration Statement, cannabis continues to be a Schedule I controlled substance under the U.S. Controlled Substances Act, and therefore, the possession, cultivation, and production of cannabis products continues to be illegal under federal law notwithstanding state laws that may permit such activities. Although we note that, as described in more detail in the Registration Statement, the U.S. Department of Justice has instructed federal prosecutors not to take actions against individuals complying with state medical cannabis laws, we also note that the basic federal prohibition under the U.S. Controlled Substances Act remains in place, and therefore the medical-use cannabis industry occupies a unique and uncertain legal status in the United States. We are not aware of any specific provisions of the Code or the rules or regulations thereunder, any U.S. tax court decisions, or any private letter rulings that cause us to believe that the nature of the Company’s business will negatively impact how the IRS or the courts would apply to the Company the provisions of the Code and the rules and regulations thereunder relative to the Company’s REIT status, but we cannot be certain that the IRS or the courts will not take a position that negatively affects REIT status by reason of the Company’s business. Accordingly, with your permission, we have assumed for purposes of our opinions herein that the IRS and the courts will not apply or interpret the provisions of the Code and the rules and regulations thereunder relative to an entity’s status as a REIT any differently to the Company and its business than they would be applied to any lawful business.
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We have also assumed for purposes of this opinion that neither the IRS nor the courts will consider the Company’s current or contemplated business activities, as described in the Registration Statement, to include a trade or business that consists of “trafficking in controlled substances” within the meaning of Section 280E of the Code.
Based upon, and subject to, the foregoing assumptions and qualifications and the discussion below, we are of the opinion that:
1. Commencing with the Company’s taxable year ended on December 31, 2016, the Company has been organized in conformity with requirements for qualification as a REIT under the Code, and the Company’s proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT for its taxable year ending December 31, 2016 and thereafter, assuming the Company’s election to be treated as a REIT is not either revoked or intentionally terminated under the Code; and
2. The discussion in the Registration Statement under the caption “Material U.S. Federal Income Tax Considerations,” to the extent it constitutes matters of law, summaries of legal matters or legal conclusions, is correct in all material respects and fairly summarizes the U.S. federal income tax considerations that are likely to be material to a holder of the Company’s Stock.
We express no opinion on any issue relating to the Company, the Operating Partnership or the discussion in the Registration Statement under the caption “Material U.S. Federal Income Tax Considerations” other than as expressly stated above.
We undertake no obligation to update this opinion, or to ascertain after the date hereof whether circumstances occurring after such date may affect the conclusions set forth herein. We express no opinion as to matters governed by any laws other than the Code, the Treasury Regulations, published administrative announcements and rulings of the Internal Revenue Service (“ IRS ”), and court decisions.
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The Company’s qualification and taxation as a REIT will depend upon the Company’s ability to meet on a continuing basis, through actual annual operating and other results, the various requirements under the Code as described in the Registration Statement with regard to, among other things, the sources of its gross income, the composition of its assets, the level of its distributions to stockholders, and the diversity of its stock ownership. Foley & Lardner LLP will not review the Company’s compliance with these requirements on a continuing basis. Accordingly, no assurance can be given that the actual results of the operations of the Company and the Operating Partnership, the sources of their income, the nature of their assets, the level of the Company’s distributions to stockholders and the diversity of its stock ownership for any given taxable year will satisfy the requirements under the Code for the Company’s qualification and taxation as a REIT. To the extent that the facts differ from those represented to or assumed by us herein, our opinion should not be relied upon.
The foregoing opinions are based on relevant provisions of the Code, Treasury Regulations issued thereunder (including Proposed and Temporary Regulations), and interpretations of the foregoing as expressed in court decisions, administrative determinations, and the legislative history as of the date hereof. These provisions and interpretations are subject to differing interpretations or change at any time, which may or may not be retroactive in effect, and which might result in modifications of our opinions. In this regard, an opinion of counsel with respect to an issue represents counsel’s best judgment as to the outcome on the merits with respect to such issue, is not binding on the IRS or the courts, and is not a guarantee that the IRS will not assert a contrary position with respect to an issue, or that a court will not sustain such a position if asserted by the IRS. The IRS has not issued Regulations or administrative interpretations with respect to various provisions of the Code relating to REIT qualification. No assurance can be given that the law will not change in a way that will prevent the Company from qualifying as a REIT or that may change the other legal conclusions stated herein. As described in the Registration Statement, the Company’s qualification and taxation as a REIT depend upon the Company’s ability to meet the various qualification tests imposed under the Code, including through actual annual operating results, asset composition, distribution levels and diversity of stock ownership, the results of which have not been and will not be reviewed by Foley & Lardner LLP. Accordingly, no assurance can be given that the actual results of the Company’s operation for any particular taxable year will satisfy such requirements.
The foregoing opinions are limited to the United States federal income tax matters addressed herein, and no other opinions are rendered with respect to other United States federal tax matters or to any issues arising under the tax laws of any other country, or any state or locality. This opinion letter is rendered to you for your use in connection with the Registration Statement and may be relied upon solely by you and the purchasers of Stock pursuant to the Registration Statement, and it speaks only as of the date hereof. Except as provided in the next paragraph, this opinion letter may not be distributed, quoted in whole or in part or otherwise reproduced in any document, filed with any governmental agency, or relied upon by any other person for any other purpose (other than as required by law) without our express written consent.
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We consent to the use of our name under the captions “Material U.S. Federal Income Tax Considerations” and “Legal Matters” in the Registration Statement and to the use of these opinions for filing as Exhibit 8.1 to the Registration Statement. In giving this consent, we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, or the rules and regulations of the Commission thereunder.
Very truly yours, | |
Foley & Lardner LLP |
Exhibit 10.1
INNOVATIVE
INDUSTRIAL PROPERTIES, Inc.
2016 OMNIBuS INCENTIVE PLAN
1. Purpose, Effective Date and Definitions.
(a) Purpose . This Innovative Industrial Properties, Inc. 2016 Omnibus Incentive Plan has two complementary purposes: (i) to attract, retain, focus and motivate executives and other selected employees, directors, consultants and advisors and (ii) to increase stockholder value. The Plan will accomplish these objectives by offering participants the opportunity to acquire shares of the Company’s Class A common stock, receive monetary payments based on the value of such Class A common stock or receive other incentive compensation on the terms that this Plan provides.
(b) Effective Date . Subject to stockholder approval of the Plan prior to such date, this Plan will become effective on the date on which the shares of the Company’s voting common stock are first sold to the public pursuant to an effective registration statement filed by the Company under the Securities Act of 1933, as amended (the “Effective Date”).
(c) Definitions . Capitalized terms used and not otherwise defined in various sections of the Plan have the meanings given in Section 18.
2. Administration.
(a) Administration . In addition to the authority specifically granted to the Administrator in this Plan, the Administrator has full discretionary authority to administer this Plan, including but not limited to the authority to: (i) interpret the provisions of this Plan or any agreement covering an Award; (ii) prescribe, amend and rescind rules and regulations relating to this Plan; (iii) correct any defect, supply any omission, or reconcile any inconsistency in the Plan, any Award or any agreement covering an Award in the manner and to the extent it deems desirable to carry this Plan or such Award into effect; and (iv) make all other determinations necessary or advisable for the administration of this Plan. All Administrator determinations shall be made in the sole discretion of the Administrator and are final and binding on all interested parties.
Notwithstanding any provision of the Plan to the contrary, the Administrator shall have the discretion to grant an Award with any vesting condition, any vesting period or any performance period if the Award is granted to a newly hired or promoted Participant, or accelerate or shorten the vesting or performance period of an Award, in connection with a Participant’s death, Disability, Retirement or termination by the Company or an Affiliate without Cause or a Change of Control.
Notwithstanding the above statement or any other provision of the Plan, once established, the Administrator shall have no discretion to increase the amount of compensation payable under an Award that is intended to be performance-based compensation under Code Section 162(m), although the Administrator may decrease the amount of compensation a Participant may earn under such an Award.
(b) Delegation to Other Committees or Officers . To the extent applicable law permits, the Board may delegate to another committee of the Board, or the Committee may delegate to one or more officers of the Company, any or all of their respective authority and responsibility as an Administrator of the Plan; provided that no such delegation is permitted with respect to Stock-based Awards made to Section 16 Participants at the time any such delegated authority or responsibility is exercised unless the delegation is to another committee of the Board consisting entirely of Non-Employee Directors. If the Board or the Committee has made such a delegation, then all references to the Administrator in this Plan include such other committee or one or more officers to the extent of such delegation.
(c) No Liability; Indemnification . No member of the Board or the Committee, and no officer or member of any other committee to whom a delegation under Section 2(b) has been made, will be liable for any act done, or determination made, by the individual in good faith with respect to the Plan or any Award. The Company will indemnify and hold harmless each such individual as to any acts or omissions, or determinations made, with respect to this Plan or any Award to the maximum extent that the law and the Company’s by-laws permit.
3. Eligibility. The Administrator may designate any of the following as a Participant from time to time, to the extent of the Administrator’s authority: any officer or other employee of the Company or its Affiliates; any individual that the Company or an Affiliate has engaged to become an officer or employee; any consultant or advisor who provides services to the Company or its Affiliates; or any Director, including a Non-Employee Director. The Administrator’s granting of an Award to a Participant will not require the Administrator to grant an Award to such individual at any future time. The Administrator’s granting of a particular type of Award to a Participant will not require the Administrator to grant any other type of Award to such individual.
4. Types of Awards; Assistance to Participants.
(a) Grants of Awards . Subject to the terms of this Plan, the Administrator may grant any type of Award to any Participant it selects, but only employees of the Company or a Subsidiary (that qualifies under Code Section 422) may receive grants of incentive stock options within the meaning of Code Section 422. Awards may be granted alone or in addition to, in tandem with, or (subject to the prohibition on repricing set forth in Section 14(e)) in substitution for any other Award (or any other award granted under another plan of the Company or any Affiliate, including the plan of an acquired entity).
(b) Assistance. On such terms and conditions as shall be approved by the Administrator, the Company or any Subsidiary may directly or indirectly lend money to any Participant or other person to accomplish the purposes of the Plan, including to assist such Participant or other person to acquire Shares upon the exercise of Options, provided that such lending is not permitted to the extent it would violate terms of the Sarbanes-Oxley Act of 2002 or any other law, regulation or other requirement applicable to the Company or any Subsidiary.
5. Shares Reserved under this Plan.
(a) Plan Reserve . Subject to adjustment as provided in Section 16, the aggregate maximum number of Shares that may be issued pursuant to Awards after the Effective Date shall equal One Million (1,000,000) Shares. Notwithstanding anything to the contrary in this Section 5(a), but subject to adjustment as provided in Section 16, the aggregate maximum number of Shares that may be issued pursuant to the exercise of incentive stock options shall be One Million (1,000,000) Shares. The Shares reserved for issuance may be either authorized and unissued Shares or shares reacquired at any time and now or hereafter held as treasury stock. The aggregate number of Shares reserved under this Section 5(a) shall be depleted by the maximum number of Shares, if any, that may be issuable under an Award as determined at the time of grant. For purposes of determining the aggregate number of Shares reserved for issuance under this Plan, any fractional Share shall be rounded to the next highest full Share.
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(b) Replenishment of Shares Under this Plan . If (i) an Award lapses, expires, terminates or is cancelled without the issuance of Shares under the Award (whether due currently or on a deferred basis), (ii) it is determined during or at the conclusion of the term of an Award that all or some portion of the Shares with respect to which the Award was granted will not be issuable, or that other compensation with respect to the Shares covered by the Award will not be payable, on the basis that the conditions for such issuance will not be satisfied, (iii) Shares are forfeited under an Award, (iv) Shares are issued under any Award and the Company subsequently reacquires them pursuant to rights reserved upon the issuance of the Shares or (v) Shares are tendered to satisfy the exercise price of an Award or federal, state or local tax withholding obligations, then such Shares shall be recredited to the Plan’s reserve and may again be used for new Awards under this Plan, but Shares recredited to the Plan’s reserve pursuant to clause (iv) or (v) may not be issued pursuant to incentive stock options.
(c) Participant Limitations . Subject to adjustment as provided in Section 16, during any time when the Company has a class of equity security registered under Section 12 of the Exchange Act and the transition period under Treasury Reg. Section 1.162-27(f)(2) has lapsed or does not apply, no Participant may be granted Awards that could result in such Participant:
(i) receiving Options for, and/or Stock Appreciation Rights with respect to, more than 200,000 Shares (or 200,000 Shares, in the case of a Non-Employee Director) during any fiscal year of the Company;
(ii) receiving Awards of Restricted Stock and/or Restricted Stock Units, and/or other Stock-based Awards pursuant to Section 12, relating to more than 200,000 Shares (or 200,000 Shares, in the case of a Non-Employee Director) during any fiscal year of the Company;
(iii) receiving Awards of Performance Shares, and/or Awards of Performance Units the value of which is based on the Fair Market Value of Shares, for more than 200,000 Shares (or 200,000 Shares, in the case of a Non-Employee Director) during any fiscal year of the Company; or
(iv) receiving Awards of Performance Units the value of which is not based on the Fair Market Value of Shares, Annual Incentive Award(s), Long-Term Incentive Award(s) or Dividend Equivalent Unit(s) that would pay more than $2,000,000 to the Participant (or $2,000,000, in the case of a Non-Employee Director) during any single fiscal year of the Company.
In all cases relating to Awards granted to Participants other than Non-Employee Directors, determinations under this Section 5(c) shall be made in a manner consistent with the exemption for performance-based compensation that Code Section 162(m) provides and, to the extent applicable, the transition rules thereunder.
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6. Options. Subject to the terms of this Plan, the Administrator will determine all terms and conditions of each Option, including but not limited to: (a) whether the Option is an “incentive stock option” which meets the requirements of Code Section 422, or a “nonqualified stock option” which does not meet the requirements of Code Section 422; (b) the grant date, which may not be any day prior to the date that the Administrator approves the grant; (c) the number of Shares subject to the Option; (d) the exercise price, which may not be less than the Fair Market Value of the Shares subject to the Option as determined on the date of grant; (e) the terms and conditions of vesting and exercise; and (f) the term, except that an Option must terminate no later than ten (10) years after the date of grant. In all other respects, the terms of any incentive stock option should comply with the provisions of Code Section 422 except to the extent the Administrator determines otherwise. Except to the extent the Administrator determines otherwise, a Participant may exercise an Option in whole or part after the right to exercise the Option has accrued, provided that any partial exercise must be for one hundred (100) Shares or multiples thereof. If an Option that is intended to be an incentive stock option fails to meet the requirements thereof, the Option shall automatically be treated as a nonqualified stock option to the extent of such failure. Unless restricted by the Administrator, and subject to such procedures as the Administrator may specify, the payment of the exercise price of Options may be made by (x) delivery of cash or other Shares or other securities of the Company (including by attestation) having a then Fair Market Value equal to the purchase price of such Shares or (y) by delivery to the Company or its designated agent of an executed irrevocable option exercise form together with irrevocable instructions to a broker-dealer to sell or margin a sufficient portion of the Shares and deliver the sale or margin loan proceeds directly to the Company to pay for the exercise price. To the extent permitted by the Administrator, the payment of the exercise price of the Options may also be made by surrendering the right to receive Shares otherwise deliverable to the Participant upon exercise of the Award having a Fair Market Value at the time of exercise equal to the total exercise price or by any combination of such method and the methods described in the preceding sentence. Except to the extent otherwise set forth in an Award agreement, a Participant shall have no rights as a holder of Stock as a result of the grant of an Option until the Option is exercised, the exercise price and applicable withholding taxes are paid and the Shares subject to the Option are issued thereunder.
7. Stock Appreciation Rights. Subject to the terms of this Plan, the Administrator will determine all terms and conditions of each SAR, including but not limited to: (a) whether the SAR is granted independently of an Option or relates to an Option; (b) the grant date, which may not be any day prior to the date that the Administrator approves the grant; (c) the number of Shares to which the SAR relates; (d) the grant price, provided that the grant price shall not be less than the Fair Market Value of the Shares subject to the SAR as determined on the date of grant; (e) the terms and conditions of exercise or maturity, including vesting; (f) the term, provided that an SAR must terminate no later than ten (10) years after the date of grant; and (g) whether the SAR will be settled in cash, Shares or a combination thereof. If an SAR is granted in relation to an Option, then unless otherwise determined by the Administrator, the SAR shall be exercisable or shall mature at the same time or times, on the same conditions and to the extent and in the proportion, that the related Option is exercisable and may be exercised or mature for all or part of the Shares subject to the related Option. Upon exercise of any number of SARs, the number of Shares subject to the related Option shall be reduced accordingly and such Option may not be exercised with respect to that number of Shares. The exercise of any number of Options that relate to an SAR shall likewise result in an equivalent reduction in the number of Shares covered by the related SAR.
8. Performance and Stock Awards. Subject to the terms of this Plan, the Administrator will determine all terms and conditions of each award of Shares, Restricted Stock, Restricted Stock Units, Performance Shares or Performance Units, including but not limited to: (a) the number of Shares and/or units to which such Award relates; (b) whether, as a condition for the Participant to realize all or a portion of the benefit provided under the Award, one or more Performance Goals must be achieved during such period as the Administrator specifies; (c) whether the restrictions imposed on Restricted Stock or Restricted Stock Units shall lapse, and all or a portion of the Performance Goals subject to an Award shall be deemed achieved, upon a Participant’s death, Disability or Retirement; (d) the length of the vesting and/or performance period and, if different, the date on which payment of the benefit provided under the Award will be made; (e) with respect to Performance Units, whether to measure the value of each unit in relation to a designated dollar value or the Fair Market Value of one or more Shares; and (f) with respect to Restricted Stock Units and Performance Units, whether to settle such Awards in cash, in Shares (including Restricted Stock), or a combination thereof.
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9. Annual Incentive Awards. Subject to the terms of this Plan, the Administrator will determine all terms and conditions of an Annual Incentive Award, including but not limited to the Performance Goals, performance period, the potential amount payable, and the timing of payment; provided that the Administrator must require that payment of all or any portion of the amount subject to the Annual Incentive Award is contingent on the achievement of one or more Performance Goals during the period the Administrator specifies, although the Administrator may specify that all or a portion of the Performance Goals subject to an Award are deemed achieved upon a Participant’s death, Disability or Retirement (except, in the case of an Award intended to constitute performance-based compensation under Code Section 162(m), to the extent inconsistent with the applicable requirements of Code Section 162(m)), or such other circumstances as the Administrator may specify.
10. Long-Term Incentive Awards. Subject to the terms of this Plan, the Administrator will determine all terms and conditions of a Long-Term Incentive Award, including but not limited to the Performance Goals, performance period (which must be more than one year), the potential amount payable, and the timing of payment; provided that the Administrator must require that payment of all or any portion of the amount subject to the Long-Term Incentive Award is contingent on the achievement of one or more Performance Goals during the period the Administrator specifies, although the Administrator may specify that all or a portion of the Performance Goals subject to an Award are deemed achieved upon a Participant’s death, Disability or Retirement (except, in the case of an Award intended to constitute performance-based compensation under Code Section 162(m), to the extent inconsistent with the applicable requirements of Code Section 162(m)), or such other circumstances as the Administrator may specify.
11. Dividend Equivalent Units. Subject to the terms of this Plan, the Administrator will determine all terms and conditions of each award of Dividend Equivalent Units, including but not limited to whether: (a) such Award will be granted in tandem with another Award; (b) payment of the Award will be made concurrently with dividend payments or credited to an account for the Participant which provides for the deferral of such amounts until a stated time; (c) the Award will be settled in cash or Shares; and (d) as a condition for the Participant to realize all or a portion of the benefit provided under the Award, one or more Performance Goals must be achieved during such period as the Administrator specifies; provided that Dividend Equivalent Units may not be granted in connection with an Option, Stock Appreciation Right or other “stock right” within the meaning of Code Section 409A; and provided further that no Dividend Equivalent Unit granted in tandem with another Award shall include vesting provisions more favorable to the Participant than the vesting provisions, if any, to which the tandem Award is subject.
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12. Other Stock-Based Awards. Subject to the terms of this Plan, the Administrator may grant to Participants other types of Awards, which may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, Shares, either alone or in addition to or in conjunction with other Awards, and payable in Stock or cash. Without limitation except as provided herein (and subject to the limitations of Section 14(e)), such Award may include the issuance of shares of unrestricted Stock, which may be awarded in payment of director fees, in lieu of cash compensation, in exchange for cancellation of a compensation right, as a bonus, or upon the attainment of Performance Goals or otherwise, or rights to acquire Stock from the Company. The Administrator shall determine all terms and conditions of the Award, including but not limited to, the time or times at which such Awards shall be made, and the number of Shares to be granted pursuant to such Awards or to which such Award shall relate; provided that any Award that provides for purchase rights shall be priced at 100% of Fair Market Value on the date of the Award.
13. Restrictions on Transfer, Encumbrance and Disposition . No Award granted under this Plan may be sold, assigned, mortgaged, pledged, exchanged, hypothecated or otherwise transferred, or encumbered or disposed of, by a Participant other than by will or the laws of descent and distribution, and during the lifetime of the Participant such Awards may be exercised only by the Participant or the Participant’s legal representative or by the permitted transferee of such Participant as hereinafter provided (or by the legal representative of such permitted transferee). Notwithstanding the foregoing, a Participant may transfer an Award to the extent expressly permitted by the Administrator. Subsequent transfers of transferred Awards are prohibited except transfers otherwise made in accordance with this Section 13. Any attempted transfer not permitted by this Section 13 shall be null and void and have no legal effect. The restrictions set forth in this Section 13, and any risk of forfeiture applicable to an Award, shall be enforceable against any transferee of an Award.
14. Termination and Amendment of Plan; Amendment, Modification or Cancellation of Awards.
(a) Term of Plan . Unless the Board earlier terminates this Plan pursuant to Section 14(b), this Plan will terminate on the tenth (10 th ) anniversary of the Effective Date. No Award may constitute qualified performance-based compensation within the meaning of Code Section 162(m) unless, to the extent required by Code Section 162(m) for such Award to constitute qualified performance-based compensation, the material terms of the Performance Goals applicable to such Award are disclosed to and reapproved by the stockholders of the Company no later than the first stockholder meeting that occurs in the fifth (5 th ) year following the year in which the stockholders previously approved the Performance Goals.
(b) Termination and Amendment . The Board or the Administrator may amend, alter, suspend, discontinue or terminate this Plan at any time, subject to the following limitations:
(i) the Board must approve any amendment of this Plan to the extent the Company determines such approval is required by: (A) prior action of the Board, (B) applicable corporate law, or (C) any other applicable law;
(ii) stockholders must approve any amendment of this Plan to the extent the Company determines such approval is required by: (A) Section 16 of the Exchange Act, (B) the Code, (C) the listing requirements of any principal securities exchange or market on which the Shares are then traded, or (D) any other applicable law; and
(iii) stockholders must approve any of the following Plan amendments: (A) an amendment to materially increase any number of Shares specified in Section 5(a) or the limits set forth in Section 5(c) (except as permitted by Section 16) or (B) an amendment that would diminish the protections afforded by Section 14(e).
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(c) Amendment, Modification, Cancellation and Disgorgement of Awards .
(i) Except as provided in Section 14(e) and subject to the requirements of this Plan, the Administrator may modify, amend or cancel any Award, or waive any restrictions or conditions applicable to any Award or the exercise of the Award; provided that, except as otherwise provided in the Plan or the Award agreement, any modification or amendment that materially diminishes the rights of the Participant, or the cancellation of the Award, shall be effective only if agreed to by the Participant or any other person(s) as may then have an interest in the Award, but the Administrator need not obtain Participant (or other interested party) consent for the modification, amendment or cancellation of an Award pursuant to the provisions of subsection (ii) or Section 16 or as follows: (A) to the extent the Administrator deems such action necessary to comply with any applicable law or the listing requirements of any principal securities exchange or market on which the Shares are then traded; (B) to the extent the Administrator deems necessary to preserve favorable accounting or tax treatment of any Award for the Company; or (C) to the extent the Administrator determines that such action does not materially and adversely affect the value of an Award or that such action is in the best interest of the affected Participant (or any other person(s) as may then have an interest in the Award). Notwithstanding the foregoing, unless determined otherwise by the Administrator, any such amendment shall be made in a manner that will enable an Award intended to be exempt from Code Section 409A to continue to be so exempt, or to enable an Award intended to comply with Code Section 409A to continue to so comply.
(ii) Notwithstanding anything to the contrary in an Award agreement, the Administrator shall have full power and authority to terminate or cause the Participant to forfeit the Award, and require the Participant to disgorge to the Company any gains attributable to the Award, if the Participant engages in any action constituting, as determined by the Administrator in its discretion, Cause for termination, or a breach of any Award agreement or any other agreement between the Participant and the Company or an Affiliate concerning noncompetition, nonsolicitation, confidentiality, trade secrets, intellectual property, nondisparagement or similar obligations.
(iii) Any Awards granted pursuant to this Plan, and any Stock issued or cash paid pursuant to an Award, shall be subject to any recoupment or clawback policy that is adopted by, or any recoupment or similar requirement otherwise made applicable by law, regulation or listing standards to, the Company from time to time.
(d) Survival of Authority and Awards . Notwithstanding the foregoing, the authority of the Board and the Administrator under this Section 14 and to otherwise administer the Plan with respect to then-outstanding Awards will extend beyond the date of this Plan’s termination. In addition, termination of this Plan will not affect the rights of Participants with respect to Awards previously granted to them, and all unexpired Awards will continue in force and effect after termination of this Plan except as they may lapse or be terminated by their own terms and conditions.
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(e) Repricing and Backdating Prohibited . Notwithstanding anything in this Plan to the contrary, and except for the adjustments provided for in Section 16, neither the Administrator nor any other person may (i) amend the terms of outstanding Options or SARs to reduce the exercise or grant price of such outstanding Options or SARs; (ii) cancel outstanding Options or SARs in exchange for Options or SARs with an exercise or grant price that is less than the exercise or grant price of the original Options or SARs; or (iii) cancel outstanding Options or SARs with an exercise or grant price above the current Fair Market Value of a Share in exchange for cash or other securities. In addition, the Administrator may not make a grant of an Option or SAR with a grant date that is effective prior to the date the Administrator takes action to approve such Award.
(f) Foreign Participation . To assure the viability of Awards granted to Participants employed or residing in foreign countries, the Administrator may provide for such special terms as it may consider necessary or appropriate to accommodate differences in local law, tax policy, accounting or custom. Moreover, the Administrator may approve such supplements to, or amendments, restatements or alternative versions of, this Plan as it determines is necessary or appropriate for such purposes. Any such amendment, restatement or alternative versions that the Administrator approves for purposes of using this Plan in a foreign country will not affect the terms of this Plan for any other country. In addition, all such supplements, amendments, restatements or alternative versions must comply with the provisions of Section 14(b)(ii).
(g) Code Section 409A . The provisions of Code Section 409A are incorporated herein by reference to the extent necessary for any Award that is subject to Code Section 409A to comply therewith.
15. Taxes .
(a) Withholding . In the event the Company or one of its Affiliates is required to withhold any Federal, state or local taxes or other amounts in respect of any income recognized by a Participant as a result of the grant, vesting, payment or settlement of an Award or disposition of any Shares acquired under an Award, the Company or its Affiliate may deduct (or require an Affiliate to deduct) from any cash payments of any kind otherwise due the Participant, or with the consent of the Administrator, Shares otherwise deliverable or vesting under an Award, to satisfy such tax or other obligations. Alternatively, the Company or its Affiliate may require such Participant to pay to the Company or its Affiliate, in cash, promptly on demand, or make other arrangements satisfactory to the Company or its Affiliate regarding the payment to the Company or its Affiliate of the aggregate amount of any such taxes and other amounts. If Shares are deliverable upon exercise or payment of an Award, then, unless restricted by the Administrator and subject to such procedures as the Administrator may specify, a Participant may satisfy all or a portion of the Federal, state and local withholding tax obligations arising in connection with such Award by electing to deliver other previously owned Shares. To the extent expressly permitted by the Administrator, a Participant may satisfy all or a portion of the Federal, state and local withholding tax obligations arising in connection with an Award by having the Company or its Affiliate withhold Shares otherwise issuable under the Award or tendering back Shares received in connection with such Award. Notwithstanding anything to the contrary herein, the amount to be withheld in Shares may not exceed the total minimum federal, state and local tax withholding obligations associated with the transaction to the extent needed for the Company and its Affiliates to avoid an accounting charge until Accounting Standards Update 2016-09 applies to the Company, after which time the amount to be withheld may not exceed the total maximum statutory tax rates associated with the transaction. If an election is provided, the election must be made on or before the date as of which the amount of tax to be withheld is determined and otherwise as the Administrator requires. In any case, the Company and its Affiliates may defer making payment or delivery under any Award if any such tax may be pending unless and until indemnified to its satisfaction.
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(b) No Guarantee of Tax Treatment . Notwithstanding any provisions of the Plan, the Company does not guarantee to any Participant or any other Person with an interest in an Award that (i) any Award intended to be exempt from Code Section 409A shall be so exempt, (ii) any Award intended to comply with Code Section 409A or Code Section 422 shall so comply, or (iii) any Award shall otherwise receive a specific tax treatment under any other applicable tax law, nor in any such case will the Company or any Affiliate be required to indemnify, defend or hold harmless any individual with respect to the tax consequences of any Award.
16. Adjustment Provisions; Change of Control.
(a) Adjustment of Shares . If: (i) the Company shall at any time be involved in a merger or other transaction in which the Shares are changed or exchanged; (ii) the Company shall subdivide or combine the Shares or the Company shall declare a dividend payable in Shares, other securities (other than stock purchase rights issued pursuant to a stockholder rights agreement) or other property; (iii) the Company shall effect a cash dividend the amount of which, on a per Share basis, exceeds ten percent (10%) of the Fair Market Value of a Share at the time the dividend is declared, or the Company shall effect any other dividend or other distribution on the Shares in the form of cash, or a repurchase of Shares, that the Board determines by resolution is special or extraordinary in nature or that is in connection with a transaction that the Company characterizes publicly as a recapitalization or reorganization involving the Shares; or (iv) any other event shall occur, which, in the case of this clause (iv), in the judgment of the Administrator necessitates an adjustment to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under this Plan, then the Administrator shall, in such manner as it may deem equitable to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under this Plan, adjust as applicable: (A) the number and type of shares subject to this Plan (including the number and type of shares described in Sections 5(a), (a) and (c)) and which may after the event be made the subject of Awards; (B) the number and type of shares subject to outstanding Awards; (C) the grant, purchase, or exercise price with respect to any Award; and (D) to the extent such discretion does not cause an Award that is intended to qualify as performance-based compensation under Code Section 162(m) to lose its status as such, the Performance Goals of an Award. In any such case, the Administrator may also (or in lieu of the foregoing) make provision for a cash payment to the holder of an outstanding Award in exchange for the cancellation of all or a portion of the Award (without the consent of the holder of an Award) in an amount determined by the Administrator effective at such time as the Administrator specifies (which may be the time such transaction or event is effective). However, in each case, with respect to Awards of incentive stock options, no such adjustment may be authorized to the extent that such authority would cause this Plan to violate Code Section 422(b). Further, the number of Shares subject to any Award payable or denominated in Shares must always be a whole number. In any event, previously granted Options or SARs are subject to only such adjustments as are necessary to maintain the relative proportionate interest the Options and SARs represented immediately prior to any such event and to preserve, without exceeding, the value of such Options or SARs.
Without limitation, in the event of any reorganization, merger, consolidation, combination or other similar corporate transaction or event, whether or not constituting a Change of Control (other than any such transaction in which the Company is the continuing corporation and in which the outstanding Stock is not being converted into or exchanged for different securities, cash or other property, or any combination thereof), the Administrator may substitute, on an equitable basis as the Administrator determines, for each Share then subject to an Award and the Shares subject to this Plan (if the Plan will continue in effect), the number and kind of shares of stock, other securities, cash or other property to which holders of Stock are or will be entitled in respect of each Share pursuant to the transaction.
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Notwithstanding the foregoing, in the case of a stock dividend (other than a stock dividend declared in lieu of an ordinary cash dividend) or subdivision or combination of the Shares (including a reverse stock split), if no action is taken by the Administrator, adjustments contemplated by this subsection that are proportionate shall nevertheless automatically be made as of the date of such stock dividend or subdivision or combination of the Shares.
(b) Issuance or Assumption . Notwithstanding any other provision of this Plan, and without affecting the number of Shares otherwise reserved or available under this Plan, in connection with any merger, consolidation, acquisition of property or stock, or reorganization, the Administrator may authorize the issuance or assumption of awards under this Plan upon such terms and conditions as it may deem appropriate.
(c) Change of Control . Unless otherwise expressly provided in an Award agreement or another contract, including an employment agreement, or under the terms of a transaction constituting a Change of Control, the Administrator may provide for the acceleration of the vesting or earning and, if applicable, exercisability of any outstanding Award, or portion thereof, or the lapsing of any conditions or restrictions on or the time for payment in respect of any outstanding Award, or portion thereof, upon a Change of Control or the termination of the Participant’s employment following a Change of Control. In addition, unless otherwise expressly provided in an Award agreement or another contract, including an employment agreement, or under the terms of a transaction constituting a Change of Control, without limitation of the foregoing, the Administrator may provide that any or all of the following shall occur in connection with a Change of Control: (a) the substitution for the Shares subject to any outstanding Award, or portion thereof, of stock or other securities of the surviving corporation or any successor corporation to the Company, or a parent or subsidiary thereof, in which event the aggregate purchase or exercise price, if any, of such Award, or portion thereof, shall remain the same, (b) the conversion of any outstanding Award, or portion thereof, into a right to receive cash or other property upon or following the consummation of the Change of Control in an amount equal to the value of the consideration to be received by holders of Shares in connection with such transaction for one Share, less the per share purchase or exercise price of such Award, if any, multiplied by the number of Shares subject to such Award, or a portion thereof, (c) acceleration of the vesting (and, as applicable, the exercisability) of any and/or all outstanding Awards, (d) the cancellation of any outstanding and unexercised Awards upon or following the consummation of the Change of Control (without the consent of an Award holder or any person with an interest in an Award), (e) in the case of Options or SARs, the cancellation of all outstanding Options or SARs in exchange for a cash payment equal to the excess of the Change of Control Price over the exercise price of the Shares subject to such Option or SAR upon the Change of Control (or for no cash payment if such excess is zero), and/or (f) the cancellation of any Awards in exchange for a cash payment based on the value of the Award as of the date of the Change of Control (or for no payment if the Award has no value).
For purposes of this Section 16, the “value” of a Performance Share shall be equal to, and the “value” of a Performance Unit for which the value is equal to the Fair Market Value of Shares shall be based on, the Change of Control Price. Notwithstanding anything to the contrary in this Section 16(c), the terms of any Awards that are subject to Code Section 409A shall govern the treatment of such Awards upon a Change of Control, and the terms of this Section 16(c) shall not apply, to the extent required for such Awards to remain compliant with Code Section 409A, as applicable.
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(d) Application of Limits on Payments .
(i) Determination of Cap or Payment . Except to the extent the Participant has in effect an employment or similar agreement with the Company or any Affiliate or is subject to a policy that provides for a more favorable result to the Participant upon a Change of Control, if any payments or benefits paid by the Company pursuant to this Plan, including any accelerated vesting or similar provisions (“Plan Payments”), would cause some or all of the Plan Payments in conjunction with any other payments made to or benefits received by a Participant in connection with a Change of Control (such payments or benefits, together with the Plan Payments, the “Total Payments”) to be subject to the tax (“Excise Tax”) imposed by Code Section 4999 but for this Section 16(d), then, notwithstanding any other provision of this Plan to the contrary, the Total Payments shall be delivered either (A) in full or (B) in an amount such that the value of the aggregate Total Payments that the Participant is entitled to receive shall be One Dollar ($1.00) less than the maximum amount that the Participant may receive without being subject to the Excise Tax, whichever of (A) or (B) results in the receipt by the Participant of the greatest benefit on an after-tax basis (taking into account applicable federal, state and local income taxes and the Excise Tax).
(ii) Procedures .
(A) If a Participant or the Company believes that a payment or benefit due the Participant will result in some or all of the Total Payments being subject to the Excise Tax, then the Company, at its expense, shall obtain the opinion (which need not be unqualified) of nationally recognized tax counsel (“National Tax Counsel”) selected by the Company (which may be regular outside counsel to the Company), which opinion sets forth (1) the amount of the Base Period Income (as defined below), (2) the amount and present value of the Total Payments, (3) the amount and present value of any excess parachute payments determined without regard to any reduction of Total Payments pursuant to Section 6(a)(ii), and (4) the net after-tax proceeds to the Participant, taking into account applicable federal, state and local income taxes and the Excise Tax if (x) the Total Payments were delivered in accordance with Section 16(d)(i)(A) or (y) the Total Payments were delivered in accordance with Section 16(d)(i)(B). The opinion of National Tax Counsel shall be addressed to the Company and the Participant and shall be binding upon the Company and the Participant. If such National Tax Counsel opinion determines that Section 16(d)(i)(B) applies, then the Plan Payments or any other payment or benefit determined by such counsel to be includable in the Total Payments shall be reduced or eliminated so that under the bases of calculations set forth in such opinion there will be no excess parachute payment. In such event, payments or benefits included in the Total Payments shall be reduced or eliminated by applying the following principles, in order: (1) the payment or benefit with the higher ratio of the parachute payment value to present economic value (determined using reasonable actuarial assumptions) shall be reduced or eliminated before a payment or benefit with a lower ratio; (2) the payment or benefit with the later possible payment date shall be reduced or eliminated before a payment or benefit with an earlier payment date; and (3) cash payments shall be reduced prior to non-cash benefits; provided that if the foregoing order of reduction or elimination would violate Code Section 409A, then the reduction shall be made pro rata among the payments or benefits included in the Total Payments (on the basis of the relative present value of the parachute payments).
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(B) For purposes of this Section 16: (1) the terms “excess parachute payment” and “parachute payments” shall have the meanings given in Code Section 280G and such “parachute payments” shall be valued as provided therein; (2) present value shall be calculated in accordance with Code Section 280G(d)(4); (3) the term “Base Period Income” means an amount equal to the Participant’s “annualized includible compensation for the base period” as defined in Code Section 280G(d)(1); (4) for purposes of the opinion of National Tax Counsel, the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company’s independent auditors in accordance with the principles of Code Sections 280G(d)(3) and (4); and (5) the Participant shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation, and state and local income taxes at the highest marginal rate of taxation in the state or locality of the Participant’s domicile, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes.
(C) If National Tax Counsel so requests in connection with the opinion required by this Section 16(d)(ii), the Company shall obtain, at the Company’s expense, and the National Tax Counsel may rely on, the advice of a firm of recognized executive compensation consultants as to the reasonableness of any item of compensation to be received by the Participant solely with respect to its status under Code Section 280G.
(D) The Company agrees to bear all costs associated with, and to indemnify and hold harmless the National Tax Counsel from, any and all claims, damages and expenses resulting from or relating to its determinations pursuant to this Section 16, except for claims, damages or expenses resulting from the gross negligence or willful misconduct of such firm.
(E) This Section 16 shall be amended to comply with any amendment or successor provision to Code Section 280G or Code Section 4999. If such provisions are repealed without successor, then this Section 16(d) shall be cancelled without further effect.
17. Miscellaneous.
(a) Other Terms and Conditions . The Administrator may provide in any Award agreement such other provisions (whether or not applicable to the Award granted to any other Participant) as the Administrator determines appropriate to the extent not otherwise prohibited by the terms of the Plan.
(b) Employment and Service . The issuance of an Award shall not confer upon a Participant any right with respect to continued employment or service with the Company or any Affiliate, or the right to continue as a Director. Unless determined otherwise by the Administrator, for purposes of the Plan and all Awards, the following rules shall apply:
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(i) a Participant who transfers employment between the Company and its Affiliates, or between Affiliates, will not be considered to have terminated employment;
(ii) a Participant who ceases to be a Non-Employee Director because he or she becomes an employee of the Company or an Affiliate shall not be considered to have ceased service as a Director with respect to any Award until such Participant’s termination of employment with the Company and its Affiliates;
(iii) a Participant who ceases to be employed by the Company or an Affiliate and immediately thereafter becomes a Non-Employee Director, a non-employee director of an Affiliate, or a consultant to the Company or any Affiliate shall not be considered to have terminated employment until such Participant’s service as a director of, or consultant to, the Company and its Affiliates has ceased; and
(iv) a Participant employed by an Affiliate will be considered to have terminated employment when such entity ceases to be an Affiliate.
Notwithstanding the foregoing, for purposes of an Award that is subject to Code Section 409A, if a Participant’s termination of employment or service triggers the payment of compensation under such Award, then the Participant will be deemed to have terminated employment or service upon his or her “separation from service” within the meaning of Code Section 409A. Notwithstanding any other provision in this Plan or an Award to the contrary, if any Participant is a “specified employee” within the meaning of Code Section 409A as of the date of his or her “separation from service” within the meaning of Code Section 409A, then, to the extent required by Code Section 409A, any payment made to the Participant on account of such separation from service shall not be made before a date that is six months after the date of the separation from service.
(c) No Fractional Shares . No fractional Shares or other securities may be issued or delivered pursuant to this Plan, and the Administrator may determine whether cash, other securities or other property will be paid or transferred in lieu of any fractional Shares or other securities, or whether such fractional Shares or other securities or any rights to fractional Shares or other securities will be canceled, terminated or otherwise eliminated.
(d) Unfunded Plan; Awards Not Includable for Benefits Purposes . This Plan is unfunded and does not create, and should not be construed to create, a trust or separate fund with respect to this Plan’s benefits. This Plan does not establish any fiduciary relationship between the Company and any Participant or other person. To the extent any person holds any rights by virtue of an Award granted under this Plan, such rights are no greater than the rights of the Company’s general unsecured creditors. Income recognized by a Participant pursuant to an Award shall not be included in the determination of benefits under any employee pension benefit plan (as such term is defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended) or group insurance or other benefit plans applicable to the Participant which are maintained by the Company or any Affiliate, except as may be provided under the terms of such plans or determined by resolution of the Board.
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(e) Requirements of Law and Securities Exchange . The granting of Awards and the issuance of Shares in connection with an Award are subject to all applicable laws, rules and regulations and to such approvals by any governmental agencies or national securities exchanges as may be required. Notwithstanding any other provision of this Plan or any award agreement, the Company has no liability to deliver any Shares under this Plan or make any payment unless such delivery or payment would comply with all applicable laws and the applicable requirements of any securities exchange or similar entity, and unless and until the Participant has taken all actions required by the Company in connection therewith. The Company may impose such restrictions on any Shares issued under the Plan as the Company determines necessary or desirable to comply with all applicable laws, rules and regulations or the requirements of any national securities exchanges.
(f) Governing Law; Venue . This Plan, and all agreements under this Plan, will be construed in accordance with and governed by the laws of the State of Maryland, without reference to any conflict of law principles. Any legal action or proceeding with respect to this Plan, any Award or any award agreement, or for recognition and enforcement of any judgment in respect of this Plan, any Award or any award agreement, may only be brought and determined in (i) a court sitting in the State of California, and (ii) a “bench” trial, and any party to such action or proceeding shall agree to waive its right to a jury trial.
(g) Limitations on Actions . Any legal action or proceeding with respect to this Plan, any Award or any award agreement, must be brought within one year (365 days) after the day the complaining party first knew or should have known of the events giving rise to the complaint.
(h) Construction . Whenever any words are used herein in the masculine, they shall be construed as though they were used in the feminine in all cases where they would so apply; and wherever any words are used in the singular or plural, they shall be construed as though they were used in the plural or singular, as the case may be, in all cases where they would so apply. Titles of sections are for general information only, and this Plan is not to be construed with reference to such titles.
(i) Severability . If any provision of this Plan or any award agreement or any Award (a) is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction, or as to any person or Award, or (b) would disqualify this Plan, any award agreement or any Award under any law the Administrator deems applicable, then such provision should be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Administrator, materially altering the intent of this Plan, award agreement or Award, then such provision should be stricken as to such jurisdiction, person or Award, and the remainder of this Plan, such award agreement and such Award will remain in full force and effect.
18. Definitions. Capitalized terms used in this Plan or any Award agreement have the following meanings, unless the Award agreement otherwise provides:
(a) “Administrator” means the Committee; provided that, to the extent the Board has retained authority and responsibility as an Administrator of the Plan, the term “Administrator” shall also mean the Board or, to the extent the Committee has delegated authority and responsibility as an Administrator of the Plan to one or more officers of the Company as permitted by Section 2(b), the term “Administrator” shall also mean such officer or officers.
(b) “Affiliate” shall have the meaning given in Rule 12b-2 under the Exchange Act. Notwithstanding the foregoing, for purposes of determining those individuals to whom an Option or Stock Appreciation Right may be granted, the term “Affiliate” means any entity that, directly or through one or more intermediaries, is controlled by, controls, or is under common control with, the Company within the meaning of Code Sections 414(b) or (c); provided that, in applying such provisions, the phrase “at least 20 percent” shall be used in place of “at least 80 percent” each place it appears therein.
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(c) “Award” means a grant of Options, Stock Appreciation Rights, Performance Shares, Performance Units, Restricted Stock, Restricted Stock Units, Shares, an Annual Incentive Award, a Long-Term Incentive Award, Dividend Equivalent Units or any other type of award permitted under the Plan.
(d) “Board” means the Board of Directors of the Company.
(e) “Cause” means any of the following as determined by the Company: (i) with respect to Participants other than Non-Employee Directors, (A) the failure of the Participant to perform or observe any of the material terms or provisions of any written employment agreement between the Participant and the Company or its Affiliates or, if no written agreement exists, the gross dereliction of the Participant’s duties (for reasons other than the Participant’s Disability) with respect to the Company or its Affiliates; (B) the failure of the Participant to comply fully with the lawful directives of the Board or the board of directors of an Affiliate of the Company, as applicable, or the officers or supervisory employees to whom the Participant reports; (C) the Participant’s dishonesty, misconduct, misappropriation of funds, or disloyalty or disparagement of the Company, any of its Affiliates or its management or employees; or (D) other proper cause determined in good faith by the Administrator; or (ii) with respect to Non-Employee Directors, (A) fraud or intentional misrepresentation; (B) embezzlement, misappropriation or conversion of assets or opportunities of the Company or any of its Affiliates; or (C) any other gross or willful misconduct as determined by the Committee, in its sole and conclusive discretion.
(f) “Change of Control” means the first to occur of the following with respect to the Company or any upstream holding company (which, for purposes of this definition, shall be included in references to “the Company”):
(i) Any “Person,” as that term is defined in Sections 13(d) and 14(d) of the Exchange Act, but excluding the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the “Beneficial Owner” (as that term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities;
(ii) The Company is merged or consolidated with any other corporation or other entity, other than: (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (B) the Company engages in a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “Person” (as defined above) acquires fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities. Notwithstanding the foregoing, a merger or consolidation involving the Company shall not be considered a “Change of Control” if the Company is the surviving corporation and shares of the Stock are not converted into or exchanged for stock or securities of any other corporation, cash or any other thing of value, unless persons who beneficially owned shares of the Stock outstanding immediately prior to such transaction own beneficially less than a majority of the outstanding voting securities of the Company immediately following the merger or consolidation;
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(iii) The Company or any Affiliate sells, assigns or otherwise transfers assets in a transaction or series of related transactions, if the aggregate market value of the assets so sold, assigned or otherwise transferred exceeds fifty percent (50%) of the Company’s consolidated book value, determined by the Company in accordance with generally accepted accounting principles, measured at the time at which such transaction occurs or the first of such series of related transactions occurs; provided that such a transfer effected pursuant to a spin-off or split-up where stockholders of the Company retain ownership of the transferred assets proportionate to their pro rata ownership interest in the Company shall not be deemed a “Change of Control”;
(iv) The Company dissolves and liquidates substantially all of its assets; or
(v) At any time after the Effective Date when the “Continuing Directors” cease to constitute a majority of the Board. For this purpose, a “Continuing Director” shall mean: (A) the individuals who, at the Effective Date, constitute the Board; and (B) any new Directors (other than Directors designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (ii), or (iii) of this definition) whose appointment to the Board or nomination for election by Company stockholders was approved by a vote of at least two-thirds of the then-serving Continuing Directors.
If an Award is considered deferred compensation subject to the provisions of Code Section 409A, then the Administrator may include an amended definition of “Change of Control” in the Award agreement issued with respect to such Award as necessary to comply with, or as necessary to permit a deferral under, Code Section 409A.
(g) “Change of Control Price” means the highest of the following: (i) the Fair Market Value of the Shares, as determined on the date of the Change of Control; (ii) the highest price per Share paid in the Change of Control transaction; or (iii) the Fair Market Value of the Shares, calculated on the date of surrender of the relevant Award in accordance with Section 16(c), but this clause (iii) shall not apply if in the Change of Control transaction, or pursuant to an agreement to which the Company is a party governing the Change of Control transaction, all of the Shares are purchased for and/or converted into the right to receive a current payment of cash and no other securities or other property.
(h) “Code” means the Internal Revenue Code of 1986, as amended. Any reference to a specific provision of the Code includes any successor provision and the regulations promulgated under such provision.
(i) “Committee” means the Compensation Subcommittee of the Board, or such other committee of the Board that is designated by the Board with the same or similar authority. The Committee shall consist only of Non-Employee Directors (not fewer than two (2)) who also qualify as Outside Directors to the extent necessary for the Plan to comply with Rule 16b-3 promulgated under the Exchange Act or any successor rule and to permit Awards that are otherwise eligible to qualify as “performance-based compensation” under Section 162(m) of the Code to so qualify.
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(j) “Company” means Innovative Industrial Properties, Inc., a Maryland corporation, or any successor thereto.
(k) “Director” means a member of the Board; “Non-Employee Director” means a Director who is not also an employee of the Company or its Subsidiaries; and “Outside Director” means a Director who qualifies as an outside director within the meaning of Code Section 162(m).
(l) "Disability" means disability as defined in the Company’s long-term disability plan covering exempt salaried employees, except as otherwise determined by the Administrator and set forth in an Award agreement. The Administrator shall make the determination of Disability and may request such evidence of disability as it reasonably determines.
(m) “Dividend Equivalent Unit” means the right to receive a payment, in cash or Shares, equal to the cash dividends or other distributions paid with respect to a Share as described in Section 11.
(n) “Exchange Act” means the Securities Exchange Act of 1934, as amended. Any reference to a specific provision of the Exchange Act includes any successor provision and the regulations and rules promulgated under such provision.
(o) “Fair Market Value” means, per Share on a particular date, the last sales price on such date on the national securities exchange on which the Stock is then traded, as reported in The Wall Street Journal, or if no sales of Stock occur on the date in question, on the last preceding date on which there was a sale on such exchange. If the Shares are not listed on a national securities exchange, but are traded in an over-the-counter market, the last sales price (or, if there is no last sales price reported, the average of the closing bid and asked prices) for the Shares on the particular date, or on the last preceding date on which there was a sale of Shares on that market, will be used. If the Shares are neither listed on a national securities exchange nor traded in an over-the-counter market, the price determined by the Administrator, in its discretion, will be used. If an actual sale of a Share occurs on the market, then the Company may consider the sale price to be the Fair Market Value of such Share.
(p) “Incentive Award” means the right to receive a cash payment to the extent Performance Goals are achieved (or other requirements are met), and shall include “Annual Incentive Awards” as described in Section 9 and “Long-Term Incentive Awards” as described in Section 10.
(q) “Option” means the right to purchase Shares at a stated price for a specified period of time.
(r) “Participant” means an individual selected by the Administrator to receive an Award.
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(s) “Performance Goals” means any goals the Administrator establishes that relate to one or more of the following with respect to the Company or any one or more of its Subsidiaries, Affiliates or other business units: funds from operations; adjusted funds from operations, earnings before any one or more of the following: interest, taxes, depreciation, amortization and/or stock compensation; operating (or gross) income or profit; pretax income before allocation of corporate overhead and/or bonus; operating efficiencies; operating income as a percentage of net revenue; return on equity, assets, capital, capital employed or investment; after tax operating income; net income; earnings or book value per share; financial ratios; cash flow(s); total rental income or revenues; capital expenditures as a percentage of rental income; total operating expenses, or some component or combination of components of total operating expenses, as a percentage of rental income; stock price or total stockholder return, including any comparisons with stock market indices; appreciation in or maintenance of the price of the Shares or any of the Company’s publicly-traded securities; dividends; debt or cost reduction; comparisons with performance metrics of peer companies of the Company; comparisons of the Company’s stock price performance to the stock price performance of peer companies; strategic business objectives, consisting of one or more objectives based on meeting specified cost, acquisition or leasing targets, meeting or reducing budgeted expenditures, attaining division, group or corporate financial goals, meeting business expansion goals and meeting goals relating to leasing, acquisitions, joint ventures or collaborations or dispositions; economic value-added models; or any combination of any of the foregoing. As to each Performance Goal, the relevant measurement of performance shall be computed in accordance with generally accepted accounting principles to the extent applicable, but, unless otherwise determined by the Administrator, will exclude the effects of the following: ( i) asset impairments or write-downs; (ii) the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results; (iii) accruals for reorganization and restructuring programs; (iv) extraordinary, unusual and/or non-recurring items of income, expense, gain or loss, that, in case of each of the foregoing, the Company identifies in its publicly filed periodic or current reports, its audited financial statements, including notes to the financial statements, or the Management’s Discussion and Analysis section of the Company’s annual report; (v) foreign exchange gains and losses, (vi) the effect of adverse federal, governmental or regulatory action, or delays in federal, governmental or regulatory action; (vii) impacts on interest expense, preferred dividends and share dilution as a result of debt and capital transactions; and (viii) any other event either not directly related to operations or not within the reasonable control of management. With respect to any Award intended to qualify as performance-based compensation under Code Section 162(m) and not subject to the transition period under Treasury Reg. Section 1.162-27(f)(2), such exclusions shall be made only to the extent consistent with Code Section 162(m). To the extent consistent with Code Section 162(m), the Administrator may also provide for other adjustments to Performance Goals in the Award agreement or plan document evidencing any Award. In addition, the Administrator may appropriately adjust any evaluation of performance under a Performance Goal to exclude any of the following events that occurs during a performance period: (i) litigation, claims, judgments or settlements; (ii) the effects of changes in other laws or regulations affecting reported results; and (iii) accruals of any amounts for payment under this Plan or any other compensation arrangements maintained by the Company; provided that, with respect to any Award intended to qualify as performance-based compensation under Code Section 162(m), such adjustment may be made only to the extent consistent with Code Section 162(m). Where applicable, the Performance Goals may be expressed, without limitation, in terms of attaining a specified level of the particular criterion or the attainment of an increase or decrease (expressed as absolute numbers, averages and/or percentages) in the particular criterion or achievement in relation to a peer group or other index. The Performance Goals may include a threshold level of performance below which no payment will be made (or no vesting will occur), levels of performance at which specified payments will be paid (or specified vesting will occur), and a maximum level of performance above which no additional payment will be made (or at which full vesting will occur). In addition, in the case of Awards that the Administrator determines at the date of grant will not be considered “performance-based compensation” under Code Section 162(m) or will be subject to the transition period under Treasury Reg. Section 1.162-27(f)(2), the Administrator may establish other Performance Goals and provide for other exclusions or adjustments not listed in this Plan.
(t) “Performance Shares” means the right to receive Shares to the extent Performance Goals are achieved (or other requirements are met) as described in Section 8.
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(u) “Performance Unit” means the right to receive a cash payment and/or Shares valued in relation to a unit that has a designated dollar value or the value of which is equal to the Fair Market Value of one or more Shares, to the extent Performance Goals are achieved (or other requirements are met) as described in Section 8.
(v) “Person” has the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, or any group of Persons acting in concert that would be considered “persons acting as a group” within the meaning of Treas. Reg. § 1.409A-3(i)(5).
(w) “Plan” means this Innovative Industrial Properties, Inc. 2016 Omnibus Incentive Plan, as may be amended from time to time.
(x) “Restricted Stock” means a Share that is subject to a risk of forfeiture or restrictions on transfer, or both a risk of forfeiture and restrictions on transfer, as described in Section 8.
(y) “Restricted Stock Unit” means the right to receive a cash payment and/or Shares equal to the Fair Market Value of one Share that is subject to a risk of forfeiture or restrictions on transfer, or both a risk of forfeiture and restrictions on transfer, as described in Section 8.
(z) “Retirement” means termination of employment or service with the Company and its Affiliates on or after the date the Participant has both attained age sixty (60) and completed ten (10) years of service with the Company and its Affiliates.
(aa) “Section 16 Participants” means Participants who are subject to the provisions of Section 16 of the Exchange Act.
(bb) “Share” means a share of Stock.
(cc) “Stock” means the Class A common stock of the Company.
(dd) “Stock Appreciation Right” or “SAR” means the right to receive cash, and/or Shares with a Fair Market Value, equal to the appreciation of the Fair Market Value of a Share during a specified period of time.
(ee) “Subsidiary” means any corporation, limited liability company or other limited liability entity in an unbroken chain of entities beginning with the Company if each of the entities (other than the last entities in the chain) owns the stock or equity interest possessing more than fifty percent (50%) of the total combined voting power of all classes of stock or other equity interests in one of the other entities in the chain.
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Exhibit 10.2
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (“Agreement”) is made and entered into as of the day of , , by and between Innovative Industrial Properties, Inc., a Maryland corporation (the “Company”), and (“Indemnitee”).
WHEREAS, at the request of the Company, Indemnitee currently serves as a director and officer of the Company and may, therefore, be subjected to claims, suits or proceedings arising as a result of Indemnitee’s service; and
WHEREAS, as an inducement to Indemnitee to continue to serve as a director and officer, the Company has agreed to indemnify and to advance expenses and costs incurred by Indemnitee in connection with any such claims, suits or proceedings, to the maximum extent permitted by law; and
WHEREAS, the parties by this Agreement desire to set forth their agreement regarding indemnification and advance of expenses.
NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:
Section 1. Definitions . For purposes of this Agreement:
(a) “Change in Control” means a change in control of the Company occurring after the Effective Date of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if, after the Effective Date (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 15% or more of the combined voting power of all of the Company’s then-outstanding securities entitled to vote generally in the election of directors without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person’s attaining such percentage interest; (ii) the Company is a party to a merger, consolidation, sale of assets, plan of liquidation or other reorganization not approved by at least two-thirds of the members of the Board of Directors then in office, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iii) at any time, a majority of the members of the Board of Directors are not individuals (A) who were directors as of the Effective Date or (B) whose election by the Board of Directors or nomination for election by the Company’s stockholders was approved by the affirmative vote of at least two-thirds of the directors then in office who were directors as of the Effective Date or whose election for nomination for election was previously so approved.
(b) “Corporate Status” means the status of a person as a present or former director, officer, employee or agent of the Company or as a director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any other foreign or domestic corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that such person is or was serving in such capacity at the request of the Company. As a clarification and without limiting the circumstances in which Indemnitee may be serving at the request of the Company, service by Indemnitee shall be deemed to be at the request of the Company if Indemnitee serves or served as a director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise (i) of which a majority of the voting power or equity interest is owned directly or indirectly by the Company or (ii) the management of which is controlled directly or indirectly by the Company.
(c) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification and/or advance of Expenses is sought by Indemnitee.
(d) “Effective Date” means the date set forth in the first paragraph of this Agreement.
(e) “Expenses” means any and all reasonable and out-of-pocket attorneys’ fees and costs, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement, ERISA excise taxes and penalties and any other disbursements or expenses incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in or otherwise participating in a Proceeding. Expenses shall also include Expenses incurred in connection with any appeal resulting from any Proceeding including, without limitation, the premium, security for and other costs relating to any cost bond, supersedeas bond or other appeal bond or its equivalent.
(f) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning Indemnitee under this Agreement or of other indemnitees under similar indemnification agreements), or (ii) any other party to or participant or witness in the Proceeding giving rise to a claim for indemnification or advance of Expenses hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.
(g) “Proceeding” means any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing, or any other proceeding, whether brought by or in the right of the Company or otherwise and whether of a civil (including intentional or unintentional tort claims), criminal, administrative or investigative (formal or informal) nature, including any appeal therefrom, except one pending or completed on or before the Effective Date, unless otherwise specifically agreed in writing by the Company and Indemnitee. If Indemnitee reasonably believes that a given situation may lead to or culminate in the institution of a Proceeding, such situation shall also be considered a Proceeding.
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Section 2. Services by Indemnitee . Indemnitee serves as a director and officer of the Company. However, this Agreement shall not impose any independent obligation on Indemnitee or the Company to continue Indemnitee’s service to the Company. This Agreement shall not be deemed an employment contract between the Company (or any other entity) and Indemnitee.
Section 3. General . The Company shall indemnify, and advance Expenses to, Indemnitee (a) as provided in this Agreement and (b) otherwise to the maximum extent permitted by Maryland law in effect on the Effective Date and as amended from time to time; provided, however, that no change in Maryland law shall have the effect of reducing the benefits available to Indemnitee hereunder based on Maryland law as in effect on the Effective Date. The rights of Indemnitee provided in this Section 3 shall include, without limitation, the rights set forth in the other sections of this Agreement, including any additional indemnification permitted by Section 2-418(g) of the Maryland General Corporation Law (the “MGCL”).
Section 4. Standard for Indemnification . If, by reason of Indemnitee’s Corporate Status, Indemnitee is, or is threatened to be, made a party to any Proceeding, the Company shall indemnify Indemnitee against all judgments, penalties, fines and amounts paid in settlement and all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with any such Proceeding unless it is established that (a) the act or omission of Indemnitee was material to the matter giving rise to the Proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) Indemnitee actually received an improper personal benefit in money, property or services or (c) in the case of any criminal Proceeding, Indemnitee had reasonable cause to believe that Indemnitee’s conduct was unlawful.
Section 5. Certain Limits on Indemnification . Notwithstanding any other provision of this Agreement (other than Section 6), Indemnitee shall not be entitled to:
(a) indemnification hereunder if the Proceeding was one by or in the right of the Company and Indemnitee is adjudged to be liable to the Company;
(b) indemnification hereunder if Indemnitee is adjudged to be liable on the basis that personal benefit was improperly received in any Proceeding charging improper personal benefit to Indemnitee, whether or not involving action in the Indemnitee’s Corporate Status; or
(c) indemnification or advance of Expenses hereunder if the Proceeding was brought by Indemnitee, unless: (i) the Proceeding was brought to enforce indemnification under this Agreement, and then only to the extent in accordance with and as authorized by Section 12 of this Agreement, or (ii) the Company’s charter or Bylaws, a resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors or an agreement approved by the Board of Directors to which the Company is a party expressly provide otherwise.
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Section 6. Court-Ordered Indemnification . Notwithstanding any other provision of this Agreement, a court of appropriate jurisdiction, upon application of Indemnitee and such notice as the court shall require, may order indemnification of Indemnitee by the Company in the following circumstances:
(a) if such court determines that Indemnitee is entitled to reimbursement under Section 2-418(d)(1) of the MGCL, the court shall order indemnification, in which case Indemnitee shall be entitled to recover the Expenses of securing such reimbursement; or
(b) if such court determines that Indemnitee is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not Indemnitee (i) has met the standards of conduct set forth in Section 2-418(b) of the MGCL or (ii) has been adjudged liable for receipt of an improper personal benefit under Section 2-418(c) of the MGCL, the court may order such indemnification as the court shall deem proper. However, indemnification with respect to any Proceeding by or in the right of the Company or in which liability shall have been adjudged in the circumstances described in Section 2-418(c) of the MGCL shall be limited to Expenses.
Section 7. Indemnification for Expenses of an Indemnitee Who is Wholly or Partially Successful . Notwithstanding any other provision of this Agreement, and without limiting any such provision, to the extent that Indemnitee was or is, by reason of Indemnitee’s Corporate Status, made a party to (or otherwise becomes a participant in) any Proceeding and is successful, on the merits or otherwise, in the defense of such Proceeding, Indemnitee shall be indemnified for all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee under this Section 7 for all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with each such claim, issue or matter, allocated on a reasonable and proportionate basis. For purposes of this Section 7 and, without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.
Section 8. Advance of Expenses for Indemnitee . If, by reason of Indemnitee’s Corporate Status, Indemnitee is, or is threatened to be, made a party to any Proceeding, the Company shall, without requiring a preliminary determination of Indemnitee’s ultimate entitlement to indemnification hereunder, advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with such Proceeding within ten days after the receipt by the Company of a statement or statements requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by a written affirmation by Indemnitee of Indemnitee’s good faith belief that the standard of conduct necessary for indemnification by the Company as authorized by law and by this Agreement has been met and a written undertaking by or on behalf of Indemnitee, in substantially the form attached hereto as Exhibit A or in such form as may be required under applicable law as in effect at the time of the execution thereof, to reimburse the portion of any Expenses advanced to Indemnitee relating to claims, issues or matters in the Proceeding as to which it shall ultimately be established that the standard of conduct has not been met by Indemnitee and which have not been successfully resolved as described in Section 7 of this Agreement. To the extent that Expenses advanced to Indemnitee do not relate to a specific claim, issue or matter in the Proceeding, such Expenses shall be allocated on a reasonable and proportionate basis. The undertaking required by this Section 8 shall be an unlimited general obligation by or on behalf of Indemnitee and shall be accepted without reference to Indemnitee’s financial ability to repay such advanced Expenses and without any requirement to post security therefor.
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Section 9. Indemnification and Advance of Expenses as a Witness or Proceeding Participant . Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is or may be, by reason of Indemnitee’s Corporate Status, made a witness or otherwise asked to participate in any Proceeding, whether instituted by the Company or any other party, and to which Indemnitee is not a party, Indemnitee shall be advanced all reasonable Expenses and indemnified against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith within ten days after the receipt by the Company of a statement or statements requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee.
Section 10. Procedure for Determination of Entitlement to Indemnification .
(a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. Indemnitee may submit one or more such requests from time to time and at such time(s) as Indemnitee deems appropriate in Indemnitee’s sole discretion. The officer of the Company receiving any such request from Indemnitee shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant to Section 10(a) above, a determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto shall promptly be made in the specific case: (i) if a Change in Control shall have occurred, by Independent Counsel, in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee, which Independent Counsel shall be selected by the Indemnitee and approved by the Board of Directors in accordance with Section 2-418(e)(2)(ii) of the MGCL, which approval shall not be unreasonably withheld; or (ii) if a Change in Control shall not have occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors or, if such a quorum cannot be obtained, then by a majority vote of a duly authorized committee of the Board of Directors consisting solely of one or more Disinterested Directors, (B) if Independent Counsel has been selected by the Board of Directors in accordance with Section 2-418(e)(2)(ii) of the MGCL and approved by the Indemnitee, which approval shall not be unreasonably withheld, by Independent Counsel, in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee or (C) if so directed by a majority of the members of the Board of Directors, by the stockholders of the Company. If it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination in the discretion of the Board of Directors or Independent Counsel if retained pursuant to clause (ii)(B) of this Section 10(b). Any Expenses incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company shall indemnify and hold Indemnitee harmless therefrom.
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(c) The Company shall pay the reasonable fees and expenses of Independent Counsel, if one is appointed.
Section 11. Presumptions and Effect of Certain Proceedings .
(a) In making any determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 10(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making of any determination contrary to that presumption.
(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, upon a plea of nolo contendere or its equivalent, or entry of an order of probation prior to judgment, does not create a presumption that Indemnitee did not meet the requisite standard of conduct described herein for indemnification.
(c) The knowledge and/or actions, or failure to act, of any other director, officer, employee or agent of the Company or any other director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any other foreign or domestic corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise shall not be imputed to Indemnitee for purposes of determining any other right to indemnification under this Agreement.
Section 12. Remedies of Indemnitee .
(a) If (i) a determination is made pursuant to Section 10(b) of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advance of Expenses is not timely made pursuant to Section 8 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 10(b) of this Agreement within 60 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 7 of this Agreement within ten days after receipt by the Company of a written request therefor, or (v) payment of indemnification pursuant to any other section of this Agreement or the charter or Bylaws of the Company is not made within ten days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication in an appropriate court located in the State of Maryland, or in any other court of competent jurisdiction, of Indemnitee’s entitlement to such indemnification or advance of Expenses. Alternatively, Indemnitee, at Indemnitee’s option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence a proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 12(a); provided, however, that the foregoing clause shall not apply to a proceeding brought by Indemnitee to enforce Indemnitee’s rights under Section 7 of this Agreement. Except as set forth herein, the provisions of Maryland law (without regard to its conflicts of laws rules) shall apply to any such arbitration. The Company shall not oppose Indemnitee’s right to seek any such adjudication or award in arbitration.
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(b) In any judicial proceeding or arbitration commenced pursuant to this Section 12, Indemnitee shall be presumed to be entitled to indemnification or advance of Expenses, as the case may be, under this Agreement and the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or advance of Expenses, as the case may be. If Indemnitee commences a judicial proceeding or arbitration pursuant to this Section 12, Indemnitee shall not be required to reimburse the Company for any advances pursuant to Section 8 of this Agreement until a final determination is made with respect to Indemnitee’s entitlement to indemnification (as to which all rights of appeal have been exhausted or lapsed). The Company shall, to the fullest extent not prohibited by law, be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 12 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all of the provisions of this Agreement.
(c) If a determination shall have been made pursuant to Section 10(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 12, absent a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification.
(d) In the event that Indemnitee, pursuant to this Section 12, seeks a judicial adjudication of or an award in arbitration to enforce Indemnitee’s rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company for, any and all Expenses actually and reasonably incurred by Indemnitee in such judicial adjudication or arbitration. If it shall be determined in such judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advance of Expenses sought, the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.
(e) Interest shall be paid by the Company to Indemnitee at the maximum rate allowed to be charged for judgments under the Courts and Judicial Proceedings Article of the Annotated Code of Maryland for amounts which the Company pays or is obligated to pay for the period (i) commencing with either the tenth day after the date on which the Company was requested to advance Expenses in accordance with Section 8 of this Agreement or the 60th day after the date on which the Company was requested to make the determination of entitlement to indemnification under Section 12(a) above and (ii) ending on the date such payment is made to Indemnitee by the Company.
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Section 13. Defense of the Underlying Proceeding .
(a) Indemnitee shall notify the Company promptly in writing upon being served with any summons, citation, subpoena, complaint, indictment, request or other document relating to any Proceeding which may result in the right to indemnification or the advance of Expenses hereunder and shall include with such notice a description of the nature of the Proceeding and a summary of the facts underlying the Proceeding. The failure to give any such notice shall not disqualify Indemnitee from the right, or otherwise affect in any manner any right of Indemnitee, to indemnification or the advance of Expenses under this Agreement unless the Company’s ability to defend in such Proceeding or to obtain proceeds under any insurance policy is materially and adversely prejudiced thereby, and then only to the extent the Company is thereby actually so prejudiced.
(b) Subject to the provisions of the last sentence of this Section 13(b) and of Section 13(c) below, the Company shall have the right to defend Indemnitee in any Proceeding which may give rise to indemnification hereunder; provided, however, that the Company shall notify Indemnitee of any such decision to defend within 15 calendar days following receipt of notice of any such Proceeding under Section 13(a) above. The Company shall not, without the prior written consent of Indemnitee, which shall not be unreasonably withheld or delayed, consent to the entry of any judgment against Indemnitee or enter into any settlement or compromise which (i) includes an admission of fault of Indemnitee, (ii) does not include, as an unconditional term thereof, the full release of Indemnitee from all liability in respect of such Proceeding, which release shall be in form and substance reasonably satisfactory to Indemnitee or (iii) would impose any Expense, judgment, fine, penalty or limitation on Indemnitee. This Section 13(b) shall not apply to a Proceeding brought by Indemnitee under Section 12 of this Agreement.
(c) Notwithstanding the provisions of Section 13(b) above, if in a Proceeding to which Indemnitee is a party by reason of Indemnitee’s Corporate Status, (i) Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval shall not be unreasonably withheld, that Indemnitee may have separate defenses or counterclaims to assert with respect to any issue which may not be consistent with other defendants in such Proceeding, (ii) Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval shall not be unreasonably withheld, that an actual or apparent conflict of interest or potential conflict of interest exists between Indemnitee and the Company, or (iii) if the Company fails to assume the defense of such Proceeding in a timely manner, Indemnitee shall be entitled to be represented by separate legal counsel of Indemnitee’s choice, subject to the prior approval of the Company, which approval shall not be unreasonably withheld, at the expense of the Company. In addition, if the Company fails to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any Proceeding to deny or to recover from Indemnitee the benefits intended to be provided to Indemnitee hereunder, Indemnitee shall have the right to retain counsel of Indemnitee’s choice, subject to the prior approval of the Company, which approval shall not be unreasonably withheld, at the expense of the Company (subject to Section 12(d) of this Agreement), to represent Indemnitee in connection with any such matter.
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Section 14. Non-Exclusivity; Survival of Rights; Subrogation .
(a) The rights of indemnification and advance of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the charter or Bylaws of the Company, any agreement or a resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors, or otherwise. Unless consented to in writing by Indemnitee, no amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in Indemnitee’s Corporate Status prior to such amendment, alteration or repeal, regardless of whether a claim with respect to such action or inaction is raised prior or subsequent to such amendment, alteration or repeal. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right or remedy shall be cumulative and in addition to every other right or remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion of any right or remedy hereunder, or otherwise, shall not prohibit the concurrent assertion or employment of any other right or remedy.
(b) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.
Section 15. Insurance . The Company will use its reasonable best efforts to acquire directors and officers liability insurance, on terms and conditions deemed appropriate by the Board of Directors, with the advice of counsel, covering Indemnitee or any claim made against Indemnitee by reason of Indemnitee’s Corporate Status and covering the Company for any indemnification or advance of Expenses made by the Company to Indemnitee for any claims made against Indemnitee by reason of Indemnitee’s Corporate Status; provided that such insurance may, but shall not be required to, include employed lawyers professional liability coverage. Without in any way limiting any other obligation under this Agreement, the Company shall indemnify Indemnitee for any payment by Indemnitee arising out of the amount of any deductible or retention and the amount of any excess of the aggregate of all judgments, penalties, fines, settlements and Expenses incurred by Indemnitee in connection with a Proceeding over the coverage of any insurance referred to in the previous sentence. The purchase, establishment and maintenance of any such insurance shall not in any way limit or affect the rights or obligations of the Company or Indemnitee under this Agreement except as expressly provided herein, and the execution and delivery of this Agreement by the Company and the Indemnitee shall not in any way limit or affect the rights or obligations of the Company under any such insurance policies. If, at the time the Company receives notice from any source of a Proceeding to which Indemnitee is a party or a participant (as a witness or otherwise) the Company has director and officer liability insurance in effect, the Company shall give prompt notice of such Proceeding to the insurers in accordance with the procedures set forth in the respective policies.
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Section 16. Coordination of Payments . The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable or payable or reimbursable as Expenses hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.
Section 17. Reports to Stockholders . To the extent required by the MGCL, the Company shall report in writing to its stockholders the payment of any amounts for indemnification of, or advance of Expenses to, Indemnitee under this Agreement arising out of a Proceeding by or in the right of the Company with the notice of the meeting of stockholders of the Company next following the date of the payment of any such indemnification or advance of Expenses or prior to such meeting.
Section 18. Duration of Agreement; Binding Effect .
(a) This Agreement shall continue until and terminate on the later of (i) the date that Indemnitee shall have ceased to serve as a director, officer, employee or agent of the Company or as a director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any other foreign or domestic corporation, real estate investment trust, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that such person is or was serving in such capacity at the request of the Company and (ii) the date that Indemnitee is no longer subject to any actual or possible Proceeding (including any rights of appeal thereto and any Proceeding commenced by Indemnitee pursuant to Section 12 of this Agreement).
(b) The indemnification and advance of Expenses provided by, or granted pursuant to, this Agreement shall be binding upon and be enforceable by the parties hereto and their respective successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), shall continue as to an Indemnitee who has ceased to be a director, officer, employee or agent of the Company or a director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any other foreign or domestic corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that such person is or was serving in such capacity at the request of the Company, and shall inure to the benefit of Indemnitee and Indemnitee’s spouse, assigns, heirs, devisees, executors and administrators and other legal representatives.
(c) The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.
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(d) The Company and Indemnitee agree hereby that a monetary remedy for breach of this Agreement, at some later date, may be inadequate, impracticable and difficult of proof, and further agree that such breach may cause Indemnitee irreparable harm. Accordingly, the parties hereto agree that Indemnitee may enforce this Agreement by seeking injunctive relief and/or specific performance hereof, without any necessity of showing actual damage or irreparable harm and that by seeking injunctive relief and/or specific performance, Indemnitee shall not be precluded from seeking or obtaining any other relief to which Indemnitee may be entitled. Indemnitee shall further be entitled to such specific performance and injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, without the necessity of posting bonds or other undertakings in connection therewith. The Company acknowledges that, in the absence of a waiver, a bond or undertaking may be required of Indemnitee by a court, and the Company hereby waives any such requirement of such a bond or undertaking.
Section 19. Severability . If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any Section, paragraph or sentence of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section, paragraph or sentence of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.
Section 20. Identical Counterparts . This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. One such counterpart signed by the party against whom enforceability is sought shall be sufficient to evidence the existence of this Agreement.
Section 21. Headings . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.
Section 22. Modification and Waiver . No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.
Section 23. Notices . All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, on the day of such delivery, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:
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(a) If to Indemnitee, to the address set forth on the signature page hereto.
(b) If to the Company, to:
Innovative Industrial Properties, Inc. | ||
17190 Bernardo Center Drive | ||
San Diego, CA 92128 | ||
Attn: General Counsel |
or to such other address as may have been furnished in writing to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.
Section 24. Governing Law . The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Maryland, without regard to its conflicts of laws rules.
Section 25. Miscellaneous . Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
INNOVATIVE INDUSTRIAL | ||
PROPERTIES, INC. | ||
By: | ||
Name: | ||
Title: | ||
INDEMNITEE | ||
Name: | ||
Address: |
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EXHIBIT A
FORM OF AFFIRMATION AND UNDERTAKING TO REPAY EXPENSES ADVANCED
To: The Board of Directors of Innovative Industrial Properties, Inc.
Re: Undertaking to Repay Expenses Advanced
Ladies and Gentlemen:
This affirmation and undertaking is being provided pursuant to that certain Indemnification Agreement dated the _____ day of ______________, 20____, by and between Innovative Industrial Properties, Inc., a Maryland corporation (the “Company”), and the undersigned Indemnitee (the “Indemnification Agreement”), pursuant to which I am entitled to advance of Expenses in connection with [Description of Proceeding] (the “Proceeding”).
Terms used herein and not otherwise defined shall have the meanings specified in the Indemnification Agreement.
I am subject to the Proceeding by reason of my Corporate Status or by reason of alleged actions or omissions by me in such capacity. I hereby affirm my good faith belief that at all times, insofar as I was involved as a director and/or officer of the Company, in any of the facts or events giving rise to the Proceeding, I (1) did not act with bad faith or active or deliberate dishonesty, (2) did not receive any improper personal benefit in money, property or services and (3) in the case of any criminal proceeding, had no reasonable cause to believe that any act or omission by me was unlawful.
In consideration of the advance of Expenses by the Company for reasonable attorneys’ fees and related Expenses incurred by me in connection with the Proceeding (the “Advanced Expenses”), I hereby agree that if, in connection with the Proceeding, it is established that (1) an act or omission by me was material to the matter giving rise to the Proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty or (2) I actually received an improper personal benefit in money, property or services or (3) in the case of any criminal proceeding, I had reasonable cause to believe that the act or omission was unlawful, then I shall promptly reimburse the portion of the Advanced Expenses relating to the claims, issues or matters in the Proceeding as to which the foregoing findings have been established.
IN WITNESS WHEREOF, I have executed this Affirmation and Undertaking on this ___ day of ____________________, 20____.
Name: |
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Exhibit 10.3
Innovative
INDUSTRIAL properties, inc.
RESTRICTED STOCK PURCHASE AGREEMENT
This Restricted Stock Purchase Agreement (the “ Agreement ”) is made as of ______, 2016 (the “ Effective Date ”) by and between Innovative Industrial Properties, Inc., a Maryland corporation (“ Company ”), and [Name of Founder], an adult resident of [State] (“ Purchaser ”).
WHEREAS, Company desires to sell to Purchaser and Purchaser desires to buy from Company an aggregate of [ ] ([ ]) shares of Company’s Class B Common Stock (the “ Shares ”); and
WHEREAS, Purchaser and Company desire to subject the Shares to a Repurchase Option (as defined below).
NOW, THEREFORE, In consideration of the mutual covenants and representations set forth herein and for good and valuable consideration the sufficiency of which is hereby acknowledged, Company and Purchaser agree as follows:
1. Purchase and Sale of the Shares. Subject to the terms and conditions of this Agreement, Company agrees to sell to Purchaser and Purchaser agrees to purchase from Company on the Effective Date the Shares at a price of $0.01 per share (the “ Purchase Price ”), for an aggregate Purchase Price of [ ] Dollars ($[ ]).
In partial consideration for the Shares and the right to purchase the Shares, effective as of the Effective Date, Purchaser hereby transfers and assigns to Company (i) any business plan of Company (the “ Business Plan ”) and (ii) any and all right, title and interest Purchaser has in Company’s business and any Intellectual Property (as defined below) related to Company’s business, as currently conducted and as contemplated to be conducted pursuant to the Business Plan or otherwise. For purposes hereof, “Intellectual Property” means: (i) United States and foreign patents, trademarks, copyrights and mask works, registrations and applications therefor, and rights granted upon any reissue, division, continuation or continuation-in-part thereof, (ii) trade secret rights arising out of the laws of any and all jurisdictions, (iii) ideas, inventions, concepts, technology, software, methods, processes, drawings, illustrations, writings know-how, show-how, trade names, domain names, web addresses and web sites, and all rights therein and thereto, (iv) any other intellectual property rights, whether or not registerable, and (v) licenses in or to any of the foregoing. Further, Purchaser agrees to take all actions reasonably requested by Company to assist Company in effecting the foregoing transfer and in establishing, perfecting, defending, enforcing and protecting Company’s rights in any of the above transferred items, including without limitation assisting in the prosecution of any patent applications included in or based upon the Intellectual Property.
2. Repurchase Option. All of the Shares shall be subject to the Repurchase Option (as defined below). If, for any reason, the Purchaser ceases his or her affiliation with Company by virtue of no longer being either a director, an employee or a consultant of Company (a “ Service Provider ”), including Purchaser’s death, disability, voluntary resignation or termination by the Company with or without cause, then Company shall, upon the date of such termination (as reasonably fixed and determined by Company), have the right, but not the obligation (the “ Repurchase Option ”), for a period of ninety (90) days from such date, to repurchase the Shares which have not yet been released from the Repurchase Option (the “ Unreleased Shares ”) at a price per share equal to the lesser of (x) the fair market value of the shares at the time the Repurchase Option is exercised, as determined by Company’s board of directors and (y) the Purchase Price (the “ Repurchase Price ”). The Repurchase Option shall be exercised by Company by delivering written notice to Purchaser and by delivering to Purchaser a check in the amount of the aggregate Repurchase Price. Upon delivery of such notice and the payment of the aggregate Repurchase Price, Company shall become the legal and beneficial owner of the Unreleased Shares being repurchased and all rights and interests therein or relating thereto, and Company shall have the right to retain and transfer to its own name the number of Unreleased Shares being repurchased by Company. Company in its sole discretion may designate and assign one or more employees, officers, directors or stockholders of Company or other persons or organizations to exercise all or a part of Company’s Repurchase Option to purchase all or a part of the Unreleased Shares.
3. Release of Shares From Repurchase Option; Vesting.
(a) So long as Purchaser’s continuous status as a Service Provider has not yet terminated in each such instance, twenty-five percent (25%) of the Shares shall be released from the Repurchase Option on the twelve month anniversary of this Agreement and an additional two and one-twelfth percent (2.083%) of the Shares shall be released from the Repurchase Option on the last day of each calendar month thereafter, commencing on and including July 31, 2017, until all of the Shares shall have been released from the Repurchase Option (the “ Released Shares ”).
Notwithstanding anything else herein to the contrary, in the event of a Change of Control (defined below), any and all Shares that have not been released from the Repurchase Option shall be released from the Repurchase Option immediately prior to the Change of Control.
(b) For purposes of this Agreement, a “ Change of Control ” means either:
(i) the acquisition of Company by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation or stock transfer, but excluding any such transaction effected primarily for the purpose of changing the domicile of Company), unless Company’s stockholders of record immediately prior to such transaction or series of related transactions hold, immediately after such transaction or series of related transactions, at least fifty percent (50%) of the voting power of the surviving or acquiring entity (provided that the sale by Company of its securities for the purposes of raising additional funds shall not constitute a Change of Control hereunder); or
(ii) a sale of all or substantially all of the assets of Company, other than such transaction effected primarily for the purpose of changing the domicile of Company.
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4. Restrictions on Transfer.
(a) Purchaser hereby makes the investment representations listed on Exhibit A to Company as of the date of this Agreement and as of the date of the Closing, and agrees that such representations are incorporated into this Agreement by this reference, such that Company may rely on them in issuing the Shares. Purchaser understands and agrees that the legends set forth below, or substantially equivalent legends, will be placed upon any certificate(s) evidencing ownership of the Shares, together with any other legends that may be required by Company or by applicable state or federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ ACT ”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION OTHERWISE COMPLIES WITH THE ACT.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER, A MARKET STANDOFF PROVISION, A RIGHT OF FIRST REFUSAL, AND, FOR SOME OF THE SHARES REPRESENTED BY THIS CERTIFICATE, A REPURCHASE OPTION HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE RESTRICTED STOCK PURCHASE AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS, MARKET STANDOFF PROVISION, RIGHT OF FIRST REFUSAL AND REPURCHASE OPTION ARE BINDING ON TRANSFEREES OF THESE SHARES.
(b) Stop-Transfer Notices . Purchaser agrees that to ensure compliance with the restrictions referred to herein, Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if Company transfers its own securities, it may make appropriate notations to the same effect in its own records.
(c) Refusal to Transfer . Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.
(d) Lock-Up Period . In connection with any public offering of the Company’s securities and upon request of Company or the underwriters or placement agents for such offering of Company’s securities, Purchaser agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any securities of Company however or whenever acquired (other than those included in the registration) without the prior written consent of Company or such underwriters or placement agents, as the case may be, for such period of time (not to exceed 180 days but subject to such extension or extensions as may be required by the underwriters in order to publish research reports while complying with the Financial Industry Regulatory Authority and the New York Stock Exchange) from the effective date of such registration as may be requested by Company or such underwriters or placement agents and to execute an agreement reflecting the foregoing as may be requested by the underwriters or placement agents at the time of the public offering.
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(e) Unreleased Shares . No Unreleased Shares subject to the Repurchase Option contained in Section 2 of this Agreement, nor any beneficial interest in such Unreleased Shares, shall be sold, gifted, transferred, encumbered or otherwise disposed of in any way (whether by operation of law or otherwise) by Purchaser.
(f) Released Shares . No Released Shares, nor any beneficial interest in such Released Shares, shall be sold, transferred, encumbered or otherwise disposed of in any way (whether by operation of law or otherwise) by Purchaser or any subsequent transferee, other than in compliance with Company’s right of first refusal provisions contained in Section 5 of this Agreement.
5. Company’s Right of First Refusal . Before any Released Shares (or any beneficial interest in such Released Shares) may be sold, transferred, encumbered or otherwise disposed of in any way (whether by operation of law or otherwise) by Purchaser or any subsequent transferee (each a “ Holder ”), such Holder must first offer such Released Shares or beneficial interest to Company and/or its assignee(s) as follows:
(a) Notice of Proposed Transfer . Holder shall deliver to Company a written notice stating: (i) Holder’s bona fide intention to sell or otherwise transfer the Released Shares; (ii) the name of each proposed transferee; (iii) the number of Released Shares to be transferred to each proposed transferee; (iv) the bona fide cash price or other consideration for which Holder proposes to transfer the Released Shares; and (v) that by delivering the notice, Holder offers all such Released Shares to Company and/or its assignee(s) pursuant to this Section and on the same terms described in the notice.
(b) Exercise of Right of First Refusal . At any time within thirty (30) days after receipt of Holder’s notice, Company and/or its assignee(s) may, by giving written notice to Holder, elect to purchase all, but not less than all, of the Released Shares proposed to be transferred to any one or more of the proposed transferees, at the purchase price determined in accordance with Section 5(c).
(c) Purchase Price . The purchase price for the Released Shares purchased by Company and/or its assignee(s) under this Section shall be the lesser of (i) the price listed in Holder’s notice or (ii) the fair market value as determined by the Board of Directors in its sole discretion. If the price listed in Holder’s notice includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of Company in its sole discretion.
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(d) Payment . Payment of the purchase price shall be made, at the option of Company and/or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of Holder to Company and/or its assignee(s), or by any combination thereof within thirty (30) days after receipt by Company of Holder’s notice (or at such later date as is called for by such notice).
(e) Holder’s Right to Transfer . If all of the Released Shares proposed in the notice to be transferred to a given proposed transferee are not purchased by Company and/or its assignee(s) as provided in this Section, then Holder may sell or otherwise transfer such Released Shares to that proposed transferee, provided that: (i) the transfer is made only on the terms provided for in the notice, with the exception of the purchase price, which may be either the price listed in the notice or any higher price; (ii) such transfer is consummated within sixty (60) days after the date the notice is delivered to Company; (iii) the transfer is effected in accordance with any applicable securities laws, and if requested by Company, Holder shall have delivered an opinion of counsel acceptable to Company to that effect; and (iv) the proposed transferee agrees in writing that the provisions of this Section shall continue to apply to the transferred Released Shares in the hands of such proposed transferee. If any Released Shares described in a notice are not transferred to the proposed transferee within the period provided above, then before any such Released Shares may be transferred, a new notice shall be given to Company, and Company and/or its assignees shall again be offered the right of first refusal described in this Section.
(f) Exception for Certain Family Transfers . Notwithstanding anything to the contrary contained elsewhere in this Section, the transfer of any or all of the Released Shares during Holder’s lifetime or on Holder’s death by will or intestacy to Holder’s spouse, child, father, mother, brother, sister, or to a trust or other similar estate planning vehicle for the benefit of Holder or any of the foregoing persons, shall be exempt from the provisions of this Section; provided that, in each such case, the transferee shall agree in writing to receive and hold the Released Shares so transferred subject to all of the provisions of this Agreement, including but not limited to this Section, and there shall be no further transfer of such Released Shares except in accordance with the terms of this Section.
(g) Termination of Right of First Refusal . The right of first refusal contained in this Section shall terminate as to all Released Shares purchased hereunder upon the earlier of: (i) the closing date of the initial public offering of Common Stock of Company registered pursuant to the Act (“ IPO ”), and (ii) the closing date of a change of control of Company pursuant to which Holders of the outstanding voting securities of Company receive securities of a class registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.
6. Tax Consequences . Purchaser has reviewed with Purchaser’s own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Purchaser is relying solely on such advisors and not on any statements or representations of Company or any of its agents. Purchaser understands that Purchaser (and not Company) shall be responsible for any tax liability that may arise as a result of the transactions contemplated by this Agreement. Purchaser understands that Section 83 of the Internal Revenue Code of 1986, as amended (the “ Code ”), taxes as ordinary income the difference between the purchase price for the Shares and the fair market value of the Shares as of the date any restrictions on the Shares lapse. In this context, “ restriction ” includes the right of Company to buy back the Shares pursuant to the Repurchase Option. Purchaser understands that Purchaser may elect to be taxed at the time the Shares are purchased rather than when and as the Repurchase Option expires by filing an election under Section 83(b) of the Code with the IRS within 30 days from the date of purchase. THE FORM FOR MAKING THIS SECTION 83(B) ELECTION IS ATTACHED TO THIS AGREEMENT AS EXHIBIT B AND PURCHASER (AND NOT COMPANY OR ANY OF ITS AGENTS) SHALL BE SOLELY RESPONSIBLE FOR APPROPRIATELY FILING SUCH FORM, EVEN IF PURCHASER REQUESTS COMPANY OR ITS AGENTS TO MAKE THIS FILING ON PURCHASER’S BEHALF.
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7. Escrow . As security for Purchaser’s faithful performance of this Agreement, Purchaser agrees, immediately upon receipt of the stock certificate(s) evidencing the Shares, to deliver such certificate(s), together with the Stock Powers executed by Purchaser and by Purchaser’s spouse, if any (with the date, transferee, stock certificate number and number of Shares left blank), to the Secretary of the Company or other designee of the Company (the “ Escrow Holder ”), who is hereby appointed to hold such certificate(s) and Stock Powers in escrow and to take all such actions and to effectuate all such transfers and/or releases of such Shares as are in accordance with the terms of this Agreement. Escrow Holder will act solely for the Company as its agent and not as a fiduciary. Purchaser and the Company agree that Escrow Holder will not be liable to any party to this Agreement (or to any other party) for any actions or omissions unless Escrow Holder is grossly negligent or intentionally fraudulent in carrying out the duties of Escrow Holder under this Agreement. Escrow Holder may rely upon any letter, notice or other document executed with any signature purported to be genuine and may rely on the advice of counsel and obey any order of any court with respect to the transactions contemplated by this Agreement. The Shares will be released from escrow upon termination of both the Repurchase Option and the “Right of First Refusal” set forth in Section 5.
8. General Provisions.
(a) Choice of Law; Entire Agreement . This Agreement shall be governed by the internal substantive laws, but not the choice of law rules, of California.
(b) Integration . This Agreement represents the entire agreement between the parties with respect to the purchase of the Shares and supersedes and replaces any and all prior written or oral agreements regarding the subject matter of this Agreement including, any representations made during any interviews, discussions or negotiations whether written or oral.
(c) Notices . All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, sent by facsimile or electronic mail or otherwise delivered by hand or by messenger addressed:
(i) if to Purchaser, at Purchaser’s address, facsimile number or electronic mail address as shown in Company’s records, as may be updated in accordance with the provisions hereof;
(ii) if to Company, one copy should be sent to Innovative Industrial Properties, Inc., Attention: Secretary, at such address as Company shall have furnished to Purchaser, with a copy to Foley & Lardner LLP, c/o Carrie Long, 3579 Valley Centre Drive, Suite 300, San Diego, CA 92130.
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(d) Successors . Any successor to Company (whether direct or indirect and whether by purchase, merger, consolidation, liquidation or otherwise) to all or substantially all of Company’s business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term “ Company ” shall include any successor to Company’s business and/or assets which executes and delivers the assumption agreement described in this Section or which becomes bound by the terms of this Agreement by operation of law. Subject to the restrictions on transfer set forth in this Agreement, this Agreement shall be binding upon Purchaser and his or her heirs, executors, administrators, successors and assigns.
(e) Assignment . The rights granted to Purchaser under this Agreement are not assignable by Purchaser under any circumstances.
(f) Waiver . Either party’s failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, nor prevent that party from hereafter enforcing any other provision of this Agreement. The rights granted to both parties hereunder are cumulative and shall not constitute a waiver of either party’s right to assert any other legal remedy available to it.
(g) Purchaser Investment Representations and Further Documents . Purchaser agrees upon request to execute any further documents or instruments necessary or reasonably desirable in the view of Company to carry out the purposes or intent of this Agreement, including Exhibits A , B and C of this Agreement.
(h) Severability . Should any provision of this Agreement be found to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable to the greatest extent permitted by law.
(i) Rights as Stockholder . Subject to the terms and conditions of this Agreement, Purchaser shall have all of the rights of a stockholder of Company with respect to the Shares from and after the date that Purchaser delivers a fully executed copy of this Agreement (including all exhibits and attachments thereto) and full payment for the Shares to Company, and until such time as Purchaser disposes of the Shares in accordance with this Agreement. Upon such transfer, Purchaser shall have no further rights as a holder of the Shares except (in the case of a transfer to Company) the right to receive payment for the Shares in accordance with the provisions of this Agreement, and Purchaser shall forthwith cause the certificate(s) evidencing the Shares to be surrendered to Company for transfer or cancellation.
(j) Adjustment for Stock Split . All references to the number of Shares and the purchase price of the Shares in this Agreement shall be adjusted to reflect any stock split, stock dividend or other change in the Shares which may be made after the date of this Agreement.
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(k) Service Provider at Will . PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF REPURCHASE SHARES PURSUANT TO THIS AGREEMENT IS EARNED ONLY BY CONTINUING SERVICE AS A SERVICE PROVIDER AT WILL (AND NOT THROUGH THE ACT OF BEING HIRED OR PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, OR FOR ANY PERIOD AT ALL, AND SHALL NOT INTERFERE WITH PURCHASER’S RIGHT OR COMPANY’S RIGHT TO TERMINATE PURCHASER’S RELATIONSHIP WITH COMPANY AT ANY TIME, WITH OR WITHOUT CAUSE OR NOTICE.
(l) Arbitration . If a dispute arises out of or relates to this Agreement, or its breach, and the parties have not been successful in resolving such dispute through negotiation, Purchaser agrees that the parties will attempt to resolve the dispute through mediation by submitting the dispute to a sole mediator selected by the parties or, at any time at the option of a party, to mediation by the American Arbitration Association (“ AAA ”). If not thus resolved, it shall be referred to a sole arbitrator selected by the parties within thirty (30) days of the mediation or, in the absence of such selection, to final and binding arbitration by a sole arbitrator under the AAA Arbitration Rules (“ Rules ”) in effect on the date of this Agreement. The mediation and arbitration, including arguments and briefs, shall be in the English language in the City of San Diego, California. Purchaser also agrees that the arbitrator shall have the power to award any remedies, including attorneys’ fees and costs (including arbitration costs), available under applicable law. The decision of the arbitrator shall be in writing. The arbitrator shall apply the substantive law of the State of California without giving effect to any principles of conflict of laws under the laws of the State of California. Any monetary award by the arbitrator shall be in United States Dollars only. Judgment upon the award rendered in the arbitration may be entered in any court having jurisdiction thereof. Purchaser agrees that each party shall bear its own expenses (including attorney’s fees) and an equal share of the expenses of the mediator and arbitrator and the fees of the AAA. The parties, their representatives, other participants and the mediator and arbitrator shall hold the existence, content and result of the mediation and arbitration in confidence. Nothing in this section shall be construed to preclude any party from seeking injunctive relief in order to protect its rights pending mediation or arbitration. A request by a party to a court for such injunctive relief shall not be deemed a waiver or violation of the obligation to mediate or arbitrate. In addition to the right under the Rules to petition the court for provisional relief, Purchaser agrees that any party may also petition the court for injunctive relief where either party alleges or claims a violation of any confidential information or invention assignment agreement between Purchaser and Company or any other agreement regarding trade secrets, confidential information, or non-solicitation. If either party seeks injunctive relief, the prevailing party shall be entitled to recover reasonable costs and attorneys’ fees.
(m) Counterparts . This Agreement may be executed in one or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same agreement. Facsimile or PDF copies of signed signature pages shall be binding originals.
[Signature Page Follows]
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The parties represent that they have read this Restricted Stock Purchase Agreement in its entirety, have had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understand this Agreement. Purchaser agrees to notify Company of any change in his address below.
PURCHASER | INNOVATIVE INDUSTRIAL PROPERTIES, INC. | |
(Signature) | ||
(Signature) | ||
(Print Name) | ||
(Print Name) | ||
Address: | ||
[Signature Page to Restricted Stock Purchase Agreement]
spouse consent
The undersigned spouse of [ ] (the “ Purchaser ”) has read, understands and hereby approves all the terms and conditions of the Restricted Stock Purchase Agreement dated June 15, 2016 (the “ Agreement ”), by and between Purchaser and Innovative Industrial Properties, Inc., a Maryland corporation (the “ Company ”), pursuant to which Purchaser has purchased [ ] Shares ([ ]) shares of the Company’s Class B common stock (the “ Shares ”).
In consideration of the Company granting my spouse the right to purchase the Shares under the Agreement, I hereby agree to be irrevocably bound by all the terms and conditions of the Agreement (including but not limited to the Company’s Repurchase Option and the Right of First Refusal and the market standoff agreements contained therein) and further agree that any community property interest I may have in the Shares will be similarly bound by the Agreement.
I hereby appoint Purchaser as my attorney-in-fact, to act in my name, place and stead with respect to any amendment of the Agreement and with respect to the making and filing of an election under Internal Revenue Code Section 83(b) in connection with the purchase of the Shares.
Dated: | |||
Signature of Spouse [Sign Here] | |||
Name of Spouse [Please Print] | |||
¨ Check this box if you do not have a spouse |
EXHIBIT A
INVESTMENT REPRESENTATION STATEMENT
In connection with the purchase of the Shares, Purchaser represents to Company as follows:
1. Company May Rely on These Representations . I understand that Company’s sale of the shares to me has not been registered under the Securities Act of 1933, as amended (the “ Securities Act "), because Company believes, relying in part on my representations in this document, that an exemption from such registration requirement is available for such sale. I understand that the availability of this exemption depends upon the representations I am making to Company in this document being true and correct.
2. I am Purchasing for Investment . I am purchasing the shares solely for investment purposes, and not for further distribution. My entire legal and beneficial ownership interest in the shares is being purchased and shall be held solely for my account, except to the extent I intend to hold the shares jointly with my spouse. I am not a party to, and do not presently intend to enter into, any contract or other arrangement with any other person or entity involving the resale, transfer, grant of participation with respect to or other distribution of any of the shares. My investment intent is not limited to my present intention to hold the shares for the minimum capital gains period specified under any applicable tax law, for a deferred sale, for a specified increase or decrease in the market price of the shares, or for any other fixed period in the future.
3. I Can Protect My Own Interests . I can properly evaluate the merits and risks of an investment in the shares and can protect my own interests in this regard, whether by reason of my own business and financial expertise, the business and financial expertise of certain professional advisors unaffiliated with Company with whom I have consulted, or my preexisting business or personal relationship with Company or any of its officers, directors or controlling persons.
4. I am Informed About Company . I am sufficiently aware of Company’s business affairs and financial condition to reach an informed and knowledgeable decision to acquire the shares. I have had opportunity to discuss the plans, operations and financial condition of Company with its officers, directors or controlling persons, and have received all information I deem appropriate for assessing the risk of an investment in the shares, including a copy of the Company’s Articles of Incorporation, which includes a forfeiture provision with respect to my Shares.
5. I Recognize My Economic Risk . I realize that the purchase of the shares involves a high degree of risk, and that Company’s future prospects are uncertain. I am able to hold the shares indefinitely if required, and am able to bear the loss of my entire investment in the shares.
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6. I Know the Shares are Restricted Securities . I understand that the shares are “restricted securities” in that Company’s sale of the shares to me has not been registered under the Securities Act in reliance upon an exemption for non-public offerings. In this regard, I also understand and agree that:
(a) I must hold the shares indefinitely, unless any subsequent proposed resale by me is registered under the Securities Act, or unless an exemption from registration is otherwise available (such as Rule 144);
(b) Company is under no obligation to register any subsequent proposed resale of the shares by me; and
(c) the certificate evidencing the shares will be imprinted with a legend which prohibits the transfer of the shares unless such transfer is registered or such registration is not required in the opinion of counsel for Company.
7. I am Familiar With Rule 144 . I am familiar with Rule 144 adopted under the Securities Act, which in some circumstances permits limited public resales of “restricted securities” like the shares acquired from an issuer in a non-public offering. I understand that my ability to sell the shares under Rule 144 in the future is uncertain, and will depend upon, among other things: (i) the availability of certain current public information about Company; (ii) the resale occurring more than six months after my purchase and full payment (within the meaning of Rule 144) for the shares; and (iii) if I am an affiliate of Company,: (A) the sale being made through a broker in an unsolicited “broker’s transaction” or in transactions directly with a market maker, or in transactions constituting “riskless principal transactions”, as said terms are defined under the Securities Exchange Acts of 1933 and 1934, as amended, (B) the amount of shares being sold during any three month period not exceeding the specified limitations stated in Rule 144, and (C) timely filing of a notice of proposed sale on Form 144, if applicable.
8. I Know Rule 144 May Never be Available . I understand that the requirements of Rule 144 may never be met, and that the shares may never be saleable. I further understand that at the time I wish to sell the shares, there may be no public market for Company’s stock upon which to make such a sale, or the current public information requirements of Rule 144 may not be satisfied, either of which would preclude me from selling the shares under Rule 144 even if the six-month minimum holding period had been satisfied.
9. I Know I am Subject to Further Restrictions on Resale . I understand that in the event Rule 144 is not available to me, any future proposed sale of any of the shares by me will not be possible without prior registration under the Securities Act, compliance with some other registration exemption (which may or may not be available), or each of the following: (i) my written notice to Company containing detailed information regarding the proposed sale, (ii) my providing an opinion of my counsel to the effect that such sale will not require registration, and (iii) Company notifying me in writing that its counsel concurs in such opinion. I understand that neither Company nor its counsel is obligated to provide me with any such opinion. I understand that although Rule 144 is not exclusive, the Staff of the SEC has stated that persons proposing to sell private placement securities other than in a registered offering or pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk.
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10. I Know I May Have Tax Liability Due to the Uncertain Value of the Shares . I understand that the Board of Directors believes its valuation of the shares represents a fair appraisal of their worth, but that it remains possible that, with the benefit of hindsight, the Internal Revenue Service may successfully assert that the value of the shares on the date of my purchase is substantially greater than the Board’s appraisal. I understand that any additional value ascribed to the shares by such an IRS determination will constitute ordinary income to me as of the purchase date, and that any additional taxes and interest due as a result will be my sole responsibility payable only by me, and that Company need not and will not reimburse me for that tax liability. I understand that if such additional value represents more than 25% of my gross income for the year in which the value of the shares is taxable, the IRS will have 6 years from the due date for filing the return (or the actual filing date of the return if filed hereafter) within which to assess me the additional tax and interest due.
[Signature Page Follows]
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IN WITNESS WHEREOF, the undersigned has signed this Investment Representation Statement as of the date written below.
(Signature) | |
(Print Name) | |
(Date) |
[Signature Page to Investment Representation Statement]
EXHIBIT B
IF YOU WISH TO MAKE A SECTION 83(B) ELECTION, THE FILING OF SUCH ELECTION IS YOUR RESPONSIBILITY.
THE FORM FOR MAKING THIS SECTION 83(b) ELECTION IS BELOW.
YOU MUST FILE THIS FORM WITHIN THIRTY (30) DAYS OF PURCHASING THE SHARES.
YOU (AND NOT COMPANY OR ANY OF ITS AGENTS) SHALL BE SOLELY RESPONSIBLE FOR FILING SUCH FORM WITH THE IRS, EVEN IF YOU REQUEST COMPANY OR ITS AGENTS TO MAKE THIS FILING ON YOUR BEHALF AND EVEN IF COMPANY OR ITS AGENTS HAVE MADE THIS FILING ON YOUR BEHALF IN THE PAST.
The election should be filed by mailing a signed election form by certified mail, return receipt requested to the IRS Service Center where you file your tax returns. See www.irs.gov .
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INFORMATION RE: FILING OF SECTION 83(b) ELECTION
These instructions are provided to assist you if you choose to make an election under Section 83(b) of the Internal Revenue Code. Please consult with your personal tax advisor as to whether an election of this nature will be in your best interests in light of your personal tax situation.
The executed original of the 83(b) election must be mailed to the Internal Revenue Service at the appropriate address as indicated below within 30 days of the Effective Date of this Agreement . PLEASE NOTE: There is no remedy for failure to mail on time. The steps outlined below should be followed to ensure the election is mailed and filed correctly and in a timely manner.
1. Complete 83(b) election form (attached below) and make four (4) copies of the signed election.
2. Prepare cover letter to the IRS (sample letter attached below).
3. Send cover letter with originally executed 83(b) form and one (1) copy via certified mail, return receipt requested to the Internal Revenue Service at the address of the IRS where you file your personal tax returns. We suggest that you have the package date-stamped at the post office. The post office will provide you with a white certified receipt that includes a dated postmark. Enclose a self-addressed, stamped envelope so that the IRS may return a date-stamped copy to you. However, your postmarked receipt is your proof of having timely filed the 83(b) if you do not receive confirmation from the IRS.
4. One (1) copy should be sent to the Company for its records and one (1) copy must be attached to your federal income tax return for the year in which you are making the election.
5. Retain the IRS file-stamped copy (when returned) for your records.
Please consult your personal tax advisor for the address of the office of the IRS to which you should mail your election.
ELECTION
UNDER SECTION 83(b) OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in his or her gross income for the current taxable year, the amount of any compensation taxable to him or her in connection with his or her receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows:
Name of Taxpayer: | |
Taxpayer’s Address:
|
|
Taxpayer ID #: |
2. The property with respect to which the election is made is described as follows: [Number of Shares] ([ ]) shares (the “ Shares ”) of the Common Stock of Innovative Industrial Properties, Inc. (the “ Company ”).
3. The date on which the property was transferred is: June 15, 2016.
4. The property is subject to the following restrictions: The Shares may be repurchased by Company, or its assignee, upon the occurrence of certain events. This right lapses with regard to a portion of the Shares over time.
5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: [ ] Dollars ($[ ]). The amount, if any, paid for such property: [ ] Dollars ($[ ]).
The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned’s receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property.
The undersigned understand(s) that the foregoing election may not be revoked except with the consent of the Commissioner.
Dated: | |||
[Purchaser Name] (Taxpayer) |
[Date]
VIA CERTIFIED MAIL
RETURN RECEIPT REQUESTED
Internal Revenue Service | |
[IRS location address] |
Re: | Taxpayer: | [Purchaser Name] |
Social Security Number: [ ] | ||
Filing of Election under Section 83(b) |
Ladies and Gentlemen:
Enclosed please find an original and one copy of an Election Under Section 83(b) of the Internal Revenue Code of 1986, as amended, which is being filed on behalf of the taxpayer referenced above. Please acknowledge receipt of the enclosed materials by stamping the enclosed copy of the 83(b) Election and returning it to me in the self-addressed stamped envelope provided herewith.
Very truly yours, | |
[Purchaser Name] |
Enclosures
cc: | [Company Name] |
[Company Address]
EXHIBIT c
STOCK POWER AND ASSIGNMENT
SEPARATE FROM STOCK CERTIFICATE
STOCK POWER AND ASSIGNMENT
SEPARATE FROM stock CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase Agreement dated as of June 15, 2016 (the “ Agreement ”), the undersigned hereby sells, assigns and transfers unto ______________________________, __________ shares of the Class B Common Stock, $.001 par value, of Innovative Industrial Properties, Inc., a Maryland corporation (the “ Company ”), standing in the undersigned’s name on the books of the Company represented by Certificate No(s). ____ delivered herewith, and does hereby irrevocably constitute and appoint the Secretary of the Company as the undersigned’s attorney-in-fact, with full power of substitution, to transfer said stock on the books of the Company. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND ANY EXHIBITS THERETO.
Dated: | |||
PURCHASER | |||
(Signature) | |||
(Please Print Name) | |||
(Spouse’s Signature, if any) | |||
(Please Print Spouse’s Name) |
Instructions to Purchaser : Please do not fill in any blanks other than the signature line. The purpose of this Stock Power and Assignment is to enable the Company and/or its assignee(s) to acquire the shares upon exercise of its “Repurchase Option” and/or “Right of First Refusal” set forth in the Agreement without requiring additional signatures on the part of Purchaser or Purchaser’s Spouse, if any.
Exhibit 10.4
SEVERANCE AND CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT, effective as of the _____ day of _______________, 2016, is by and between Innovative Industrial Properties, Inc., a Maryland corporation (the “ Company ”), IIP Operating Partnership, LP, a Delaware limited partnership (the “ Partnership ”), and Alan D. Gold (the “ Employee ”).
WHEREAS, to induce the Employee to remain as an executive officer of the Company and a key employee of the Partnership, the Company, the Partnership and the Employee desire to enter into this Severance and Change Of Control Agreement (the “ Agreement ”); and
WHEREAS, the parties agree that the restrictive covenants underlying certain of the Employee’s obligations under this Agreement are necessary to protect the goodwill or other business interests of the Innovative Industrial Entities (as defined below) and that such restrictive covenants do not impose a greater restraint than is necessary to protect such goodwill or other business interests.
NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, including the Employee’s agreement to continue as an executive officer of the Company and as an employee of the Partnership, the Employee’s agreement to provide consulting services following termination of employment pursuant to the terms hereof, and the restrictive covenants contained herein, the Employee, the Company, and the Partnership agree as follows:
1. Definitions . The following words, when capitalized in this Agreement, shall have the meanings ascribed below and shall supersede the meanings given to any such terms in any other award agreement or related plan document in effect prior to the date of this Agreement, including but not limited to the definitions of “Cause,” “Change of Control,” or “Good Reason”:
(a) “ Affiliate ” shall have the meaning given to such term in Rule 12b-2 of the General Rules and Regulations of the Exchange Act.
(b) “ Average Annual Cash Bonus ” means the average of the annual cash bonus, if any, paid or payable to the Employee with respect to the three (3) most recently completed calendar years prior to termination of employment (or the period of the Employee’s employment, if shorter).
(c) “ Base Performance Share Value ” means the fair market value as of the date of the Change of Control of the number of unvested shares underlying the Employee’s outstanding performance share awards that would have been earned pursuant to the terms of the award if the performance period for each such award ended immediately prior to the Change of Control. For such purposes, the level of achievement of the performance goals established for each such award will be determined on the date immediately prior to the Change of Control as follows: (X) if the goal is a market-based goal, such as total stockholder return or stock price, then the actual performance to date shall be used, and (Y) if the goal is not a market-based goal, then the annualized forecasted number for such goal as most recently prepared by the Company prior to the date of the Change of Control shall be used and treated as if it were actual performance.
(d) “ Base Restricted Share Value ” means the fair market value as of the date of the Change of Control of the shares underlying all of the Employee’s unvested time-vesting restricted stock awards, restricted stock units or stock rights awards outstanding immediately prior to the Change of Control.
(e) “ Board ” means the Board of Directors of the Company.
(f) “ Cause ” means the termination of the Employee’s employment with all Innovative Industrial Entities by action of the Board or its delegate for one or more of the following reasons:
(i) The Employee’s willful and continued failure substantially to perform his duties with the Innovative Industrial Entities (other than any such failure resulting from the Employee’s incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Employee by the Board, which demand specifically identifies the manner in which the Board believes that the Employee has not substantially performed his duties;
(ii) The Employee’s willful commission of an act of fraud or dishonesty resulting in economic or financial damage to the Innovative Industrial Entities;
(iii) The Employee’s conviction of, or entry by the Employee of a guilty or no contest plea to, the commission of a felony or a crime involving moral turpitude;
(iv) A willful breach by the Employee of his fiduciary duty to the Company which results in economic or other damage to the Innovative Industrial Entities; or
(v) The Employee’s willful and material breach of the Employee’s covenants set forth in this Section 16 of this Agreement.
(g) “ Change of Control ” means the occurrence of an event or series of events which qualify as a change in control event for purposes of Code Section 409A and Treasury Regulation §1.409A-3(i)(5), including:
(i) A change in the ownership of the Company, which shall occur on the date that any one Person, or more than one Person Acting as a Group (as defined below), other than Excluded Person(s) (as defined below), acquires ownership of the stock of the Company that, together with the stock then held by such Person or group, constitutes more than fifty percent (50%) of the total fair market value of the stock of the Company. However, if any one Person or more than one Person Acting as a Group is considered to own more than fifty (50%) of the total fair market value of the stock of the Company, the acquisition of additional stock by the same Person or Persons is not considered to cause a Change of Control.
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(ii) A change in the effective control of the Company, which shall occur on the date that:
(1) Any one Person, or more than one Person Acting as a Group, other than Excluded Person(s), acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such Person or Persons) ownership of stock of the Company possessing thirty percent (30%) or more of the total voting power of the stock of the Company. However, if any one Person or more than one Person Acting as a Group is considered to own more than thirty percent (30%) of the total voting power of the stock of the Company, the acquisition of additional voting stock by the same Person or Persons is not considered to cause a Change of Control; or
(2) A majority of the members of the Board is replaced during any twelve (12) month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election.
(iii) A change in the ownership of a substantial portion of the Company’s assets, which shall occur on the date that any one Person, or more than one Person Acting as a Group, other than Excluded Person(s), acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such Person or Persons) assets from the Company that have a total Gross Fair Market Value (as defined below) equal to more than fifty percent (50%) of the total Gross Fair Market Value of all the assets of the Company immediately prior to such acquisition or acquisitions, other than an Excluded Transaction (as defined below).
For purposes of this Subsection (g):
“ Gross Fair Market Value ” means the value of the assets of the Company, or the value of the assets being disposed of, as applicable, determined without regard to any liabilities associated with such assets.
Persons will not be considered to be “ Acting as a Group ” solely because they purchase or own stock of the Company at the same time, or as a result of the same public offering, or solely because they purchase assets of the Company at the same time, or as a result of the same public offering, as the case may be. However, Persons will be considered to be Acting as a Group if they (i) are owners of an entity that enters into a merger, consolidation, purchase or acquisition of assets, or similar business transaction with the Company, or (ii) do so within the meaning of Section 13(d) of the Exchange Act, including any group acting for the purpose of acquiring, holding or disposing of securities (within the meaning of Rule 13d-5(b)(1) under the Exchange Act).
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The term “ Excluded Transaction ” means any transaction in which assets are transferred to: (A) a stockholder of the Company (determined immediately before the asset transfer) in exchange for or with respect to its stock; (B) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the Company (determined after the asset transfer); (C) a Person, or more than one Person Acting as a Group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company (determined after the asset transfer); or (D) an entity at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a Person described in clause (C) (determined after the asset transfer).
The term “ Excluded Person(s) ” means (A) the Company or any Innovative Industrial Entity; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Innovative Industrial Entity; (C) an underwriter temporarily holding securities pursuant to an offering of such securities; or (D) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock in the Company.
The term “ Change of Control ” as defined above shall be construed in accordance with Code Section 409A and the regulations promulgated thereunder. In no event shall a transaction described above constitute a “Change of Control” for purposes of this Agreement unless such transaction also satisfies the requirement to be a change in the ownership or effective control of a corporation, or a change in the ownership of a substantial portion of the assets of a corporation, as each of those terms are defined under Code Section 409A and the regulations promulgated thereunder.
(h) “ Code ” means the Internal Revenue Code of 1986, as amended.
(i) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.
(j) “ General Release ” means (i) a release of the Innovative Industrial Entities, in such form as the Partnership may reasonably request, of all claims against the Innovative Industrial Entities relating to the Employee’s employment and termination thereof, and (ii) an agreement to continue to comply with, and be bound by, the provisions of Section 16 hereof.
(k) “ Good Reason ” means any one or more of the following conditions:
(i) any material diminution of the Employee’s authority, duties or responsibilities;
(ii) a material diminution of the Employee’s annual base salary;
(iii) a material change in the geographic location at which the Employee must perform the Employee’s duties and responsibilities; or
(iv) any other action or inaction by the Company or the Partnership that constitutes a material breach of this Agreement or any other agreement pursuant to which the Employee provides services to the Company or the Partnership.
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A termination of the Employee’s employment for Good Reason shall be effective only if (X) such condition was not consented to by the Employee in advance or subsequently ratified by the Employee in writing, (Y) such condition remains in effect thirty (30) days after the Employee gives written notice to the Board of the Employee’s intention to terminate his employment for Good Reason, which notice specifically identifies such condition, and (Z) the Employee gives the notice referred to in (Y) above within ninety (90) days of the initial existence of such condition. If the Company or the Partnership, as applicable, does not cure the condition within the thirty (30) day cure period described in (Y) above, then the Employee’s termination will occur on the day immediately following the end of the cure period. If the Company or the Partnership, as applicable, cures the condition within such thirty (30) day cure period, then the Employee will be deemed to have withdrawn his notice of termination effective as of the date the cure is effected.
(l) “ Innovative Industrial Entity ” or “ Innovative Industrial Entities ” means the Company, the Partnership, any of their Affiliates, and any other entities that along with the Company or the Partnership is considered a single employer pursuant to Code Section 414(b) or (c) and the Treasury regulations promulgated thereunder, determined by applying the phrase “at least 50 percent” in place of the phrase “at least 80 percent” each place it appears in such Treasury regulations or Code Section 1563(a).
(m) “ Medical Benefits ” shall mean the monthly fair market value of benefits provided to the Employee and the Employee’s dependents under the major medical, dental and vision benefit plans sponsored and maintained by the Partnership, at the level of coverage in effect for such persons immediately prior to the Employee’s termination of employment date. The “monthly fair market value” of such benefits shall be equal to the monthly cost (including any applicable administrative fee) to the Employee as if the Employee elected COBRA continuation coverage at the level of coverage in effect at such time for the Employee and the Employee’s dependents at their own expense.
(n) “ Person ” means a “person” as used in Sections 3(a)(9) and 13(d) of the Exchange Act or any group of Persons acting in concert that would be considered “persons acting as a group” within the meaning of Treasury Regulation §1.409A-3(i)(5).
(o) “ Prime Rate ” means an annual rate, compounding annually, equal to the prime rate, as reported in The Wall Street Journal on the date of the Change of Control, or if not reported on that date, the last preceding date on which so reported, which rate shall be adjusted on each January 1 to the prime rate then in effect and shall remain in effect for the year.
(p) “ Qualifying Retirement ” means the Employee’s voluntary termination of employment after the Employee has (i) attained (X) age sixty-five (65), (Y) age fifty-five (55) with ten (10) Years of Service as a full-time employee of the Partnership or any of its Affiliates, or (Z) an age which, when added to such Years of Service of the Employee equals at least seventy-five (75), and (ii) previously delivered a written notice of retirement to the Partnership and on the date of retirement the Employee has satisfied the minimum applicable advance written notice requirement set forth below:
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Age at
Voluntary Termination |
Number of Years of
Advance Notice |
|
58 or younger
59 60 or older |
3 years
2 years 1 year |
By way of illustration, and without limiting the foregoing, if (i) the Employee is eligible to retire at age fifty-nine (59) after ten (10) Years of Service, (ii) the Employee gives two (2) years notice at age fifty-eight (58) that the Employee intends to retire at age sixty (60), and (iii) the Employee later terminates employment at age fifty-nine (59), then the Employee’s retirement at age fifty-nine (59) would not constitute a Qualifying Retirement. However, if (i) the Employee is eligible to retire at age fifty-nine (59) after ten (10) Years of Service, (ii) the Employee gives two (2) years notice at age fifty-eight (58) that the Employee intends to retire at age sixty (60), and (iii) the Employee terminates employment upon reaching age sixty (60), then the Employee’s retirement at age sixty (60) would constitute a Qualifying Retirement.
(q) “ Separation from Service ” means the termination of the Employee’s employment with all Innovative Industrial Entities, provided that, notwithstanding such termination of the employment relationship between the Employee and all Innovative Industrial Entities, the Employee shall not be deemed to have had a Separation from Service where it is reasonably anticipated that the level of bona fide services that the Employee will perform (whether as an employee or independent contractor) following such termination from the Partnership and all Innovative Industrial Entities would be twenty percent (20%) or more of the average level of bona fide services performed by the Employee (whether as an employee or independent contractor) for the Innovative Industrial Entities over the immediately preceding thirty-six (36) month period (or such lesser period of actual service). In such event, Separation from Service shall mean the permanent reduction of the level of bona fide services to be performed by the Employee (whether as an employee or independent contractor) to a level that is less than twenty percent (20%) of the average level of bona fide services performed by the Employee (whether as an employee or independent contractor) during the thirty-six (36) month period (or such lesser period of actual service) immediately prior to the termination of the Employee’s employment relationship. A Separation from Service shall not be deemed to have occurred if the Employee is absent from active employment due to military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed the greater of (i) six (6) months or (ii) the period during which the Employee’s right to reemployment by any Innovative Industrial Entity is provided either by statute or contract.
(r) “ Specified Employee ” means an employee of any Innovative Industrial Entity who is a “specified employee” as defined in Code Section 409A(a)(2)(b)(i) and Treasury Regulation §1.409A-1(i). If the Employee is a key employee as of the applicable identification date, the Employee shall be treated as a Specified Employee for the twelve (12) month period beginning on the first day of the fourth month following such identification date. The applicable identification date for purposes of this Agreement shall be September 30 of each year.
(s) “ Unvested Equity Award ” has the meaning given to such term in Section 6(a).
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(t) “ Years of Service ” means the Employee’s total complete years of employment with an Innovative Industrial Entity, including years of employment with an entity that is acquired by an Innovative Industrial Entity prior to such acquisition. For this purpose, a “complete year of employment” shall begin on the Employee’s date of hire and end on each subsequent anniversary of such date.
2. Term of the Agreement . The term of this Agreement shall begin on the date hereof and end at 11:59 p.m. on December 31, 2019 and thereafter shall automatically renew for successive three (3) year terms unless either party delivers written notice of non-renewal to the other party at least ninety (90) days prior to the end of the then current term; provided, however, that if a Change of Control has occurred during the original or any extended term (including any extension resulting from a prior Change of Control), the term of the Agreement shall end no earlier than twenty-four (24) calendar months after the end of the calendar month in which the Change of Control occurs.
3. No Change of Control – Severance . Except in circumstances in which the Employee would be entitled to payments and benefits in connection with a Change of Control as provided in Section 4 below, in the event that during the term of this Agreement the Employee has a Separation from Service as a result of the Innovative Industrial Entities terminating the Employee’s employment without Cause or the Employee terminating the Employee’s employment for Good Reason, subject to Sections 11, 15 and 16 below:
(a) The Partnership shall pay to the Employee an amount equal to (i) 3.0 times the sum of (A) the Employee’s annual base salary in effect on the date the Employee’s employment terminates, plus (B) the Employee’s Average Annual Cash Bonus, plus (ii) eighteen (18) months of the Employee’s Medical Benefits. Payment shall be made in a lump sum on the first business day after sixty (60) days following the Employee’s Separation from Service;
(b) All of the Employee’s outstanding unvested stock options, restricted stock awards, restricted stock units and stock rights awards that vest solely on the basis of time shall become vested on a pro-rated basis, based on the portion of the vesting period that has elapsed as of the date of the Employee’s Separation from Service; and
(c) All of the Employee’s outstanding performance share awards shall be earned as of the date of Separation from Service based on the level of achievement of the performance goals established for such awards as of such date, but then pro-rated based on the portion of the performance period that has elapsed as of the date of the Employee’s Separation from Service. For purposes hereof, the level of achievement of the performance goals established for each such award will be determined on the date immediately prior to the Separation from Service as follows: (i) if the goal is a market-based goal, such as total stockholder return or stock price, then the actual performance to date shall be used, and (ii) if the goal is not a market-based goal, then the level of achievement of such goal shall be (X) based on the most recently reported number(s) by the Company in its reports filed with the Securities and Exchange Commission or (Y) if such numbers are not so filed, based on the numbers as prepared internally by the Company for the quarter ending prior to the date of the Separation from Service.
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Any shares issuable under awards that vest or are earned pursuant to subsections (b) and (c) shall be issued on the same date as the cash severance payment is made pursuant to subsection (a).
4. Change of Control – Severance . In the event that during the term of this Agreement the Innovative Industrial Entities terminate the Employee’s employment without Cause or the Employee terminates the Employee’s employment for Good Reason, in each case within two (2) years following a Change of Control, the following provisions shall apply:
(a) The Partnership shall pay to the Employee the amount set forth in Section 3(a);
(b) All outstanding unvested stock options, restricted stock, restricted stock units, stock rights awards and performance share awards then held by the Employee will vest (at the greater of actual performance to-date or target, for any awards subject to performance goals), and all outstanding equity awards that have not vested at the time of the Change of Control or been converted to the right to receive a cash payment pursuant to Section 6(c) will vest on the date the General Release in Section 15 becomes effective, and, if applicable, will be paid on the tenth (10th) business day following such time. Notwithstanding the foregoing, all such awards which are subject to Code Section 409A will be paid on the first (1st) business day after sixty (60) days following the Employee’s Separation from Service, provided the General Release in Section 15 has become effective; and
(c) With respect to those Unvested Equity Awards that have been exchanged pursuant to Sections 6(b) and 6(c) for the right to receive a contingent cash payment, subject to Section 11 below, the Employee shall receive a cash payment made in a lump sum on the first business day after sixty (60) days following the Employee’s Separation from Service equal to any portion of the unpaid Base Performance Share Value and Base Restricted Share Value that has not been paid pursuant to Sections 6(b) and 6(c), together with accrued but unpaid interest at the Prime Rate on such unpaid amount from the date of the Change of Control to the date of payment.
5. Entitlement to Severance .
(a) If the Employee becomes entitled to receive any severance payments or benefits described in Section 3 or Section 4 after the Employee has delivered written notice of what would otherwise have been a Qualifying Retirement to the Partnership had the Employee continued to be employed by the Partnership through the date of retirement set forth in the notice, then the amount of such payments and benefits shall be limited to (i) those that the Employee would have otherwise received had such employment continued through such date of retirement, and (ii) those provided by Section 9, if any.
(b) If the Employee dies after receiving notice from the Company that the Employee is being terminated without Cause, or after providing notice of termination for Good Reason, but prior to the date the Employee receives the payments and benefits described in Section 3 or Section 4, as the case may be, then the Employee’s estate, heirs and beneficiaries shall be entitled to the payments and benefits described in Section 3 or Section 4, as the case may be, at the same time such payments and benefits would have been paid or provided to the Employee had the Employee lived.
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6. Change of Control – Effect on Stock Rights .
(a) Except as otherwise provided in Sections 6(b) and 6(c) below (or in Sections 4(b) or 4(c), if applicable), the occurrence of a Change of Control shall not impact any existing unvested stock options, restricted stock awards, restricted stock units, stock rights awards or performance share awards (collectively, “ Unvested Equity Awards ”) unless such rights are cashed out pursuant to the terms of the applicable merger agreement or other agreement(s) pursuant to which such Change of Control is effected.
(b) With respect to Unvested Equity Awards that are performance share awards (“ Performance Awards ”), notwithstanding anything to the contrary contained in the related plan or award agreement, all of the Employee’s outstanding unvested Performance Awards shall be cancelled and, in consideration for the cancellation of such awards, the Employee shall receive a deferred contingent cash payment with respect to each such cancelled award equal to (X) the Base Performance Share Value determined for such cancelled award, plus (Y) interest on such unpaid Base Performance Share Value from the date of the Change of Control to the date of payment at the Prime Rate, such cash payment to be made on the last day of the applicable performance period for such award, provided that the Employee remains employed by the Partnership, an Affiliate, or one of their successors through the last day of the applicable performance period.
(c) With respect to Unvested Equity Awards that are not Performance Awards, if the stock underlying such awards is not readily tradable on an established securities market immediately after the Change of Control (after giving effect to any conversion, exchange or replacement pursuant to the applicable plan or award agreement of the stock underlying Unvested Equity Awards as a result of a reorganization, merger, consolidation, combination or other similar corporate transaction or event), then notwithstanding anything to the contrary contained in the related plan or award agreement, all of the Employee’s outstanding Unvested Equity Awards shall be cancelled and, in consideration for the cancellation of such awards, the Employee shall receive:
(i) a cash payment equal to (X) the fair market value of the shares underlying all of the Employee’s unvested stock options as of the date of the Change of Control, less (Y) the aggregate exercise price of such stock options, such cash payment to be made within thirty (30) days after the Change of Control; and
(ii) a deferred contingent cash payment equal to (X) the Base Restricted Share Value, plus (Y) interest on the unpaid Base Restricted Share Value from the date of the Change of Control to the date of payment at the Prime Rate, such cash payment of the Base Restricted Share Value to be made in installments on the applicable vesting dates with respect to the number of shares that would have been issued on that vesting date, plus all accrued but unpaid interest on the unpaid Base Restricted Share Value through such vesting date, provided that the Employee remains employed by the Partnership, an Affiliate, or one of their successors through the applicable date of vesting.
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7. Change of Control – Excise Tax .
(a) If in the opinion of Tax Counsel (as defined in Section 7(b)) the Employee will be subject to an excise tax under Code Section 4999 with respect to all or any portion of the payments and benefits to be made by the Company or any of its Affiliates to the Employee, whether upon a Change of Control or following a termination of the Employee’s employment, under this Agreement or otherwise (in the aggregate, “ Total Payments ”), then such parties agree that the Total Payments shall either be (i) delivered in full, or (ii) reduced to three (3) times the Employee’s “base amount” for purposes of Code Section 280G, less $1.00 (“ Scaled Back Amount ”), whichever of the foregoing results in the receipt by the Employee of the greatest benefit on an after-tax basis (taking into account the applicable federal, state and local income taxes and the excise tax). If the Employee is entitled to the Scaled Back Amount, then such payments and benefits shall be reduced or eliminated by applying the following principles, in order: (1) the payment or benefit with the higher ratio of the parachute payment value to present economic value (determined using reasonable actuarial assumptions) shall be reduced or eliminated before a payment or benefit with a lower ratio; (2) the payment or benefit with the later possible payment date shall be reduced or eliminated before a payment or benefit with an earlier payment date; and (3) cash payments shall be reduced prior to non-cash benefits; provided that if the foregoing order of reduction or elimination would violate Code Section 409A, then the reduction shall be made pro rata among the payments or benefits to be received by the Employee (on the basis of the relative present value of the parachute payments).
(b) For purposes of this Section 7, within forty (40) days after delivery of a written notice of termination by the Employee or by the Company pursuant to this Agreement within two (2) years of a Change of Control with respect to the Company (or, if an event other than termination of employment results in payment of parachute payments under Code Section 280G and it is reasonably possible that such parachute payments could result in an excise tax, within forty (40) days after such other event), the Company shall obtain, at its expense, the opinion (which need not be unqualified) of nationally recognized tax counsel (“ Tax Counsel ”) selected by the Compensation Committee of the Board, which sets forth (i) the “base amount” within the meaning of Code Section 280G; (ii) the aggregate present value of the payments in the nature of compensation to the Employee as prescribed in Code Section 280G(b)(2)(A)(ii); (iii) the amount and present value of any “excess parachute payment” within the meaning of Code Section 280G(b)(1); and (iv) as applicable, (X) the net after-tax proceeds to the Employee, taking into account the tax imposed by Code Section 4999 if the Total Payments were delivered in full, and (Y) the amount and nature of the parachute payments to be reduced or forfeited according to Section 7(a) in order for the total payments and benefits to equal the Scaled Back Amount. For purposes of such opinion, the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company’s independent auditors in accordance with the principles of Code Section 280G and regulations thereunder, which determination shall be evidenced in a certificate of such auditors addressed to the Company and the Employee. Such opinion shall be addressed to the Company and the Employee and shall be binding upon the Company, its Affiliates, and the Employee.
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8. Plan of Liquidation . If the stockholders of the Company approve a complete plan of liquidation or dissolution of the Company (“ Approved Liquidation Plan ”), all Unvested Equity Awards that are not Performance Awards will fully vest on the date of such approval and all such awards that are Performance Awards shall vest to the extent the performance goals established under such awards have been achieved on such date (as if the Employee had satisfied all employment conditions required to vest), with the corresponding performance period for such award(s) deemed completed as of the date immediately preceding the date of such approval. Shares of common stock that so vest will be deemed outstanding as of the close of business on the date of such approval, and certificates representing such shares shall be delivered to the Employee as promptly as practicable thereafter. Any Performance Awards not vesting on the date of such approval shall be immediately cancelled without consideration therefor. In addition, unless the Approved Liquidation Plan shall have been rescinded, if the Partnership terminates the Employee’s employment without Cause or the Employee terminates the Employee’s employment for Good Reason in each case following stockholder approval of the Approved Liquidation Plan, then the Employee shall receive the benefits provided in Sections 4(a), 4(b) and 4(c), as applicable.
9. Retirement and Performance Shares . If the Employee’s termination of employment constitutes a Qualifying Retirement, then the Employee’s unvested stock options, restricted stock, restricted stock units and stock rights awards (other than performance shares) will vest on the date of retirement set forth in the notice thereof, and if the Qualifying Retirement occurs on or after a Change of Control, then the provision of Section 4(c) shall also apply. Notwithstanding anything to the contrary in any related plan or award agreement, the Employee shall be entitled to exercise all vested stock options until the earlier of (a) three (3) years after the date of Qualifying Retirement, and (b) the original terms of the options. Unless an award agreement provides for more favorable treatment, upon a Qualifying Retirement, the Employee shall continue to have the right to earn unvested performance shares upon the achievement of the applicable performance goals over any remaining performance period, as if the Employee’s employment had not been terminated.
10. Death and Disability . In no event shall a termination of the Employee’s employment due to death or Disability constitute a termination by the Partnership without Cause or a termination by the Employee for Good Reason; however, upon termination of employment due to the Employee’s death or Disability, the Employee’s estate or the Employee, as applicable, shall receive the benefits provided in Section 4(b) or 4(c) with respect to unvested stock options, restricted stock, restricted stock units and stock rights awards (other than performance shares), and the Employee’s estate or the Employee, as applicable, shall continue to have the right to earn unvested performance shares upon the achievement of the applicable performance goals over any remaining performance period, as if the Employee’s employment had not been terminated. Notwithstanding anything to the contrary in any related plan or award agreement, (a) the Employee’s estate shall be entitled to exercise all vested stock options until the earlier of (i) three (3) years after termination of employment due to death, and (ii) the original term of the option, and (b) the Employee shall be entitled to exercise all vested stock options until the earlier of (i) one (1) year after termination of employment due to Disability, and (ii) the original term of the option. For purposes of this Agreement, “ Disability ” shall mean the absence of the Employee from the Employee’s duties with the Innovative Industrial Entities on a full-time basis for ninety (90) consecutive days or on a total of one hundred eighty (180) days in any twelve (12) month period, in either case as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company and reasonably acceptable to the Employee or the Employee’s legal representative.
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11. Payments to Specified Employees . Notwithstanding any other Section of this Agreement, if the Employee is a Specified Employee at the time of the Employee’s Separation from Service, payments or distribution of property to the Employee provided under this Agreement, to the extent considered amounts deferred under a non-qualified deferred compensation plan (as defined in Code Section 409A) shall be deferred until the six (6) month anniversary of such Separation from Service to the extent required in order to comply with Code Section 409A and Treasury Regulation 1.409A-3(i)(2).
12. Reductions in Base Salary . For purposes of this Agreement, in the event there is a reduction in the Employee’s base salary that would constitute the basis for a termination for Good Reason, the base salary used for purposes of calculating the severance payable pursuant to Sections 3 or 4(a), as the case may be, shall be the amounts in effect immediately prior to such reduction.
13. Other Payments and Benefits . On any termination of employment, including, without limitation, termination due to the Employee’s death or Disability (as defined in Section 10) or for Cause, the Employee shall receive any accrued but unpaid salary, reimbursement of any business or other expenses incurred prior to termination of employment but for which the Employee had not received reimbursement (provided that such expenses have been previously approved in writing or comply with the terms of any expense reimbursement policy then in effect), and any other rights, compensation and/or benefits as may be due the Employee in accordance with the terms and provisions of any agreements, plans or programs of the Company or the Partnership (but in no event shall the Employee be entitled to duplicative rights, compensation and/or benefits).
14. Set Off; Mitigation . The obligation of the Company or the Partnership to pay or provide the Employee the amounts or benefits under this Agreement shall be subject to set-off, counterclaim or recoupment of amounts owed by the Employee to the Company or the Partnership. In addition, except as provided in Section 7 with respect to the Scaled Back Amount, if applicable, the Employee shall not be required to mitigate the amount of any payments or benefits provided to the Employee hereunder by securing other employment or otherwise, nor will such payments and/or benefits be reduced by reason of the Employee securing other employment or for any other reason.
15. Release . Notwithstanding any provision herein to the contrary, none of the Innovative Industrial Entities shall have any obligation to pay any amount or provide any benefit (other than those amounts set forth in Section 13), as the case may be, under this Agreement, unless the Employee executes, delivers to the Partnership, and does not revoke (to the extent the Employee is allowed to do so as set forth in the General Release), a General Release within sixty (60) days of the Employee’s termination of employment.
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16. Restrictive Covenants and Consulting Arrangement .
(a) The Employee will hold in a fiduciary capacity all secret or confidential information, knowledge or data relating to any Innovative Industrial Entity, and each of their respective businesses (the “ Confidential Information ”), except in furtherance of the business of the Innovative Industrial Entities or except as may be required by law. Additionally, and without limiting the foregoing, the Employee agrees not to participate in or facilitate the dissemination to the media or any other third party (i) of the Confidential Information, or (ii) of any damaging or defamatory information concerning any Innovative Industrial Entity or the Employee’s experiences as an employee of any Innovative Industrial Entity, without the Company’s prior written consent, except as may be required by law. Notwithstanding the foregoing, this Section 16(a) does not apply to information which is already in the public domain other than pursuant to acts of the Employee or representatives of the Employee in violation of this Agreement.
(b) During the Employee’s employment and during the one (1) year period after the date that the Employee ceases to be employed by any of the Innovative Industrial Entities for any reason (the “ Termination Date ”), the Employee agrees that the Employee shall not directly or knowingly and intentionally through another party recruit, induce, solicit or assist any other Person in recruiting, inducing or soliciting (A) any other employee of any Innovative Industrial Entity to leave such employment or (B) any other Person with which any Innovative Industrial Entity was actively conducting negotiations for employment on the Termination Date.
(c) For a six (6) month period following any termination of employment, the Employee agrees to make himself available and, upon and as requested by the Company or the Partnership from time to time, to provide consulting services with respect to any projects the Employee was involved in prior to such termination and/or to provide such other consulting services as the Company or the Partnership may reasonably request. The Employee will be reimbursed for reasonable travel and miscellaneous expenses incurred in connection with the provision of requested consulting services hereunder. The Company or the Partnership will provide the Employee reasonable advance notice of any request to provide consulting services, and will make all reasonable accommodations necessary to prevent the Employee’s commitment hereunder from materially interfering with the Employee’s employment obligations, if any. In no event will the Employee be required to provide more than twenty (20) hours of consulting services in any one month to the Company and the Partnership pursuant to this provision.
(d) The parties agree that any breach of this Section 16 will result in irreparable harm to the non-breaching party which cannot be fully compensated by monetary damages and accordingly, in the event of any breach or threatened breach of this Section 16, the non-breaching party shall be entitled to injunctive relief. Should any provision of this Section 16 be determined by a court of law or equity to be unreasonable or unenforceable, the parties agree that to the extent it is valid and enforceable, they shall be bound by the same, the intention of the parties being that the parties be given the broadest protection allowed by law or equity with respect to such provision.
17. Survival . The provisions of Sections 3 through 22 shall survive the termination of this Agreement to the extent necessary to enforce the rights and obligations described therein.
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18. Compliance with Code Section 409A . For purposes of applying the provisions of Code Section 409A to this Agreement, each separately identified amount to which the Employee is entitled under this Agreement shall be treated as a separate payment. In addition, to the extent permissible under Code Section 409A, any series of installment payments under this Agreement shall be treated as a right to a series of separate payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be within the sole discretion of the Company or the Partnership, as the case may be.
19. Withholding . The Company or the Partnership shall be entitled to withhold from all payments to the Employee hereunder all amounts required to be withheld under applicable local, state or federal income and employment tax laws.
20. Clawbacks . All incentive-based compensation paid to the Employee hereunder will be subject to the policies of the Company and the Partnership regarding clawbacks of erroneously awarded incentive-based compensation triggered by an accounting restatement, as required by law and approved by the Board in the case of the Company.
21. Dispute Resolution . Any dispute, controversy or claim between the Company or the Partnership and the Employee or other Person arising out of or relating to this Agreement shall be settled by arbitration conducted in San Diego, California, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association then in force and California law within thirty (30) days after written notice from one party to the other requesting that the matter be submitted to arbitration; provided that this Section 21 shall not apply to, and the Company and the Partnership shall be free to seek, injunctive or other equitable relief with respect to any actual or threatened violation by the Employee of his or her obligations under Section 16 hereof in any court of competent jurisdiction. The arbitration decision or award shall be binding and final upon the parties. The arbitration award shall be in writing and shall set forth the basis thereof. The parties hereto shall abide by all awards rendered in such arbitration proceedings, and all such awards may be enforced and executed upon in any court having jurisdiction over the party against whom enforcement of such award is sought. Each party shall be responsible for its own costs and expenses in any dispute or proceeding regarding the enforcement of this Agreement.
22. Miscellaneous . This Agreement shall be construed and enforced in accordance with the laws of the State of California (exclusive of conflict of law principles). In the event that any provision of this Agreement shall be invalid, illegal or unenforceable, the remainder shall not be affected thereby. This Agreement supersedes and terminates any prior employment agreement, severance agreement, change of control agreement or non-competition agreement between the Company or the Partnership and the Employee. It is intended that the payments and benefits provided under this Agreement are in lieu of, and not in addition to, termination, severance or change of control payments and benefits provided under the other termination or severance plans, policies or agreements, if any, of the Company or the Partnership. This Agreement shall be binding upon and inure to the benefit of the Employee and the Employee’s heirs and personal representatives, the Company and the Partnership, and their successors, assigns and legal representatives. Headings herein are inserted for convenience and shall not affect the interpretation of any provision of the Agreement. References to sections of the Exchange Act or the Code, or rules or regulations related thereto, shall be deemed to refer to any successor provisions, as applicable. The Company and the Partnership will require any successors thereto (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to expressly assume and agree to perform under this Agreement in the same manner and to the same extent that the Company and the Partnership would be required to perform if no such succession had taken place. This Agreement may not be terminated, amended, or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives.
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23. Counterparts . This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
(Signature pages to follow)
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IN WITNESS WHEREOF , the parties hereto have executed this Agreement as of the day and year first above written.
INNOVATIVE INDUSTRIAL PROPERTIES, INC. | ||
By: | ||
[ insert name ] | ||
[ insert title ] | ||
IIP OPERATING PARTNERSHIP, LP | ||
By: | INNOVATIVE INDUSTRIAL PROPERTIES, INC. | |
Its General Partner | ||
By: | ||
[ insert name ] | ||
[ insert title ] | ||
EMPLOYEE | ||
Alan D. Gold |
Exhibit 10.5
SEVERANCE AND CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT, effective as of the _____ day of _______________, 2016, is by and between Innovative Industrial Properties, Inc., a Maryland corporation (the “ Company ”), IIP Operating Partnership, LP, a Delaware limited partnership (the “ Partnership ”), and Paul E. Smithers (the “ Employee ”).
WHEREAS, to induce the Employee to remain as an executive officer of the Company and a key employee of the Partnership, the Company, the Partnership and the Employee desire to enter into this Severance and Change Of Control Agreement (the “ Agreement ”); and
WHEREAS, the parties agree that the restrictive covenants underlying certain of the Employee’s obligations under this Agreement are necessary to protect the goodwill or other business interests of the Innovative Industrial Entities (as defined below) and that such restrictive covenants do not impose a greater restraint than is necessary to protect such goodwill or other business interests.
NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, including the Employee’s agreement to continue as an executive officer of the Company and as an employee of the Partnership, the Employee’s agreement to provide consulting services following termination of employment pursuant to the terms hereof, and the restrictive covenants contained herein, the Employee, the Company, and the Partnership agree as follows:
1. Definitions . The following words, when capitalized in this Agreement, shall have the meanings ascribed below and shall supersede the meanings given to any such terms in any other award agreement or related plan document in effect prior to the date of this Agreement, including but not limited to the definitions of “Cause,” “Change of Control,” or “Good Reason”:
(a) “ Affiliate ” shall have the meaning given to such term in Rule 12b-2 of the General Rules and Regulations of the Exchange Act.
(b) “ Average Annual Cash Bonus ” means the average of the annual cash bonus, if any, paid or payable to the Employee with respect to the three (3) most recently completed calendar years prior to termination of employment (or the period of the Employee’s employment, if shorter).
(c) “ Base Performance Share Value ” means the fair market value as of the date of the Change of Control of the number of unvested shares underlying the Employee’s outstanding performance share awards that would have been earned pursuant to the terms of the award if the performance period for each such award ended immediately prior to the Change of Control. For such purposes, the level of achievement of the performance goals established for each such award will be determined on the date immediately prior to the Change of Control as follows: (X) if the goal is a market-based goal, such as total stockholder return or stock price, then the actual performance to date shall be used, and (Y) if the goal is not a market-based goal, then the annualized forecasted number for such goal as most recently prepared by the Company prior to the date of the Change of Control shall be used and treated as if it were actual performance.
(d) “ Base Restricted Share Value ” means the fair market value as of the date of the Change of Control of the shares underlying all of the Employee’s unvested time-vesting restricted stock awards, restricted stock units or stock rights awards outstanding immediately prior to the Change of Control.
(e) “ Board ” means the Board of Directors of the Company.
(f) “ Cause ” means the termination of the Employee’s employment with all Innovative Industrial Entities by action of the Board or its delegate for one or more of the following reasons:
(i) The Employee’s willful and continued failure substantially to perform his duties with the Innovative Industrial Entities (other than any such failure resulting from the Employee’s incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Employee by the Board, which demand specifically identifies the manner in which the Board believes that the Employee has not substantially performed his duties;
(ii) The Employee’s willful commission of an act of fraud or dishonesty resulting in economic or financial damage to the Innovative Industrial Entities;
(iii) The Employee’s conviction of, or entry by the Employee of a guilty or no contest plea to, the commission of a felony or a crime involving moral turpitude;
(iv) A willful breach by the Employee of his fiduciary duty to the Company which results in economic or other damage to the Innovative Industrial Entities; or
(v) The Employee’s willful and material breach of the Employee’s covenants set forth in this Section 16 of this Agreement.
(g) “ Change of Control ” means the occurrence of an event or series of events which qualify as a change in control event for purposes of Code Section 409A and Treasury Regulation §1.409A-3(i)(5), including:
(i) A change in the ownership of the Company, which shall occur on the date that any one Person, or more than one Person Acting as a Group (as defined below), other than Excluded Person(s) (as defined below), acquires ownership of the stock of the Company that, together with the stock then held by such Person or group, constitutes more than fifty percent (50%) of the total fair market value of the stock of the Company. However, if any one Person or more than one Person Acting as a Group is considered to own more than fifty (50%) of the total fair market value of the stock of the Company, the acquisition of additional stock by the same Person or Persons is not considered to cause a Change of Control.
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(ii) A change in the effective control of the Company, which shall occur on the date that:
(1) Any one Person, or more than one Person Acting as a Group, other than Excluded Person(s), acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such Person or Persons) ownership of stock of the Company possessing thirty percent (30%) or more of the total voting power of the stock of the Company. However, if any one Person or more than one Person Acting as a Group is considered to own more than thirty percent (30%) of the total voting power of the stock of the Company, the acquisition of additional voting stock by the same Person or Persons is not considered to cause a Change of Control; or
(2) A majority of the members of the Board is replaced during any twelve (12) month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election.
(iii) A change in the ownership of a substantial portion of the Company’s assets, which shall occur on the date that any one Person, or more than one Person Acting as a Group, other than Excluded Person(s), acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such Person or Persons) assets from the Company that have a total Gross Fair Market Value (as defined below) equal to more than fifty percent (50%) of the total Gross Fair Market Value of all the assets of the Company immediately prior to such acquisition or acquisitions, other than an Excluded Transaction (as defined below).
For purposes of this Subsection (g):
“ Gross Fair Market Value ” means the value of the assets of the Company, or the value of the assets being disposed of, as applicable, determined without regard to any liabilities associated with such assets.
Persons will not be considered to be “ Acting as a Group ” solely because they purchase or own stock of the Company at the same time, or as a result of the same public offering, or solely because they purchase assets of the Company at the same time, or as a result of the same public offering, as the case may be. However, Persons will be considered to be Acting as a Group if they (i) are owners of an entity that enters into a merger, consolidation, purchase or acquisition of assets, or similar business transaction with the Company, or (ii) do so within the meaning of Section 13(d) of the Exchange Act, including any group acting for the purpose of acquiring, holding or disposing of securities (within the meaning of Rule 13d-5(b)(1) under the Exchange Act).
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The term “ Excluded Transaction ” means any transaction in which assets are transferred to: (A) a stockholder of the Company (determined immediately before the asset transfer) in exchange for or with respect to its stock; (B) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the Company (determined after the asset transfer); (C) a Person, or more than one Person Acting as a Group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company (determined after the asset transfer); or (D) an entity at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a Person described in clause (C) (determined after the asset transfer).
The term “ Excluded Person(s) ” means (A) the Company or any Innovative Industrial Entity; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Innovative Industrial Entity; (C) an underwriter temporarily holding securities pursuant to an offering of such securities; or (D) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock in the Company.
The term “ Change of Control ” as defined above shall be construed in accordance with Code Section 409A and the regulations promulgated thereunder. In no event shall a transaction described above constitute a “Change of Control” for purposes of this Agreement unless such transaction also satisfies the requirement to be a change in the ownership or effective control of a corporation, or a change in the ownership of a substantial portion of the assets of a corporation, as each of those terms are defined under Code Section 409A and the regulations promulgated thereunder.
(h) “ Code ” means the Internal Revenue Code of 1986, as amended.
(i) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.
(j) “ General Release ” means (i) a release of the Innovative Industrial Entities, in such form as the Partnership may reasonably request, of all claims against the Innovative Industrial Entities relating to the Employee’s employment and termination thereof, and (ii) an agreement to continue to comply with, and be bound by, the provisions of Section 16 hereof.
(k) “ Good Reason ” means any one or more of the following conditions:
(i) any material diminution of the Employee’s authority, duties or responsibilities;
(ii) a material diminution of the Employee’s annual base salary;
(iii) a material change in the geographic location at which the Employee must perform the Employee’s duties and responsibilities; or
(iv) any other action or inaction by the Company or the Partnership that constitutes a material breach of this Agreement or any other agreement pursuant to which the Employee provides services to the Company or the Partnership.
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A termination of the Employee’s employment for Good Reason shall be effective only if (X) such condition was not consented to by the Employee in advance or subsequently ratified by the Employee in writing, (Y) such condition remains in effect thirty (30) days after the Employee gives written notice to the Board of the Employee’s intention to terminate his employment for Good Reason, which notice specifically identifies such condition, and (Z) the Employee gives the notice referred to in (Y) above within ninety (90) days of the initial existence of such condition. If the Company or the Partnership, as applicable, does not cure the condition within the thirty (30) day cure period described in (Y) above, then the Employee’s termination will occur on the day immediately following the end of the cure period. If the Company or the Partnership, as applicable, cures the condition within such thirty (30) day cure period, then the Employee will be deemed to have withdrawn his notice of termination effective as of the date the cure is effected.
(l) “ Innovative Industrial Entity ” or “ Innovative Industrial Entities ” means the Company, the Partnership, any of their Affiliates, and any other entities that along with the Company or the Partnership is considered a single employer pursuant to Code Section 414(b) or (c) and the Treasury regulations promulgated thereunder, determined by applying the phrase “at least 50 percent” in place of the phrase “at least 80 percent” each place it appears in such Treasury regulations or Code Section 1563(a).
(m) “ Medical Benefits ” shall mean the monthly fair market value of benefits provided to the Employee and the Employee’s dependents under the major medical, dental and vision benefit plans sponsored and maintained by the Partnership, at the level of coverage in effect for such persons immediately prior to the Employee’s termination of employment date. The “monthly fair market value” of such benefits shall be equal to the monthly cost (including any applicable administrative fee) to the Employee as if the Employee elected COBRA continuation coverage at the level of coverage in effect at such time for the Employee and the Employee’s dependents at their own expense.
(n) “ Person ” means a “person” as used in Sections 3(a)(9) and 13(d) of the Exchange Act or any group of Persons acting in concert that would be considered “persons acting as a group” within the meaning of Treasury Regulation §1.409A-3(i)(5).
(o) “ Prime Rate ” means an annual rate, compounding annually, equal to the prime rate, as reported in The Wall Street Journal on the date of the Change of Control, or if not reported on that date, the last preceding date on which so reported, which rate shall be adjusted on each January 1 to the prime rate then in effect and shall remain in effect for the year.
(p) “ Qualifying Retirement ” means the Employee’s voluntary termination of employment after the Employee has (i) attained (X) age sixty-five (65), (Y) age fifty-five (55) with ten (10) Years of Service as a full-time employee of the Partnership or any of its Affiliates, or (Z) an age which, when added to such Years of Service of the Employee equals at least seventy-five (75), and (ii) previously delivered a written notice of retirement to the Partnership and on the date of retirement the Employee has satisfied the minimum applicable advance written notice requirement set forth below:
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Age at Voluntary Termination |
Number of Years of Advance Notice |
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58 or younger | 3 years | |
59 | 2 years | |
60 or older | 1 year |
By way of illustration, and without limiting the foregoing, if (i) the Employee is eligible to retire at age fifty-nine (59) after ten (10) Years of Service, (ii) the Employee gives two (2) years notice at age fifty-eight (58) that the Employee intends to retire at age sixty (60), and (iii) the Employee later terminates employment at age fifty-nine (59), then the Employee’s retirement at age fifty-nine (59) would not constitute a Qualifying Retirement. However, if (i) the Employee is eligible to retire at age fifty-nine (59) after ten (10) Years of Service, (ii) the Employee gives two (2) years notice at age fifty-eight (58) that the Employee intends to retire at age sixty (60), and (iii) the Employee terminates employment upon reaching age sixty (60), then the Employee’s retirement at age sixty (60) would constitute a Qualifying Retirement.
(q) “ Separation from Service ” means the termination of the Employee’s employment with all Innovative Industrial Entities, provided that, notwithstanding such termination of the employment relationship between the Employee and all Innovative Industrial Entities, the Employee shall not be deemed to have had a Separation from Service where it is reasonably anticipated that the level of bona fide services that the Employee will perform (whether as an employee or independent contractor) following such termination from the Partnership and all Innovative Industrial Entities would be twenty percent (20%) or more of the average level of bona fide services performed by the Employee (whether as an employee or independent contractor) for the Innovative Industrial Entities over the immediately preceding thirty-six (36) month period (or such lesser period of actual service). In such event, Separation from Service shall mean the permanent reduction of the level of bona fide services to be performed by the Employee (whether as an employee or independent contractor) to a level that is less than twenty percent (20%) of the average level of bona fide services performed by the Employee (whether as an employee or independent contractor) during the thirty-six (36) month period (or such lesser period of actual service) immediately prior to the termination of the Employee’s employment relationship. A Separation from Service shall not be deemed to have occurred if the Employee is absent from active employment due to military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed the greater of (i) six (6) months or (ii) the period during which the Employee’s right to reemployment by any Innovative Industrial Entity is provided either by statute or contract.
(r) “ Specified Employee ” means an employee of any Innovative Industrial Entity who is a “specified employee” as defined in Code Section 409A(a)(2)(b)(i) and Treasury Regulation §1.409A-1(i). If the Employee is a key employee as of the applicable identification date, the Employee shall be treated as a Specified Employee for the twelve (12) month period beginning on the first day of the fourth month following such identification date. The applicable identification date for purposes of this Agreement shall be September 30 of each year.
(s) “ Unvested Equity Award ” has the meaning given to such term in Section 6(a).
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(t) “ Years of Service ” means the Employee’s total complete years of employment with an Innovative Industrial Entity, including years of employment with an entity that is acquired by an Innovative Industrial Entity prior to such acquisition. For this purpose, a “complete year of employment” shall begin on the Employee’s date of hire and end on each subsequent anniversary of such date.
2. Term of the Agreement . The term of this Agreement shall begin on the date hereof and end at 11:59 p.m. on December 31, 2019 and thereafter shall automatically renew for successive three (3) year terms unless either party delivers written notice of non-renewal to the other party at least ninety (90) days prior to the end of the then current term; provided, however, that if a Change of Control has occurred during the original or any extended term (including any extension resulting from a prior Change of Control), the term of the Agreement shall end no earlier than twenty-four (24) calendar months after the end of the calendar month in which the Change of Control occurs.
3. No Change of Control – Severance . Except in circumstances in which the Employee would be entitled to payments and benefits in connection with a Change of Control as provided in Section 4 below, in the event that during the term of this Agreement the Employee has a Separation from Service as a result of the Innovative Industrial Entities terminating the Employee’s employment without Cause or the Employee terminating the Employee’s employment for Good Reason, subject to Sections 11, 15 and 16 below:
(a) The Partnership shall pay to the Employee an amount equal to (i) 3.0 times the sum of (A) the Employee’s annual base salary in effect on the date the Employee’s employment terminates, plus (B) the Employee’s Average Annual Cash Bonus, plus (ii) eighteen (18) months of the Employee’s Medical Benefits. Payment shall be made in a lump sum on the first business day after sixty (60) days following the Employee’s Separation from Service;
(b) All of the Employee’s outstanding unvested stock options, restricted stock awards, restricted stock units and stock rights awards that vest solely on the basis of time shall become vested on a pro-rated basis, based on the portion of the vesting period that has elapsed as of the date of the Employee’s Separation from Service; and
(c) All of the Employee’s outstanding performance share awards shall be earned as of the date of Separation from Service based on the level of achievement of the performance goals established for such awards as of such date, but then pro-rated based on the portion of the performance period that has elapsed as of the date of the Employee’s Separation from Service. For purposes hereof, the level of achievement of the performance goals established for each such award will be determined on the date immediately prior to the Separation from Service as follows: (i) if the goal is a market-based goal, such as total stockholder return or stock price, then the actual performance to date shall be used, and (ii) if the goal is not a market-based goal, then the level of achievement of such goal shall be (X) based on the most recently reported number(s) by the Company in its reports filed with the Securities and Exchange Commission or (Y) if such numbers are not so filed, based on the numbers as prepared internally by the Company for the quarter ending prior to the date of the Separation from Service.
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Any shares issuable under awards that vest or are earned pursuant to subsections (b) and (c) shall be issued on the same date as the cash severance payment is made pursuant to subsection (a).
4. Change of Control – Severance . In the event that during the term of this Agreement the Innovative Industrial Entities terminate the Employee’s employment without Cause or the Employee terminates the Employee’s employment for Good Reason, in each case within two (2) years following a Change of Control, the following provisions shall apply:
(a) The Partnership shall pay to the Employee the amount set forth in Section 3(a);
(b) All outstanding unvested stock options, restricted stock, restricted stock units, stock rights awards and performance share awards then held by the Employee will vest (at the greater of actual performance to-date or target, for any awards subject to performance goals), and all outstanding equity awards that have not vested at the time of the Change of Control or been converted to the right to receive a cash payment pursuant to Section 6(c) will vest on the date the General Release in Section 15 becomes effective, and, if applicable, will be paid on the tenth (10th) business day following such time. Notwithstanding the foregoing, all such awards which are subject to Code Section 409A will be paid on the first (1st) business day after sixty (60) days following the Employee’s Separation from Service, provided the General Release in Section 15 has become effective; and
(c) With respect to those Unvested Equity Awards that have been exchanged pursuant to Sections 6(b) and 6(c) for the right to receive a contingent cash payment, subject to Section 11 below, the Employee shall receive a cash payment made in a lump sum on the first business day after sixty (60) days following the Employee’s Separation from Service equal to any portion of the unpaid Base Performance Share Value and Base Restricted Share Value that has not been paid pursuant to Sections 6(b) and 6(c), together with accrued but unpaid interest at the Prime Rate on such unpaid amount from the date of the Change of Control to the date of payment.
5. Entitlement to Severance .
(a) If the Employee becomes entitled to receive any severance payments or benefits described in Section 3 or Section 4 after the Employee has delivered written notice of what would otherwise have been a Qualifying Retirement to the Partnership had the Employee continued to be employed by the Partnership through the date of retirement set forth in the notice, then the amount of such payments and benefits shall be limited to (i) those that the Employee would have otherwise received had such employment continued through such date of retirement, and (ii) those provided by Section 9, if any.
(b) If the Employee dies after receiving notice from the Company that the Employee is being terminated without Cause, or after providing notice of termination for Good Reason, but prior to the date the Employee receives the payments and benefits described in Section 3 or Section 4, as the case may be, then the Employee’s estate, heirs and beneficiaries shall be entitled to the payments and benefits described in Section 3 or Section 4, as the case may be, at the same time such payments and benefits would have been paid or provided to the Employee had the Employee lived.
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6. Change of Control – Effect on Stock Rights .
(a) Except as otherwise provided in Sections 6(b) and 6(c) below (or in Sections 4(b) or 4(c), if applicable), the occurrence of a Change of Control shall not impact any existing unvested stock options, restricted stock awards, restricted stock units, stock rights awards or performance share awards (collectively, “ Unvested Equity Awards ”) unless such rights are cashed out pursuant to the terms of the applicable merger agreement or other agreement(s) pursuant to which such Change of Control is effected.
(b) With respect to Unvested Equity Awards that are performance share awards (“ Performance Awards ”), notwithstanding anything to the contrary contained in the related plan or award agreement, all of the Employee’s outstanding unvested Performance Awards shall be cancelled and, in consideration for the cancellation of such awards, the Employee shall receive a deferred contingent cash payment with respect to each such cancelled award equal to (X) the Base Performance Share Value determined for such cancelled award, plus (Y) interest on such unpaid Base Performance Share Value from the date of the Change of Control to the date of payment at the Prime Rate, such cash payment to be made on the last day of the applicable performance period for such award, provided that the Employee remains employed by the Partnership, an Affiliate, or one of their successors through the last day of the applicable performance period.
(c) With respect to Unvested Equity Awards that are not Performance Awards, if the stock underlying such awards is not readily tradable on an established securities market immediately after the Change of Control (after giving effect to any conversion, exchange or replacement pursuant to the applicable plan or award agreement of the stock underlying Unvested Equity Awards as a result of a reorganization, merger, consolidation, combination or other similar corporate transaction or event), then notwithstanding anything to the contrary contained in the related plan or award agreement, all of the Employee’s outstanding Unvested Equity Awards shall be cancelled and, in consideration for the cancellation of such awards, the Employee shall receive:
(i) a cash payment equal to (X) the fair market value of the shares underlying all of the Employee’s unvested stock options as of the date of the Change of Control, less (Y) the aggregate exercise price of such stock options, such cash payment to be made within thirty (30) days after the Change of Control; and
(ii) a deferred contingent cash payment equal to (X) the Base Restricted Share Value, plus (Y) interest on the unpaid Base Restricted Share Value from the date of the Change of Control to the date of payment at the Prime Rate, such cash payment of the Base Restricted Share Value to be made in installments on the applicable vesting dates with respect to the number of shares that would have been issued on that vesting date, plus all accrued but unpaid interest on the unpaid Base Restricted Share Value through such vesting date, provided that the Employee remains employed by the Partnership, an Affiliate, or one of their successors through the applicable date of vesting.
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7. Change of Control – Excise Tax .
(a) If in the opinion of Tax Counsel (as defined in Section 7(b)) the Employee will be subject to an excise tax under Code Section 4999 with respect to all or any portion of the payments and benefits to be made by the Company or any of its Affiliates to the Employee, whether upon a Change of Control or following a termination of the Employee’s employment, under this Agreement or otherwise (in the aggregate, “ Total Payments ”), then such parties agree that the Total Payments shall either be (i) delivered in full, or (ii) reduced to three (3) times the Employee’s “base amount” for purposes of Code Section 280G, less $1.00 (“ Scaled Back Amount ”), whichever of the foregoing results in the receipt by the Employee of the greatest benefit on an after-tax basis (taking into account the applicable federal, state and local income taxes and the excise tax). If the Employee is entitled to the Scaled Back Amount, then such payments and benefits shall be reduced or eliminated by applying the following principles, in order: (1) the payment or benefit with the higher ratio of the parachute payment value to present economic value (determined using reasonable actuarial assumptions) shall be reduced or eliminated before a payment or benefit with a lower ratio; (2) the payment or benefit with the later possible payment date shall be reduced or eliminated before a payment or benefit with an earlier payment date; and (3) cash payments shall be reduced prior to non-cash benefits; provided that if the foregoing order of reduction or elimination would violate Code Section 409A, then the reduction shall be made pro rata among the payments or benefits to be received by the Employee (on the basis of the relative present value of the parachute payments).
(b) For purposes of this Section 7, within forty (40) days after delivery of a written notice of termination by the Employee or by the Company pursuant to this Agreement within two (2) years of a Change of Control with respect to the Company (or, if an event other than termination of employment results in payment of parachute payments under Code Section 280G and it is reasonably possible that such parachute payments could result in an excise tax, within forty (40) days after such other event), the Company shall obtain, at its expense, the opinion (which need not be unqualified) of nationally recognized tax counsel (“ Tax Counsel ”) selected by the Compensation Committee of the Board, which sets forth (i) the “base amount” within the meaning of Code Section 280G; (ii) the aggregate present value of the payments in the nature of compensation to the Employee as prescribed in Code Section 280G(b)(2)(A)(ii); (iii) the amount and present value of any “excess parachute payment” within the meaning of Code Section 280G(b)(1); and (iv) as applicable, (X) the net after-tax proceeds to the Employee, taking into account the tax imposed by Code Section 4999 if the Total Payments were delivered in full, and (Y) the amount and nature of the parachute payments to be reduced or forfeited according to Section 7(a) in order for the total payments and benefits to equal the Scaled Back Amount. For purposes of such opinion, the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company’s independent auditors in accordance with the principles of Code Section 280G and regulations thereunder, which determination shall be evidenced in a certificate of such auditors addressed to the Company and the Employee. Such opinion shall be addressed to the Company and the Employee and shall be binding upon the Company, its Affiliates, and the Employee.
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8. Plan of Liquidation . If the stockholders of the Company approve a complete plan of liquidation or dissolution of the Company (“ Approved Liquidation Plan ”), all Unvested Equity Awards that are not Performance Awards will fully vest on the date of such approval and all such awards that are Performance Awards shall vest to the extent the performance goals established under such awards have been achieved on such date (as if the Employee had satisfied all employment conditions required to vest), with the corresponding performance period for such award(s) deemed completed as of the date immediately preceding the date of such approval. Shares of common stock that so vest will be deemed outstanding as of the close of business on the date of such approval, and certificates representing such shares shall be delivered to the Employee as promptly as practicable thereafter. Any Performance Awards not vesting on the date of such approval shall be immediately cancelled without consideration therefor. In addition, unless the Approved Liquidation Plan shall have been rescinded, if the Partnership terminates the Employee’s employment without Cause or the Employee terminates the Employee’s employment for Good Reason in each case following stockholder approval of the Approved Liquidation Plan, then the Employee shall receive the benefits provided in Sections 4(a), 4(b) and 4(c), as applicable.
9. Retirement and Performance Shares . If the Employee’s termination of employment constitutes a Qualifying Retirement, then the Employee’s unvested stock options, restricted stock, restricted stock units and stock rights awards (other than performance shares) will vest on the date of retirement set forth in the notice thereof, and if the Qualifying Retirement occurs on or after a Change of Control, then the provision of Section 4(c) shall also apply. Notwithstanding anything to the contrary in any related plan or award agreement, the Employee shall be entitled to exercise all vested stock options until the earlier of (a) three (3) years after the date of Qualifying Retirement, and (b) the original terms of the options. Unless an award agreement provides for more favorable treatment, upon a Qualifying Retirement, the Employee shall continue to have the right to earn unvested performance shares upon the achievement of the applicable performance goals over any remaining performance period, as if the Employee’s employment had not been terminated.
10. Death and Disability . In no event shall a termination of the Employee’s employment due to death or Disability constitute a termination by the Partnership without Cause or a termination by the Employee for Good Reason; however, upon termination of employment due to the Employee’s death or Disability, the Employee’s estate or the Employee, as applicable, shall receive the benefits provided in Section 4(b) or 4(c) with respect to unvested stock options, restricted stock, restricted stock units and stock rights awards (other than performance shares), and the Employee’s estate or the Employee, as applicable, shall continue to have the right to earn unvested performance shares upon the achievement of the applicable performance goals over any remaining performance period, as if the Employee’s employment had not been terminated. Notwithstanding anything to the contrary in any related plan or award agreement, (a) the Employee’s estate shall be entitled to exercise all vested stock options until the earlier of (i) three (3) years after termination of employment due to death, and (ii) the original term of the option, and (b) the Employee shall be entitled to exercise all vested stock options until the earlier of (i) one (1) year after termination of employment due to Disability, and (ii) the original term of the option. For purposes of this Agreement, “ Disability ” shall mean the absence of the Employee from the Employee’s duties with the Innovative Industrial Entities on a full-time basis for ninety (90) consecutive days or on a total of one hundred eighty (180) days in any twelve (12) month period, in either case as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company and reasonably acceptable to the Employee or the Employee’s legal representative.
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11. Payments to Specified Employees . Notwithstanding any other Section of this Agreement, if the Employee is a Specified Employee at the time of the Employee’s Separation from Service, payments or distribution of property to the Employee provided under this Agreement, to the extent considered amounts deferred under a non-qualified deferred compensation plan (as defined in Code Section 409A) shall be deferred until the six (6) month anniversary of such Separation from Service to the extent required in order to comply with Code Section 409A and Treasury Regulation 1.409A-3(i)(2).
12. Reductions in Base Salary . For purposes of this Agreement, in the event there is a reduction in the Employee’s base salary that would constitute the basis for a termination for Good Reason, the base salary used for purposes of calculating the severance payable pursuant to Sections 3 or 4(a), as the case may be, shall be the amounts in effect immediately prior to such reduction.
13. Other Payments and Benefits . On any termination of employment, including, without limitation, termination due to the Employee’s death or Disability (as defined in Section 10) or for Cause, the Employee shall receive any accrued but unpaid salary, reimbursement of any business or other expenses incurred prior to termination of employment but for which the Employee had not received reimbursement (provided that such expenses have been previously approved in writing or comply with the terms of any expense reimbursement policy then in effect), and any other rights, compensation and/or benefits as may be due the Employee in accordance with the terms and provisions of any agreements, plans or programs of the Company or the Partnership (but in no event shall the Employee be entitled to duplicative rights, compensation and/or benefits).
14. Set Off; Mitigation . The obligation of the Company or the Partnership to pay or provide the Employee the amounts or benefits under this Agreement shall be subject to set-off, counterclaim or recoupment of amounts owed by the Employee to the Company or the Partnership. In addition, except as provided in Section 7 with respect to the Scaled Back Amount, if applicable, the Employee shall not be required to mitigate the amount of any payments or benefits provided to the Employee hereunder by securing other employment or otherwise, nor will such payments and/or benefits be reduced by reason of the Employee securing other employment or for any other reason.
15. Release . Notwithstanding any provision herein to the contrary, none of the Innovative Industrial Entities shall have any obligation to pay any amount or provide any benefit (other than those amounts set forth in Section 13), as the case may be, under this Agreement, unless the Employee executes, delivers to the Partnership, and does not revoke (to the extent the Employee is allowed to do so as set forth in the General Release), a General Release within sixty (60) days of the Employee’s termination of employment.
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16. Restrictive Covenants and Consulting Arrangement .
(a) The Employee will hold in a fiduciary capacity all secret or confidential information, knowledge or data relating to any Innovative Industrial Entity, and each of their respective businesses (the “ Confidential Information ”), except in furtherance of the business of the Innovative Industrial Entities or except as may be required by law. Additionally, and without limiting the foregoing, the Employee agrees not to participate in or facilitate the dissemination to the media or any other third party (i) of the Confidential Information, or (ii) of any damaging or defamatory information concerning any Innovative Industrial Entity or the Employee’s experiences as an employee of any Innovative Industrial Entity, without the Company’s prior written consent, except as may be required by law. Notwithstanding the foregoing, this Section 16(a) does not apply to information which is already in the public domain other than pursuant to acts of the Employee or representatives of the Employee in violation of this Agreement.
(b) During the Employee’s employment and during the one (1) year period after the date that the Employee ceases to be employed by any of the Innovative Industrial Entities for any reason (the “ Termination Date ”), the Employee agrees that the Employee shall not directly or knowingly and intentionally through another party recruit, induce, solicit or assist any other Person in recruiting, inducing or soliciting (A) any other employee of any Innovative Industrial Entity to leave such employment or (B) any other Person with which any Innovative Industrial Entity was actively conducting negotiations for employment on the Termination Date.
(c) For a six (6) month period following any termination of employment, the Employee agrees to make himself available and, upon and as requested by the Company or the Partnership from time to time, to provide consulting services with respect to any projects the Employee was involved in prior to such termination and/or to provide such other consulting services as the Company or the Partnership may reasonably request. The Employee will be reimbursed for reasonable travel and miscellaneous expenses incurred in connection with the provision of requested consulting services hereunder. The Company or the Partnership will provide the Employee reasonable advance notice of any request to provide consulting services, and will make all reasonable accommodations necessary to prevent the Employee’s commitment hereunder from materially interfering with the Employee’s employment obligations, if any. In no event will the Employee be required to provide more than twenty (20) hours of consulting services in any one month to the Company and the Partnership pursuant to this provision.
(d) The parties agree that any breach of this Section 16 will result in irreparable harm to the non-breaching party which cannot be fully compensated by monetary damages and accordingly, in the event of any breach or threatened breach of this Section 16, the non-breaching party shall be entitled to injunctive relief. Should any provision of this Section 16 be determined by a court of law or equity to be unreasonable or unenforceable, the parties agree that to the extent it is valid and enforceable, they shall be bound by the same, the intention of the parties being that the parties be given the broadest protection allowed by law or equity with respect to such provision.
17. Survival . The provisions of Sections 3 through 22 shall survive the termination of this Agreement to the extent necessary to enforce the rights and obligations described therein.
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18. Compliance with Code Section 409A . For purposes of applying the provisions of Code Section 409A to this Agreement, each separately identified amount to which the Employee is entitled under this Agreement shall be treated as a separate payment. In addition, to the extent permissible under Code Section 409A, any series of installment payments under this Agreement shall be treated as a right to a series of separate payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be within the sole discretion of the Company or the Partnership, as the case may be.
19. Withholding . The Company or the Partnership shall be entitled to withhold from all payments to the Employee hereunder all amounts required to be withheld under applicable local, state or federal income and employment tax laws.
20. Clawbacks . All incentive-based compensation paid to the Employee hereunder will be subject to the policies of the Company and the Partnership regarding clawbacks of erroneously awarded incentive-based compensation triggered by an accounting restatement, as required by law and approved by the Board in the case of the Company.
21. Dispute Resolution . Any dispute, controversy or claim between the Company or the Partnership and the Employee or other Person arising out of or relating to this Agreement shall be settled by arbitration conducted in San Diego, California, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association then in force and California law within thirty (30) days after written notice from one party to the other requesting that the matter be submitted to arbitration; provided that this Section 21 shall not apply to, and the Company and the Partnership shall be free to seek, injunctive or other equitable relief with respect to any actual or threatened violation by the Employee of his or her obligations under Section 16 hereof in any court of competent jurisdiction. The arbitration decision or award shall be binding and final upon the parties. The arbitration award shall be in writing and shall set forth the basis thereof. The parties hereto shall abide by all awards rendered in such arbitration proceedings, and all such awards may be enforced and executed upon in any court having jurisdiction over the party against whom enforcement of such award is sought. Each party shall be responsible for its own costs and expenses in any dispute or proceeding regarding the enforcement of this Agreement.
22. Miscellaneous . This Agreement shall be construed and enforced in accordance with the laws of the State of California (exclusive of conflict of law principles). In the event that any provision of this Agreement shall be invalid, illegal or unenforceable, the remainder shall not be affected thereby. This Agreement supersedes and terminates any prior employment agreement, severance agreement, change of control agreement or non-competition agreement between the Company or the Partnership and the Employee. It is intended that the payments and benefits provided under this Agreement are in lieu of, and not in addition to, termination, severance or change of control payments and benefits provided under the other termination or severance plans, policies or agreements, if any, of the Company or the Partnership. This Agreement shall be binding upon and inure to the benefit of the Employee and the Employee’s heirs and personal representatives, the Company and the Partnership, and their successors, assigns and legal representatives. Headings herein are inserted for convenience and shall not affect the interpretation of any provision of the Agreement. References to sections of the Exchange Act or the Code, or rules or regulations related thereto, shall be deemed to refer to any successor provisions, as applicable. The Company and the Partnership will require any successors thereto (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to expressly assume and agree to perform under this Agreement in the same manner and to the same extent that the Company and the Partnership would be required to perform if no such succession had taken place. This Agreement may not be terminated, amended, or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives.
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23. Counterparts . This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
(Signature pages to follow)
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IN WITNESS WHEREOF , the parties hereto have executed this Agreement as of the day and year first above written.
INNOVATIVE INDUSTRIAL PROPERTIES, INC. | ||
By: | ||
[ insert name ] | ||
[ insert title ] | ||
IIP OPERATING PARTNERSHIP, LP | ||
By: | INNOVATIVE INDUSTRIAL PROPERTIES, INC. | |
Its General Partner | ||
By: | ||
[ insert name ] | ||
[ insert title ] | ||
EMPLOYEE | ||
Paul E. Smithers |
E XHIBIT 10.6
SEVERANCE AND CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT, effective as of the _____ day of _______________, 2016, is by and between Innovative Industrial Properties, Inc., a Maryland corporation (the “ Company ”), IIP Operating Partnership, LP, a Delaware limited partnership (the “ Partnership ”), and Gregory J. Fahey (the “ Employee ”).
WHEREAS, to induce the Employee to remain as an executive officer of the Company and a key employee of the Partnership, the Company, the Partnership and the Employee desire to enter into this Severance and Change Of Control Agreement (the “ Agreement ”); and
WHEREAS, the parties agree that the restrictive covenants underlying certain of the Employee’s obligations under this Agreement are necessary to protect the goodwill or other business interests of the Innovative Industrial Entities (as defined below) and that such restrictive covenants do not impose a greater restraint than is necessary to protect such goodwill or other business interests.
NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, including the Employee’s agreement to continue as an executive officer of the Company and as an employee of the Partnership, the Employee’s agreement to provide consulting services following termination of employment pursuant to the terms hereof, and the restrictive covenants contained herein, the Employee, the Company, and the Partnership agree as follows:
1. Definitions . The following words, when capitalized in this Agreement, shall have the meanings ascribed below and shall supersede the meanings given to any such terms in any other award agreement or related plan document in effect prior to the date of this Agreement, including but not limited to the definitions of “Cause,” “Change of Control,” or “Good Reason”:
(a) “ Affiliate ” shall have the meaning given to such term in Rule 12b-2 of the General Rules and Regulations of the Exchange Act.
(b) “ Average Annual Cash Bonus ” means the average of the annual cash bonus, if any, paid or payable to the Employee with respect to the three (3) most recently completed calendar years prior to termination of employment (or the period of the Employee’s employment, if shorter).
(c) “ Base Performance Share Value ” means the fair market value as of the date of the Change of Control of the number of unvested shares underlying the Employee’s outstanding performance share awards that would have been earned pursuant to the terms of the award if the performance period for each such award ended immediately prior to the Change of Control. For such purposes, the level of achievement of the performance goals established for each such award will be determined on the date immediately prior to the Change of Control as follows: (X) if the goal is a market-based goal, such as total stockholder return or stock price, then the actual performance to date shall be used, and (Y) if the goal is not a market-based goal, then the annualized forecasted number for such goal as most recently prepared by the Company prior to the date of the Change of Control shall be used and treated as if it were actual performance.
(d) “ Base Restricted Share Value ” means the fair market value as of the date of the Change of Control of the shares underlying all of the Employee’s unvested time-vesting restricted stock awards, restricted stock units or stock rights awards outstanding immediately prior to the Change of Control.
(e) “ Board ” means the Board of Directors of the Company.
(f) “ Cause ” means the termination of the Employee’s employment with all Innovative Industrial Entities by action of the Board or its delegate for one or more of the following reasons:
(i) The Employee’s willful and continued failure substantially to perform his duties with the Innovative Industrial Entities (other than any such failure resulting from the Employee’s incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Employee by the Board, which demand specifically identifies the manner in which the Board believes that the Employee has not substantially performed his duties;
(ii) The Employee’s willful commission of an act of fraud or dishonesty resulting in economic or financial damage to the Innovative Industrial Entities;
(iii) The Employee’s conviction of, or entry by the Employee of a guilty or no contest plea to, the commission of a felony or a crime involving moral turpitude;
(iv) A willful breach by the Employee of his fiduciary duty to the Company which results in economic or other damage to the Innovative Industrial Entities; or
(v) The Employee’s willful and material breach of the Employee’s covenants set forth in this Section 16 of this Agreement.
(g) “ Change of Control ” means the occurrence of an event or series of events which qualify as a change in control event for purposes of Code Section 409A and Treasury Regulation §1.409A-3(i)(5), including:
(i) A change in the ownership of the Company, which shall occur on the date that any one Person, or more than one Person Acting as a Group (as defined below), other than Excluded Person(s) (as defined below), acquires ownership of the stock of the Company that, together with the stock then held by such Person or group, constitutes more than fifty percent (50%) of the total fair market value of the stock of the Company. However, if any one Person or more than one Person Acting as a Group is considered to own more than fifty (50%) of the total fair market value of the stock of the Company, the acquisition of additional stock by the same Person or Persons is not considered to cause a Change of Control.
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(ii) A change in the effective control of the Company, which shall occur on the date that:
(1) Any one Person, or more than one Person Acting as a Group, other than Excluded Person(s), acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such Person or Persons) ownership of stock of the Company possessing thirty percent (30%) or more of the total voting power of the stock of the Company. However, if any one Person or more than one Person Acting as a Group is considered to own more than thirty percent (30%) of the total voting power of the stock of the Company, the acquisition of additional voting stock by the same Person or Persons is not considered to cause a Change of Control; or
(2) A majority of the members of the Board is replaced during any twelve (12) month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election.
(iii) A change in the ownership of a substantial portion of the Company’s assets, which shall occur on the date that any one Person, or more than one Person Acting as a Group, other than Excluded Person(s), acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such Person or Persons) assets from the Company that have a total Gross Fair Market Value (as defined below) equal to more than fifty percent (50%) of the total Gross Fair Market Value of all the assets of the Company immediately prior to such acquisition or acquisitions, other than an Excluded Transaction (as defined below).
For purposes of this Subsection (g):
“ Gross Fair Market Value ” means the value of the assets of the Company, or the value of the assets being disposed of, as applicable, determined without regard to any liabilities associated with such assets.
Persons will not be considered to be “ Acting as a Group ” solely because they purchase or own stock of the Company at the same time, or as a result of the same public offering, or solely because they purchase assets of the Company at the same time, or as a result of the same public offering, as the case may be. However, Persons will be considered to be Acting as a Group if they (i) are owners of an entity that enters into a merger, consolidation, purchase or acquisition of assets, or similar business transaction with the Company, or (ii) do so within the meaning of Section 13(d) of the Exchange Act, including any group acting for the purpose of acquiring, holding or disposing of securities (within the meaning of Rule 13d-5(b)(1) under the Exchange Act).
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The term “ Excluded Transaction ” means any transaction in which assets are transferred to: (A) a stockholder of the Company (determined immediately before the asset transfer) in exchange for or with respect to its stock; (B) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the Company (determined after the asset transfer); (C) a Person, or more than one Person Acting as a Group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company (determined after the asset transfer); or (D) an entity at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a Person described in clause (C) (determined after the asset transfer).
The term “ Excluded Person(s) ” means (A) the Company or any Innovative Industrial Entity; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Innovative Industrial Entity; (C) an underwriter temporarily holding securities pursuant to an offering of such securities; or (D) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock in the Company.
The term “ Change of Control ” as defined above shall be construed in accordance with Code Section 409A and the regulations promulgated thereunder. In no event shall a transaction described above constitute a “Change of Control” for purposes of this Agreement unless such transaction also satisfies the requirement to be a change in the ownership or effective control of a corporation, or a change in the ownership of a substantial portion of the assets of a corporation, as each of those terms are defined under Code Section 409A and the regulations promulgated thereunder.
(h) “ Code ” means the Internal Revenue Code of 1986, as amended.
(i) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.
(j) “ General Release ” means (i) a release of the Innovative Industrial Entities, in such form as the Partnership may reasonably request, of all claims against the Innovative Industrial Entities relating to the Employee’s employment and termination thereof, and (ii) an agreement to continue to comply with, and be bound by, the provisions of Section 16 hereof.
(k) “ Good Reason ” means any one or more of the following conditions:
(i) any material diminution of the Employee’s authority, duties or responsibilities;
(ii) a material diminution of the Employee’s annual base salary;
(iii) a material change in the geographic location at which the Employee must perform the Employee’s duties and responsibilities; or
(iv) any other action or inaction by the Company or the Partnership that constitutes a material breach of this Agreement or any other agreement pursuant to which the Employee provides services to the Company or the Partnership.
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A termination of the Employee’s employment for Good Reason shall be effective only if (X) such condition was not consented to by the Employee in advance or subsequently ratified by the Employee in writing, (Y) such condition remains in effect thirty (30) days after the Employee gives written notice to the Board of the Employee’s intention to terminate his employment for Good Reason, which notice specifically identifies such condition, and (Z) the Employee gives the notice referred to in (Y) above within ninety (90) days of the initial existence of such condition. If the Company or the Partnership, as applicable, does not cure the condition within the thirty (30) day cure period described in (Y) above, then the Employee’s termination will occur on the day immediately following the end of the cure period. If the Company or the Partnership, as applicable, cures the condition within such thirty (30) day cure period, then the Employee will be deemed to have withdrawn his notice of termination effective as of the date the cure is effected.
(l) “ Innovative Industrial Entity ” or “ Innovative Industrial Entities ” means the Company, the Partnership, any of their Affiliates, and any other entities that along with the Company or the Partnership is considered a single employer pursuant to Code Section 414(b) or (c) and the Treasury regulations promulgated thereunder, determined by applying the phrase “at least 50 percent” in place of the phrase “at least 80 percent” each place it appears in such Treasury regulations or Code Section 1563(a).
(m) “ Medical Benefits ” shall mean the monthly fair market value of benefits provided to the Employee and the Employee’s dependents under the major medical, dental and vision benefit plans sponsored and maintained by the Partnership, at the level of coverage in effect for such persons immediately prior to the Employee’s termination of employment date. The “monthly fair market value” of such benefits shall be equal to the monthly cost (including any applicable administrative fee) to the Employee as if the Employee elected COBRA continuation coverage at the level of coverage in effect at such time for the Employee and the Employee’s dependents at their own expense.
(n) “ Person ” means a “person” as used in Sections 3(a)(9) and 13(d) of the Exchange Act or any group of Persons acting in concert that would be considered “persons acting as a group” within the meaning of Treasury Regulation §1.409A-3(i)(5).
(o) “ Prime Rate ” means an annual rate, compounding annually, equal to the prime rate, as reported in The Wall Street Journal on the date of the Change of Control, or if not reported on that date, the last preceding date on which so reported, which rate shall be adjusted on each January 1 to the prime rate then in effect and shall remain in effect for the year.
(p) “ Qualifying Retirement ” means the Employee’s voluntary termination of employment after the Employee has (i) attained (X) age sixty-five (65), (Y) age fifty-five (55) with ten (10) Years of Service as a full-time employee of the Partnership or any of its Affiliates, or (Z) an age which, when added to such Years of Service of the Employee equals at least seventy-five (75), and (ii) previously delivered a written notice of retirement to the Partnership and on the date of retirement the Employee has satisfied the minimum applicable advance written notice requirement set forth below:
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Age at Voluntary Termination |
Number of Years of Advance Notice |
|
58 or younger 59 60 or older |
3 years 2 years 1 year |
By way of illustration, and without limiting the foregoing, if (i) the Employee is eligible to retire at age fifty-nine (59) after ten (10) Years of Service, (ii) the Employee gives two (2) years notice at age fifty-eight (58) that the Employee intends to retire at age sixty (60), and (iii) the Employee later terminates employment at age fifty-nine (59), then the Employee’s retirement at age fifty-nine (59) would not constitute a Qualifying Retirement. However, if (i) the Employee is eligible to retire at age fifty-nine (59) after ten (10) Years of Service, (ii) the Employee gives two (2) years notice at age fifty-eight (58) that the Employee intends to retire at age sixty (60), and (iii) the Employee terminates employment upon reaching age sixty (60), then the Employee’s retirement at age sixty (60) would constitute a Qualifying Retirement.
(q) “ Separation from Service ” means the termination of the Employee’s employment with all Innovative Industrial Entities, provided that, notwithstanding such termination of the employment relationship between the Employee and all Innovative Industrial Entities, the Employee shall not be deemed to have had a Separation from Service where it is reasonably anticipated that the level of bona fide services that the Employee will perform (whether as an employee or independent contractor) following such termination from the Partnership and all Innovative Industrial Entities would be twenty percent (20%) or more of the average level of bona fide services performed by the Employee (whether as an employee or independent contractor) for the Innovative Industrial Entities over the immediately preceding thirty-six (36) month period (or such lesser period of actual service). In such event, Separation from Service shall mean the permanent reduction of the level of bona fide services to be performed by the Employee (whether as an employee or independent contractor) to a level that is less than twenty percent (20%) of the average level of bona fide services performed by the Employee (whether as an employee or independent contractor) during the thirty-six (36) month period (or such lesser period of actual service) immediately prior to the termination of the Employee’s employment relationship. A Separation from Service shall not be deemed to have occurred if the Employee is absent from active employment due to military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed the greater of (i) six (6) months or (ii) the period during which the Employee’s right to reemployment by any Innovative Industrial Entity is provided either by statute or contract.
(r) “ Specified Employee ” means an employee of any Innovative Industrial Entity who is a “specified employee” as defined in Code Section 409A(a)(2)(b)(i) and Treasury Regulation §1.409A-1(i). If the Employee is a key employee as of the applicable identification date, the Employee shall be treated as a Specified Employee for the twelve (12) month period beginning on the first day of the fourth month following such identification date. The applicable identification date for purposes of this Agreement shall be September 30 of each year.
(s) “ Unvested Equity Award ” has the meaning given to such term in Section 6(a).
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(t) “ Years of Service ” means the Employee’s total complete years of employment with an Innovative Industrial Entity, including years of employment with an entity that is acquired by an Innovative Industrial Entity prior to such acquisition. For this purpose, a “complete year of employment” shall begin on the Employee’s date of hire and end on each subsequent anniversary of such date.
2. Term of the Agreement . The term of this Agreement shall begin on the date hereof and end at 11:59 p.m. on December 31, 2019 and thereafter shall automatically renew for successive three (3) year terms unless either party delivers written notice of non-renewal to the other party at least ninety (90) days prior to the end of the then current term; provided, however, that if a Change of Control has occurred during the original or any extended term (including any extension resulting from a prior Change of Control), the term of the Agreement shall end no earlier than twenty-four (24) calendar months after the end of the calendar month in which the Change of Control occurs.
3. No Change of Control – Severance . Except in circumstances in which the Employee would be entitled to payments and benefits in connection with a Change of Control as provided in Section 4 below, in the event that during the term of this Agreement the Employee has a Separation from Service as a result of the Innovative Industrial Entities terminating the Employee’s employment without Cause or the Employee terminating the Employee’s employment for Good Reason, subject to Sections 11, 15 and 16 below:
(a) The Partnership shall pay to the Employee an amount equal to (i) 2.0 times the sum of (A) the Employee’s annual base salary in effect on the date the Employee’s employment terminates, plus (B) the Employee’s Average Annual Cash Bonus, plus (ii) eighteen (18) months of the Employee’s Medical Benefits. Payment shall be made in a lump sum on the first business day after sixty (60) days following the Employee’s Separation from Service;
(b) All of the Employee’s outstanding unvested stock options, restricted stock awards, restricted stock units and stock rights awards that vest solely on the basis of time shall become vested on a pro-rated basis, based on the portion of the vesting period that has elapsed as of the date of the Employee’s Separation from Service; and
(c) All of the Employee’s outstanding performance share awards shall be earned as of the date of Separation from Service based on the level of achievement of the performance goals established for such awards as of such date, but then pro-rated based on the portion of the performance period that has elapsed as of the date of the Employee’s Separation from Service. For purposes hereof, the level of achievement of the performance goals established for each such award will be determined on the date immediately prior to the Separation from Service as follows: (i) if the goal is a market-based goal, such as total stockholder return or stock price, then the actual performance to date shall be used, and (ii) if the goal is not a market-based goal, then the level of achievement of such goal shall be (X) based on the most recently reported number(s) by the Company in its reports filed with the Securities and Exchange Commission or (Y) if such numbers are not so filed, based on the numbers as prepared internally by the Company for the quarter ending prior to the date of the Separation from Service.
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Any shares issuable under awards that vest or are earned pursuant to subsections (b) and (c) shall be issued on the same date as the cash severance payment is made pursuant to subsection (a).
4. Change of Control – Severance . In the event that during the term of this Agreement the Innovative Industrial Entities terminate the Employee’s employment without Cause or the Employee terminates the Employee’s employment for Good Reason, in each case within two (2) years following a Change of Control, the following provisions shall apply:
(a) The Partnership shall pay to the Employee the amount set forth in Section 3(a);
(b) All outstanding unvested stock options, restricted stock, restricted stock units, stock rights awards and performance share awards then held by the Employee will vest (at the greater of actual performance to-date or target, for any awards subject to performance goals), and all outstanding equity awards that have not vested at the time of the Change of Control or been converted to the right to receive a cash payment pursuant to Section 6(c) will vest on the date the General Release in Section 15 becomes effective, and, if applicable, will be paid on the tenth (10th) business day following such time. Notwithstanding the foregoing, all such awards which are subject to Code Section 409A will be paid on the first (1st) business day after sixty (60) days following the Employee’s Separation from Service, provided the General Release in Section 15 has become effective; and
(c) With respect to those Unvested Equity Awards that have been exchanged pursuant to Sections 6(b) and 6(c) for the right to receive a contingent cash payment, subject to Section 11 below, the Employee shall receive a cash payment made in a lump sum on the first business day after sixty (60) days following the Employee’s Separation from Service equal to any portion of the unpaid Base Performance Share Value and Base Restricted Share Value that has not been paid pursuant to Sections 6(b) and 6(c), together with accrued but unpaid interest at the Prime Rate on such unpaid amount from the date of the Change of Control to the date of payment.
5. Entitlement to Severance .
(a) If the Employee becomes entitled to receive any severance payments or benefits described in Section 3 or Section 4 after the Employee has delivered written notice of what would otherwise have been a Qualifying Retirement to the Partnership had the Employee continued to be employed by the Partnership through the date of retirement set forth in the notice, then the amount of such payments and benefits shall be limited to (i) those that the Employee would have otherwise received had such employment continued through such date of retirement, and (ii) those provided by Section 9, if any.
(b) If the Employee dies after receiving notice from the Company that the Employee is being terminated without Cause, or after providing notice of termination for Good Reason, but prior to the date the Employee receives the payments and benefits described in Section 3 or Section 4, as the case may be, then the Employee’s estate, heirs and beneficiaries shall be entitled to the payments and benefits described in Section 3 or Section 4, as the case may be, at the same time such payments and benefits would have been paid or provided to the Employee had the Employee lived.
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6. Change of Control – Effect on Stock Rights .
(a) Except as otherwise provided in Sections 6(b) and 6(c) below (or in Sections 4(b) or 4(c), if applicable), the occurrence of a Change of Control shall not impact any existing unvested stock options, restricted stock awards, restricted stock units, stock rights awards or performance share awards (collectively, “ Unvested Equity Awards ”) unless such rights are cashed out pursuant to the terms of the applicable merger agreement or other agreement(s) pursuant to which such Change of Control is effected.
(b) With respect to Unvested Equity Awards that are performance share awards (“ Performance Awards ”), notwithstanding anything to the contrary contained in the related plan or award agreement, all of the Employee’s outstanding unvested Performance Awards shall be cancelled and, in consideration for the cancellation of such awards, the Employee shall receive a deferred contingent cash payment with respect to each such cancelled award equal to (X) the Base Performance Share Value determined for such cancelled award, plus (Y) interest on such unpaid Base Performance Share Value from the date of the Change of Control to the date of payment at the Prime Rate, such cash payment to be made on the last day of the applicable performance period for such award, provided that the Employee remains employed by the Partnership, an Affiliate, or one of their successors through the last day of the applicable performance period.
(c) With respect to Unvested Equity Awards that are not Performance Awards, if the stock underlying such awards is not readily tradable on an established securities market immediately after the Change of Control (after giving effect to any conversion, exchange or replacement pursuant to the applicable plan or award agreement of the stock underlying Unvested Equity Awards as a result of a reorganization, merger, consolidation, combination or other similar corporate transaction or event), then notwithstanding anything to the contrary contained in the related plan or award agreement, all of the Employee’s outstanding Unvested Equity Awards shall be cancelled and, in consideration for the cancellation of such awards, the Employee shall receive:
(i) a cash payment equal to (X) the fair market value of the shares underlying all of the Employee’s unvested stock options as of the date of the Change of Control, less (Y) the aggregate exercise price of such stock options, such cash payment to be made within thirty (30) days after the Change of Control; and
(ii) a deferred contingent cash payment equal to (X) the Base Restricted Share Value, plus (Y) interest on the unpaid Base Restricted Share Value from the date of the Change of Control to the date of payment at the Prime Rate, such cash payment of the Base Restricted Share Value to be made in installments on the applicable vesting dates with respect to the number of shares that would have been issued on that vesting date, plus all accrued but unpaid interest on the unpaid Base Restricted Share Value through such vesting date, provided that the Employee remains employed by the Partnership, an Affiliate, or one of their successors through the applicable date of vesting.
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7. Change of Control – Excise Tax .
(a) If in the opinion of Tax Counsel (as defined in Section 7(b)) the Employee will be subject to an excise tax under Code Section 4999 with respect to all or any portion of the payments and benefits to be made by the Company or any of its Affiliates to the Employee, whether upon a Change of Control or following a termination of the Employee’s employment, under this Agreement or otherwise (in the aggregate, “ Total Payments ”), then such parties agree that the Total Payments shall either be (i) delivered in full, or (ii) reduced to three (3) times the Employee’s “base amount” for purposes of Code Section 280G, less $1.00 (“ Scaled Back Amount ”), whichever of the foregoing results in the receipt by the Employee of the greatest benefit on an after-tax basis (taking into account the applicable federal, state and local income taxes and the excise tax). If the Employee is entitled to the Scaled Back Amount, then such payments and benefits shall be reduced or eliminated by applying the following principles, in order: (1) the payment or benefit with the higher ratio of the parachute payment value to present economic value (determined using reasonable actuarial assumptions) shall be reduced or eliminated before a payment or benefit with a lower ratio; (2) the payment or benefit with the later possible payment date shall be reduced or eliminated before a payment or benefit with an earlier payment date; and (3) cash payments shall be reduced prior to non-cash benefits; provided that if the foregoing order of reduction or elimination would violate Code Section 409A, then the reduction shall be made pro rata among the payments or benefits to be received by the Employee (on the basis of the relative present value of the parachute payments).
(b) For purposes of this Section 7, within forty (40) days after delivery of a written notice of termination by the Employee or by the Company pursuant to this Agreement within two (2) years of a Change of Control with respect to the Company (or, if an event other than termination of employment results in payment of parachute payments under Code Section 280G and it is reasonably possible that such parachute payments could result in an excise tax, within forty (40) days after such other event), the Company shall obtain, at its expense, the opinion (which need not be unqualified) of nationally recognized tax counsel (“ Tax Counsel ”) selected by the Compensation Committee of the Board, which sets forth (i) the “base amount” within the meaning of Code Section 280G; (ii) the aggregate present value of the payments in the nature of compensation to the Employee as prescribed in Code Section 280G(b)(2)(A)(ii); (iii) the amount and present value of any “excess parachute payment” within the meaning of Code Section 280G(b)(1); and (iv) as applicable, (X) the net after-tax proceeds to the Employee, taking into account the tax imposed by Code Section 4999 if the Total Payments were delivered in full, and (Y) the amount and nature of the parachute payments to be reduced or forfeited according to Section 7(a) in order for the total payments and benefits to equal the Scaled Back Amount. For purposes of such opinion, the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company’s independent auditors in accordance with the principles of Code Section 280G and regulations thereunder, which determination shall be evidenced in a certificate of such auditors addressed to the Company and the Employee. Such opinion shall be addressed to the Company and the Employee and shall be binding upon the Company, its Affiliates, and the Employee.
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8. Plan of Liquidation . If the stockholders of the Company approve a complete plan of liquidation or dissolution of the Company (“ Approved Liquidation Plan ”), all Unvested Equity Awards that are not Performance Awards will fully vest on the date of such approval and all such awards that are Performance Awards shall vest to the extent the performance goals established under such awards have been achieved on such date (as if the Employee had satisfied all employment conditions required to vest), with the corresponding performance period for such award(s) deemed completed as of the date immediately preceding the date of such approval. Shares of common stock that so vest will be deemed outstanding as of the close of business on the date of such approval, and certificates representing such shares shall be delivered to the Employee as promptly as practicable thereafter. Any Performance Awards not vesting on the date of such approval shall be immediately cancelled without consideration therefor. In addition, unless the Approved Liquidation Plan shall have been rescinded, if the Partnership terminates the Employee’s employment without Cause or the Employee terminates the Employee’s employment for Good Reason in each case following stockholder approval of the Approved Liquidation Plan, then the Employee shall receive the benefits provided in Sections 4(a), 4(b) and 4(c), as applicable.
9. Retirement and Performance Shares . If the Employee’s termination of employment constitutes a Qualifying Retirement, then the Employee’s unvested stock options, restricted stock, restricted stock units and stock rights awards (other than performance shares) will vest on the date of retirement set forth in the notice thereof, and if the Qualifying Retirement occurs on or after a Change of Control, then the provision of Section 4(c) shall also apply. Notwithstanding anything to the contrary in any related plan or award agreement, the Employee shall be entitled to exercise all vested stock options until the earlier of (a) three (3) years after the date of Qualifying Retirement, and (b) the original terms of the options. Unless an award agreement provides for more favorable treatment, upon a Qualifying Retirement, the Employee shall continue to have the right to earn unvested performance shares upon the achievement of the applicable performance goals over any remaining performance period, as if the Employee’s employment had not been terminated.
10. Death and Disability . In no event shall a termination of the Employee’s employment due to death or Disability constitute a termination by the Partnership without Cause or a termination by the Employee for Good Reason; however, upon termination of employment due to the Employee’s death or Disability, the Employee’s estate or the Employee, as applicable, shall receive the benefits provided in Section 4(b) or 4(c) with respect to unvested stock options, restricted stock, restricted stock units and stock rights awards (other than performance shares), and the Employee’s estate or the Employee, as applicable, shall continue to have the right to earn unvested performance shares upon the achievement of the applicable performance goals over any remaining performance period, as if the Employee’s employment had not been terminated. Notwithstanding anything to the contrary in any related plan or award agreement, (a) the Employee’s estate shall be entitled to exercise all vested stock options until the earlier of (i) three (3) years after termination of employment due to death, and (ii) the original term of the option, and (b) the Employee shall be entitled to exercise all vested stock options until the earlier of (i) one (1) year after termination of employment due to Disability, and (ii) the original term of the option. For purposes of this Agreement, “ Disability ” shall mean the absence of the Employee from the Employee’s duties with the Innovative Industrial Entities on a full-time basis for ninety (90) consecutive days or on a total of one hundred eighty (180) days in any twelve (12) month period, in either case as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company and reasonably acceptable to the Employee or the Employee’s legal representative.
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11. Payments to Specified Employees . Notwithstanding any other Section of this Agreement, if the Employee is a Specified Employee at the time of the Employee’s Separation from Service, payments or distribution of property to the Employee provided under this Agreement, to the extent considered amounts deferred under a non-qualified deferred compensation plan (as defined in Code Section 409A) shall be deferred until the six (6) month anniversary of such Separation from Service to the extent required in order to comply with Code Section 409A and Treasury Regulation 1.409A-3(i)(2).
12. Reductions in Base Salary . For purposes of this Agreement, in the event there is a reduction in the Employee’s base salary that would constitute the basis for a termination for Good Reason, the base salary used for purposes of calculating the severance payable pursuant to Sections 3 or 4(a), as the case may be, shall be the amounts in effect immediately prior to such reduction.
13. Other Payments and Benefits . On any termination of employment, including, without limitation, termination due to the Employee’s death or Disability (as defined in Section 10) or for Cause, the Employee shall receive any accrued but unpaid salary, reimbursement of any business or other expenses incurred prior to termination of employment but for which the Employee had not received reimbursement (provided that such expenses have been previously approved in writing or comply with the terms of any expense reimbursement policy then in effect), and any other rights, compensation and/or benefits as may be due the Employee in accordance with the terms and provisions of any agreements, plans or programs of the Company or the Partnership (but in no event shall the Employee be entitled to duplicative rights, compensation and/or benefits).
14. Set Off; Mitigation . The obligation of the Company or the Partnership to pay or provide the Employee the amounts or benefits under this Agreement shall be subject to set-off, counterclaim or recoupment of amounts owed by the Employee to the Company or the Partnership. In addition, except as provided in Section 7 with respect to the Scaled Back Amount, if applicable, the Employee shall not be required to mitigate the amount of any payments or benefits provided to the Employee hereunder by securing other employment or otherwise, nor will such payments and/or benefits be reduced by reason of the Employee securing other employment or for any other reason.
15. Release . Notwithstanding any provision herein to the contrary, none of the Innovative Industrial Entities shall have any obligation to pay any amount or provide any benefit (other than those amounts set forth in Section 13), as the case may be, under this Agreement, unless the Employee executes, delivers to the Partnership, and does not revoke (to the extent the Employee is allowed to do so as set forth in the General Release), a General Release within sixty (60) days of the Employee’s termination of employment.
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16. Restrictive Covenants and Consulting Arrangement .
(a) The Employee will hold in a fiduciary capacity all secret or confidential information, knowledge or data relating to any Innovative Industrial Entity, and each of their respective businesses (the “ Confidential Information ”), except in furtherance of the business of the Innovative Industrial Entities or except as may be required by law. Additionally, and without limiting the foregoing, the Employee agrees not to participate in or facilitate the dissemination to the media or any other third party (i) of the Confidential Information, or (ii) of any damaging or defamatory information concerning any Innovative Industrial Entity or the Employee’s experiences as an employee of any Innovative Industrial Entity, without the Company’s prior written consent, except as may be required by law. Notwithstanding the foregoing, this Section 16(a) does not apply to information which is already in the public domain other than pursuant to acts of the Employee or representatives of the Employee in violation of this Agreement.
(b) During the Employee’s employment and during the one (1) year period after the date that the Employee ceases to be employed by any of the Innovative Industrial Entities for any reason (the “ Termination Date ”), the Employee agrees that the Employee shall not directly or knowingly and intentionally through another party recruit, induce, solicit or assist any other Person in recruiting, inducing or soliciting (A) any other employee of any Innovative Industrial Entity to leave such employment or (B) any other Person with which any Innovative Industrial Entity was actively conducting negotiations for employment on the Termination Date.
(c) For a six (6) month period following any termination of employment, the Employee agrees to make himself available and, upon and as requested by the Company or the Partnership from time to time, to provide consulting services with respect to any projects the Employee was involved in prior to such termination and/or to provide such other consulting services as the Company or the Partnership may reasonably request. The Employee will be reimbursed for reasonable travel and miscellaneous expenses incurred in connection with the provision of requested consulting services hereunder. The Company or the Partnership will provide the Employee reasonable advance notice of any request to provide consulting services, and will make all reasonable accommodations necessary to prevent the Employee’s commitment hereunder from materially interfering with the Employee’s employment obligations, if any. In no event will the Employee be required to provide more than twenty (20) hours of consulting services in any one month to the Company and the Partnership pursuant to this provision.
(d) The parties agree that any breach of this Section 16 will result in irreparable harm to the non-breaching party which cannot be fully compensated by monetary damages and accordingly, in the event of any breach or threatened breach of this Section 16, the non-breaching party shall be entitled to injunctive relief. Should any provision of this Section 16 be determined by a court of law or equity to be unreasonable or unenforceable, the parties agree that to the extent it is valid and enforceable, they shall be bound by the same, the intention of the parties being that the parties be given the broadest protection allowed by law or equity with respect to such provision.
17. Survival . The provisions of Sections 3 through 22 shall survive the termination of this Agreement to the extent necessary to enforce the rights and obligations described therein.
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18. Compliance with Code Section 409A . For purposes of applying the provisions of Code Section 409A to this Agreement, each separately identified amount to which the Employee is entitled under this Agreement shall be treated as a separate payment. In addition, to the extent permissible under Code Section 409A, any series of installment payments under this Agreement shall be treated as a right to a series of separate payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be within the sole discretion of the Company or the Partnership, as the case may be.
19. Withholding . The Company or the Partnership shall be entitled to withhold from all payments to the Employee hereunder all amounts required to be withheld under applicable local, state or federal income and employment tax laws.
20. Clawbacks . All incentive-based compensation paid to the Employee hereunder will be subject to the policies of the Company and the Partnership regarding clawbacks of erroneously awarded incentive-based compensation triggered by an accounting restatement, as required by law and approved by the Board in the case of the Company.
21. Dispute Resolution . Any dispute, controversy or claim between the Company or the Partnership and the Employee or other Person arising out of or relating to this Agreement shall be settled by arbitration conducted in San Diego, California, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association then in force and California law within thirty (30) days after written notice from one party to the other requesting that the matter be submitted to arbitration; provided that this Section 21 shall not apply to, and the Company and the Partnership shall be free to seek, injunctive or other equitable relief with respect to any actual or threatened violation by the Employee of his or her obligations under Section 16 hereof in any court of competent jurisdiction. The arbitration decision or award shall be binding and final upon the parties. The arbitration award shall be in writing and shall set forth the basis thereof. The parties hereto shall abide by all awards rendered in such arbitration proceedings, and all such awards may be enforced and executed upon in any court having jurisdiction over the party against whom enforcement of such award is sought. Each party shall be responsible for its own costs and expenses in any dispute or proceeding regarding the enforcement of this Agreement.
22. Miscellaneous . This Agreement shall be construed and enforced in accordance with the laws of the State of California (exclusive of conflict of law principles). In the event that any provision of this Agreement shall be invalid, illegal or unenforceable, the remainder shall not be affected thereby. This Agreement supersedes and terminates any prior employment agreement, severance agreement, change of control agreement or non-competition agreement between the Company or the Partnership and the Employee. It is intended that the payments and benefits provided under this Agreement are in lieu of, and not in addition to, termination, severance or change of control payments and benefits provided under the other termination or severance plans, policies or agreements, if any, of the Company or the Partnership. This Agreement shall be binding upon and inure to the benefit of the Employee and the Employee’s heirs and personal representatives, the Company and the Partnership, and their successors, assigns and legal representatives. Headings herein are inserted for convenience and shall not affect the interpretation of any provision of the Agreement. References to sections of the Exchange Act or the Code, or rules or regulations related thereto, shall be deemed to refer to any successor provisions, as applicable. The Company and the Partnership will require any successors thereto (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to expressly assume and agree to perform under this Agreement in the same manner and to the same extent that the Company and the Partnership would be required to perform if no such succession had taken place. This Agreement may not be terminated, amended, or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives.
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23. Counterparts . This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
(Signature pages to follow)
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IN WITNESS WHEREOF , the parties hereto have executed this Agreement as of the day and year first above written.
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INNOVATIVE INDUSTRIAL PROPERTIES, INC. | |
By: | ||
[ insert name ] | ||
[ insert title ] | ||
IIP OPERATING PARTNERSHIP, LP | ||
By: | INNOVATIVE INDUSTRIAL PROPERTIES, INC. | |
Its General Partner | ||
By: | ||
[ insert name ] | ||
[ insert title ] | ||
EMPLOYEE | ||
Gregory J. Fahey |
Exhibit 10.7
SEVERANCE AND CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT, effective as of the _____ day of _______________, 2016, is by and between Innovative Industrial Properties, Inc., a Maryland corporation (the “ Company ”), IIP Operating Partnership, LP, a Delaware limited partnership (the “ Partnership ”), and Brian J. Wolfe (the “ Employee ”).
WHEREAS, to induce the Employee to remain as an executive officer of the Company and a key employee of the Partnership, the Company, the Partnership and the Employee desire to enter into this Severance and Change Of Control Agreement (the “ Agreement ”); and
WHEREAS, the parties agree that the restrictive covenants underlying certain of the Employee’s obligations under this Agreement are necessary to protect the goodwill or other business interests of the Innovative Industrial Entities (as defined below) and that such restrictive covenants do not impose a greater restraint than is necessary to protect such goodwill or other business interests.
NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, including the Employee’s agreement to continue as an executive officer of the Company and as an employee of the Partnership, the Employee’s agreement to provide consulting services following termination of employment pursuant to the terms hereof, and the restrictive covenants contained herein, the Employee, the Company, and the Partnership agree as follows:
1. Definitions . The following words, when capitalized in this Agreement, shall have the meanings ascribed below and shall supersede the meanings given to any such terms in any other award agreement or related plan document in effect prior to the date of this Agreement, including but not limited to the definitions of “Cause,” “Change of Control,” or “Good Reason”:
(a) “ Affiliate ” shall have the meaning given to such term in Rule 12b-2 of the General Rules and Regulations of the Exchange Act.
(b) “ Average Annual Cash Bonus ” means the average of the annual cash bonus, if any, paid or payable to the Employee with respect to the three (3) most recently completed calendar years prior to termination of employment (or the period of the Employee’s employment, if shorter).
(c) “ Base Performance Share Value ” means the fair market value as of the date of the Change of Control of the number of unvested shares underlying the Employee’s outstanding performance share awards that would have been earned pursuant to the terms of the award if the performance period for each such award ended immediately prior to the Change of Control. For such purposes, the level of achievement of the performance goals established for each such award will be determined on the date immediately prior to the Change of Control as follows: (X) if the goal is a market-based goal, such as total stockholder return or stock price, then the actual performance to date shall be used, and (Y) if the goal is not a market-based goal, then the annualized forecasted number for such goal as most recently prepared by the Company prior to the date of the Change of Control shall be used and treated as if it were actual performance.
(d) “ Base Restricted Share Value ” means the fair market value as of the date of the Change of Control of the shares underlying all of the Employee’s unvested time-vesting restricted stock awards, restricted stock units or stock rights awards outstanding immediately prior to the Change of Control.
(e) “ Board ” means the Board of Directors of the Company.
(f) “ Cause ” means the termination of the Employee’s employment with all Innovative Industrial Entities by action of the Board or its delegate for one or more of the following reasons:
(i) The Employee’s willful and continued failure substantially to perform his duties with the Innovative Industrial Entities (other than any such failure resulting from the Employee’s incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Employee by the Board, which demand specifically identifies the manner in which the Board believes that the Employee has not substantially performed his duties;
(ii) The Employee’s willful commission of an act of fraud or dishonesty resulting in economic or financial damage to the Innovative Industrial Entities;
(iii) The Employee’s conviction of, or entry by the Employee of a guilty or no contest plea to, the commission of a felony or a crime involving moral turpitude;
(iv) A willful breach by the Employee of his fiduciary duty to the Company which results in economic or other damage to the Innovative Industrial Entities; or
(v) The Employee’s willful and material breach of the Employee’s covenants set forth in this Section 16 of this Agreement.
(g) “ Change of Control ” means the occurrence of an event or series of events which qualify as a change in control event for purposes of Code Section 409A and Treasury Regulation §1.409A-3(i)(5), including:
(i) A change in the ownership of the Company, which shall occur on the date that any one Person, or more than one Person Acting as a Group (as defined below), other than Excluded Person(s) (as defined below), acquires ownership of the stock of the Company that, together with the stock then held by such Person or group, constitutes more than fifty percent (50%) of the total fair market value of the stock of the Company. However, if any one Person or more than one Person Acting as a Group is considered to own more than fifty (50%) of the total fair market value of the stock of the Company, the acquisition of additional stock by the same Person or Persons is not considered to cause a Change of Control.
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(ii) A change in the effective control of the Company, which shall occur on the date that:
(1) Any one Person, or more than one Person Acting as a Group, other than Excluded Person(s), acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such Person or Persons) ownership of stock of the Company possessing thirty percent (30%) or more of the total voting power of the stock of the Company. However, if any one Person or more than one Person Acting as a Group is considered to own more than thirty percent (30%) of the total voting power of the stock of the Company, the acquisition of additional voting stock by the same Person or Persons is not considered to cause a Change of Control; or
(2) A majority of the members of the Board is replaced during any twelve (12) month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election.
(iii) A change in the ownership of a substantial portion of the Company’s assets, which shall occur on the date that any one Person, or more than one Person Acting as a Group, other than Excluded Person(s), acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such Person or Persons) assets from the Company that have a total Gross Fair Market Value (as defined below) equal to more than fifty percent (50%) of the total Gross Fair Market Value of all the assets of the Company immediately prior to such acquisition or acquisitions, other than an Excluded Transaction (as defined below).
For purposes of this Subsection (g):
“ Gross Fair Market Value ” means the value of the assets of the Company, or the value of the assets being disposed of, as applicable, determined without regard to any liabilities associated with such assets.
Persons will not be considered to be “ Acting as a Group ” solely because they purchase or own stock of the Company at the same time, or as a result of the same public offering, or solely because they purchase assets of the Company at the same time, or as a result of the same public offering, as the case may be. However, Persons will be considered to be Acting as a Group if they (i) are owners of an entity that enters into a merger, consolidation, purchase or acquisition of assets, or similar business transaction with the Company, or (ii) do so within the meaning of Section 13(d) of the Exchange Act, including any group acting for the purpose of acquiring, holding or disposing of securities (within the meaning of Rule 13d-5(b)(1) under the Exchange Act).
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The term “ Excluded Transaction ” means any transaction in which assets are transferred to: (A) a stockholder of the Company (determined immediately before the asset transfer) in exchange for or with respect to its stock; (B) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the Company (determined after the asset transfer); (C) a Person, or more than one Person Acting as a Group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company (determined after the asset transfer); or (D) an entity at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a Person described in clause (C) (determined after the asset transfer).
The term “ Excluded Person(s) ” means (A) the Company or any Innovative Industrial Entity; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Innovative Industrial Entity; (C) an underwriter temporarily holding securities pursuant to an offering of such securities; or (D) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock in the Company.
The term “ Change of Control ” as defined above shall be construed in accordance with Code Section 409A and the regulations promulgated thereunder. In no event shall a transaction described above constitute a “Change of Control” for purposes of this Agreement unless such transaction also satisfies the requirement to be a change in the ownership or effective control of a corporation, or a change in the ownership of a substantial portion of the assets of a corporation, as each of those terms are defined under Code Section 409A and the regulations promulgated thereunder.
(h) “ Code ” means the Internal Revenue Code of 1986, as amended.
(i) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.
(j) “ General Release ” means (i) a release of the Innovative Industrial Entities, in such form as the Partnership may reasonably request, of all claims against the Innovative Industrial Entities relating to the Employee’s employment and termination thereof, and (ii) an agreement to continue to comply with, and be bound by, the provisions of Section 16 hereof.
(k) “ Good Reason ” means any one or more of the following conditions:
(i) any material diminution of the Employee’s authority, duties or responsibilities;
(ii) a material diminution of the Employee’s annual base salary;
(iii) a material change in the geographic location at which the Employee must perform the Employee’s duties and responsibilities; or
(iv) any other action or inaction by the Company or the Partnership that constitutes a material breach of this Agreement or any other agreement pursuant to which the Employee provides services to the Company or the Partnership.
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A termination of the Employee’s employment for Good Reason shall be effective only if (X) such condition was not consented to by the Employee in advance or subsequently ratified by the Employee in writing, (Y) such condition remains in effect thirty (30) days after the Employee gives written notice to the Board of the Employee’s intention to terminate his employment for Good Reason, which notice specifically identifies such condition, and (Z) the Employee gives the notice referred to in (Y) above within ninety (90) days of the initial existence of such condition. If the Company or the Partnership, as applicable, does not cure the condition within the thirty (30) day cure period described in (Y) above, then the Employee’s termination will occur on the day immediately following the end of the cure period. If the Company or the Partnership, as applicable, cures the condition within such thirty (30) day cure period, then the Employee will be deemed to have withdrawn his notice of termination effective as of the date the cure is effected.
(l) “ Innovative Industrial Entity ” or “ Innovative Industrial Entities ” means the Company, the Partnership, any of their Affiliates, and any other entities that along with the Company or the Partnership is considered a single employer pursuant to Code Section 414(b) or (c) and the Treasury regulations promulgated thereunder, determined by applying the phrase “at least 50 percent” in place of the phrase “at least 80 percent” each place it appears in such Treasury regulations or Code Section 1563(a).
(m) “ Medical Benefits ” shall mean the monthly fair market value of benefits provided to the Employee and the Employee’s dependents under the major medical, dental and vision benefit plans sponsored and maintained by the Partnership, at the level of coverage in effect for such persons immediately prior to the Employee’s termination of employment date. The “monthly fair market value” of such benefits shall be equal to the monthly cost (including any applicable administrative fee) to the Employee as if the Employee elected COBRA continuation coverage at the level of coverage in effect at such time for the Employee and the Employee’s dependents at their own expense.
(n) “ Person ” means a “person” as used in Sections 3(a)(9) and 13(d) of the Exchange Act or any group of Persons acting in concert that would be considered “persons acting as a group” within the meaning of Treasury Regulation §1.409A-3(i)(5).
(o) “ Prime Rate ” means an annual rate, compounding annually, equal to the prime rate, as reported in The Wall Street Journal on the date of the Change of Control, or if not reported on that date, the last preceding date on which so reported, which rate shall be adjusted on each January 1 to the prime rate then in effect and shall remain in effect for the year.
(p) “ Qualifying Retirement ” means the Employee’s voluntary termination of employment after the Employee has (i) attained (X) age sixty-five (65), (Y) age fifty-five (55) with ten (10) Years of Service as a full-time employee of the Partnership or any of its Affiliates, or (Z) an age which, when added to such Years of Service of the Employee equals at least seventy-five (75), and (ii) previously delivered a written notice of retirement to the Partnership and on the date of retirement the Employee has satisfied the minimum applicable advance written notice requirement set forth below:
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Age at Voluntary Termination |
Number of Years of Advance Notice |
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58 or younger 59 60 or older |
3 years 2 years 1 year |
By way of illustration, and without limiting the foregoing, if (i) the Employee is eligible to retire at age fifty-nine (59) after ten (10) Years of Service, (ii) the Employee gives two (2) years notice at age fifty-eight (58) that the Employee intends to retire at age sixty (60), and (iii) the Employee later terminates employment at age fifty-nine (59), then the Employee’s retirement at age fifty-nine (59) would not constitute a Qualifying Retirement. However, if (i) the Employee is eligible to retire at age fifty-nine (59) after ten (10) Years of Service, (ii) the Employee gives two (2) years notice at age fifty-eight (58) that the Employee intends to retire at age sixty (60), and (iii) the Employee terminates employment upon reaching age sixty (60), then the Employee’s retirement at age sixty (60) would constitute a Qualifying Retirement.
(q) “ Separation from Service ” means the termination of the Employee’s employment with all Innovative Industrial Entities, provided that, notwithstanding such termination of the employment relationship between the Employee and all Innovative Industrial Entities, the Employee shall not be deemed to have had a Separation from Service where it is reasonably anticipated that the level of bona fide services that the Employee will perform (whether as an employee or independent contractor) following such termination from the Partnership and all Innovative Industrial Entities would be twenty percent (20%) or more of the average level of bona fide services performed by the Employee (whether as an employee or independent contractor) for the Innovative Industrial Entities over the immediately preceding thirty-six (36) month period (or such lesser period of actual service). In such event, Separation from Service shall mean the permanent reduction of the level of bona fide services to be performed by the Employee (whether as an employee or independent contractor) to a level that is less than twenty percent (20%) of the average level of bona fide services performed by the Employee (whether as an employee or independent contractor) during the thirty-six (36) month period (or such lesser period of actual service) immediately prior to the termination of the Employee’s employment relationship. A Separation from Service shall not be deemed to have occurred if the Employee is absent from active employment due to military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed the greater of (i) six (6) months or (ii) the period during which the Employee’s right to reemployment by any Innovative Industrial Entity is provided either by statute or contract.
(r) “ Specified Employee ” means an employee of any Innovative Industrial Entity who is a “specified employee” as defined in Code Section 409A(a)(2)(b)(i) and Treasury Regulation §1.409A-1(i). If the Employee is a key employee as of the applicable identification date, the Employee shall be treated as a Specified Employee for the twelve (12) month period beginning on the first day of the fourth month following such identification date. The applicable identification date for purposes of this Agreement shall be September 30 of each year.
(s) “ Unvested Equity Award ” has the meaning given to such term in Section 6(a).
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(t) “ Years of Service ” means the Employee’s total complete years of employment with an Innovative Industrial Entity, including years of employment with an entity that is acquired by an Innovative Industrial Entity prior to such acquisition. For this purpose, a “complete year of employment” shall begin on the Employee’s date of hire and end on each subsequent anniversary of such date.
2. Term of the Agreement . The term of this Agreement shall begin on the date hereof and end at 11:59 p.m. on December 31, 2019 and thereafter shall automatically renew for successive three (3) year terms unless either party delivers written notice of non-renewal to the other party at least ninety (90) days prior to the end of the then current term; provided, however, that if a Change of Control has occurred during the original or any extended term (including any extension resulting from a prior Change of Control), the term of the Agreement shall end no earlier than twenty-four (24) calendar months after the end of the calendar month in which the Change of Control occurs.
3. No Change of Control – Severance . Except in circumstances in which the Employee would be entitled to payments and benefits in connection with a Change of Control as provided in Section 4 below, in the event that during the term of this Agreement the Employee has a Separation from Service as a result of the Innovative Industrial Entities terminating the Employee’s employment without Cause or the Employee terminating the Employee’s employment for Good Reason, subject to Sections 11, 15 and 16 below:
(a) The Partnership shall pay to the Employee an amount equal to (i) 2.0 times the sum of (A) the Employee’s annual base salary in effect on the date the Employee’s employment terminates, plus (B) the Employee’s Average Annual Cash Bonus, plus (ii) eighteen (18) months of the Employee’s Medical Benefits. Payment shall be made in a lump sum on the first business day after sixty (60) days following the Employee’s Separation from Service;
(b) All of the Employee’s outstanding unvested stock options, restricted stock awards, restricted stock units and stock rights awards that vest solely on the basis of time shall become vested on a pro-rated basis, based on the portion of the vesting period that has elapsed as of the date of the Employee’s Separation from Service; and
(c) All of the Employee’s outstanding performance share awards shall be earned as of the date of Separation from Service based on the level of achievement of the performance goals established for such awards as of such date, but then pro-rated based on the portion of the performance period that has elapsed as of the date of the Employee’s Separation from Service. For purposes hereof, the level of achievement of the performance goals established for each such award will be determined on the date immediately prior to the Separation from Service as follows: (i) if the goal is a market-based goal, such as total stockholder return or stock price, then the actual performance to date shall be used, and (ii) if the goal is not a market-based goal, then the level of achievement of such goal shall be (X) based on the most recently reported number(s) by the Company in its reports filed with the Securities and Exchange Commission or (Y) if such numbers are not so filed, based on the numbers as prepared internally by the Company for the quarter ending prior to the date of the Separation from Service.
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Any shares issuable under awards that vest or are earned pursuant to subsections (b) and (c) shall be issued on the same date as the cash severance payment is made pursuant to subsection (a).
4. Change of Control – Severance . In the event that during the term of this Agreement the Innovative Industrial Entities terminate the Employee’s employment without Cause or the Employee terminates the Employee’s employment for Good Reason, in each case within two (2) years following a Change of Control, the following provisions shall apply:
(a) The Partnership shall pay to the Employee the amount set forth in Section 3(a);
(b) All outstanding unvested stock options, restricted stock, restricted stock units, stock rights awards and performance share awards then held by the Employee will vest (at the greater of actual performance to-date or target, for any awards subject to performance goals), and all outstanding equity awards that have not vested at the time of the Change of Control or been converted to the right to receive a cash payment pursuant to Section 6(c) will vest on the date the General Release in Section 15 becomes effective, and, if applicable, will be paid on the tenth (10th) business day following such time. Notwithstanding the foregoing, all such awards which are subject to Code Section 409A will be paid on the first (1st) business day after sixty (60) days following the Employee’s Separation from Service, provided the General Release in Section 15 has become effective; and
(c) With respect to those Unvested Equity Awards that have been exchanged pursuant to Sections 6(b) and 6(c) for the right to receive a contingent cash payment, subject to Section 11 below, the Employee shall receive a cash payment made in a lump sum on the first business day after sixty (60) days following the Employee’s Separation from Service equal to any portion of the unpaid Base Performance Share Value and Base Restricted Share Value that has not been paid pursuant to Sections 6(b) and 6(c), together with accrued but unpaid interest at the Prime Rate on such unpaid amount from the date of the Change of Control to the date of payment.
5. Entitlement to Severance .
(a) If the Employee becomes entitled to receive any severance payments or benefits described in Section 3 or Section 4 after the Employee has delivered written notice of what would otherwise have been a Qualifying Retirement to the Partnership had the Employee continued to be employed by the Partnership through the date of retirement set forth in the notice, then the amount of such payments and benefits shall be limited to (i) those that the Employee would have otherwise received had such employment continued through such date of retirement, and (ii) those provided by Section 9, if any.
(b) If the Employee dies after receiving notice from the Company that the Employee is being terminated without Cause, or after providing notice of termination for Good Reason, but prior to the date the Employee receives the payments and benefits described in Section 3 or Section 4, as the case may be, then the Employee’s estate, heirs and beneficiaries shall be entitled to the payments and benefits described in Section 3 or Section 4, as the case may be, at the same time such payments and benefits would have been paid or provided to the Employee had the Employee lived.
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6. Change of Control – Effect on Stock Rights .
(a) Except as otherwise provided in Sections 6(b) and 6(c) below (or in Sections 4(b) or 4(c), if applicable), the occurrence of a Change of Control shall not impact any existing unvested stock options, restricted stock awards, restricted stock units, stock rights awards or performance share awards (collectively, “ Unvested Equity Awards ”) unless such rights are cashed out pursuant to the terms of the applicable merger agreement or other agreement(s) pursuant to which such Change of Control is effected.
(b) With respect to Unvested Equity Awards that are performance share awards (“ Performance Awards ”), notwithstanding anything to the contrary contained in the related plan or award agreement, all of the Employee’s outstanding unvested Performance Awards shall be cancelled and, in consideration for the cancellation of such awards, the Employee shall receive a deferred contingent cash payment with respect to each such cancelled award equal to (X) the Base Performance Share Value determined for such cancelled award, plus (Y) interest on such unpaid Base Performance Share Value from the date of the Change of Control to the date of payment at the Prime Rate, such cash payment to be made on the last day of the applicable performance period for such award, provided that the Employee remains employed by the Partnership, an Affiliate, or one of their successors through the last day of the applicable performance period.
(c) With respect to Unvested Equity Awards that are not Performance Awards, if the stock underlying such awards is not readily tradable on an established securities market immediately after the Change of Control (after giving effect to any conversion, exchange or replacement pursuant to the applicable plan or award agreement of the stock underlying Unvested Equity Awards as a result of a reorganization, merger, consolidation, combination or other similar corporate transaction or event), then notwithstanding anything to the contrary contained in the related plan or award agreement, all of the Employee’s outstanding Unvested Equity Awards shall be cancelled and, in consideration for the cancellation of such awards, the Employee shall receive:
(i) a cash payment equal to (X) the fair market value of the shares underlying all of the Employee’s unvested stock options as of the date of the Change of Control, less (Y) the aggregate exercise price of such stock options, such cash payment to be made within thirty (30) days after the Change of Control; and
(ii) a deferred contingent cash payment equal to (X) the Base Restricted Share Value, plus (Y) interest on the unpaid Base Restricted Share Value from the date of the Change of Control to the date of payment at the Prime Rate, such cash payment of the Base Restricted Share Value to be made in installments on the applicable vesting dates with respect to the number of shares that would have been issued on that vesting date, plus all accrued but unpaid interest on the unpaid Base Restricted Share Value through such vesting date, provided that the Employee remains employed by the Partnership, an Affiliate, or one of their successors through the applicable date of vesting.
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7. Change of Control – Excise Tax .
(a) If in the opinion of Tax Counsel (as defined in Section 7(b)) the Employee will be subject to an excise tax under Code Section 4999 with respect to all or any portion of the payments and benefits to be made by the Company or any of its Affiliates to the Employee, whether upon a Change of Control or following a termination of the Employee’s employment, under this Agreement or otherwise (in the aggregate, “ Total Payments ”), then such parties agree that the Total Payments shall either be (i) delivered in full, or (ii) reduced to three (3) times the Employee’s “base amount” for purposes of Code Section 280G, less $1.00 (“ Scaled Back Amount ”), whichever of the foregoing results in the receipt by the Employee of the greatest benefit on an after-tax basis (taking into account the applicable federal, state and local income taxes and the excise tax). If the Employee is entitled to the Scaled Back Amount, then such payments and benefits shall be reduced or eliminated by applying the following principles, in order: (1) the payment or benefit with the higher ratio of the parachute payment value to present economic value (determined using reasonable actuarial assumptions) shall be reduced or eliminated before a payment or benefit with a lower ratio; (2) the payment or benefit with the later possible payment date shall be reduced or eliminated before a payment or benefit with an earlier payment date; and (3) cash payments shall be reduced prior to non-cash benefits; provided that if the foregoing order of reduction or elimination would violate Code Section 409A, then the reduction shall be made pro rata among the payments or benefits to be received by the Employee (on the basis of the relative present value of the parachute payments).
(b) For purposes of this Section 7, within forty (40) days after delivery of a written notice of termination by the Employee or by the Company pursuant to this Agreement within two (2) years of a Change of Control with respect to the Company (or, if an event other than termination of employment results in payment of parachute payments under Code Section 280G and it is reasonably possible that such parachute payments could result in an excise tax, within forty (40) days after such other event), the Company shall obtain, at its expense, the opinion (which need not be unqualified) of nationally recognized tax counsel (“ Tax Counsel ”) selected by the Compensation Committee of the Board, which sets forth (i) the “base amount” within the meaning of Code Section 280G; (ii) the aggregate present value of the payments in the nature of compensation to the Employee as prescribed in Code Section 280G(b)(2)(A)(ii); (iii) the amount and present value of any “excess parachute payment” within the meaning of Code Section 280G(b)(1); and (iv) as applicable, (X) the net after-tax proceeds to the Employee, taking into account the tax imposed by Code Section 4999 if the Total Payments were delivered in full, and (Y) the amount and nature of the parachute payments to be reduced or forfeited according to Section 7(a) in order for the total payments and benefits to equal the Scaled Back Amount. For purposes of such opinion, the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company’s independent auditors in accordance with the principles of Code Section 280G and regulations thereunder, which determination shall be evidenced in a certificate of such auditors addressed to the Company and the Employee. Such opinion shall be addressed to the Company and the Employee and shall be binding upon the Company, its Affiliates, and the Employee.
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8. Plan of Liquidation . If the stockholders of the Company approve a complete plan of liquidation or dissolution of the Company (“ Approved Liquidation Plan ”), all Unvested Equity Awards that are not Performance Awards will fully vest on the date of such approval and all such awards that are Performance Awards shall vest to the extent the performance goals established under such awards have been achieved on such date (as if the Employee had satisfied all employment conditions required to vest), with the corresponding performance period for such award(s) deemed completed as of the date immediately preceding the date of such approval. Shares of common stock that so vest will be deemed outstanding as of the close of business on the date of such approval, and certificates representing such shares shall be delivered to the Employee as promptly as practicable thereafter. Any Performance Awards not vesting on the date of such approval shall be immediately cancelled without consideration therefor. In addition, unless the Approved Liquidation Plan shall have been rescinded, if the Partnership terminates the Employee’s employment without Cause or the Employee terminates the Employee’s employment for Good Reason in each case following stockholder approval of the Approved Liquidation Plan, then the Employee shall receive the benefits provided in Sections 4(a), 4(b) and 4(c), as applicable.
9. Retirement and Performance Shares . If the Employee’s termination of employment constitutes a Qualifying Retirement, then the Employee’s unvested stock options, restricted stock, restricted stock units and stock rights awards (other than performance shares) will vest on the date of retirement set forth in the notice thereof, and if the Qualifying Retirement occurs on or after a Change of Control, then the provision of Section 4(c) shall also apply. Notwithstanding anything to the contrary in any related plan or award agreement, the Employee shall be entitled to exercise all vested stock options until the earlier of (a) three (3) years after the date of Qualifying Retirement, and (b) the original terms of the options. Unless an award agreement provides for more favorable treatment, upon a Qualifying Retirement, the Employee shall continue to have the right to earn unvested performance shares upon the achievement of the applicable performance goals over any remaining performance period, as if the Employee’s employment had not been terminated.
10. Death and Disability . In no event shall a termination of the Employee’s employment due to death or Disability constitute a termination by the Partnership without Cause or a termination by the Employee for Good Reason; however, upon termination of employment due to the Employee’s death or Disability, the Employee’s estate or the Employee, as applicable, shall receive the benefits provided in Section 4(b) or 4(c) with respect to unvested stock options, restricted stock, restricted stock units and stock rights awards (other than performance shares), and the Employee’s estate or the Employee, as applicable, shall continue to have the right to earn unvested performance shares upon the achievement of the applicable performance goals over any remaining performance period, as if the Employee’s employment had not been terminated. Notwithstanding anything to the contrary in any related plan or award agreement, (a) the Employee’s estate shall be entitled to exercise all vested stock options until the earlier of (i) three (3) years after termination of employment due to death, and (ii) the original term of the option, and (b) the Employee shall be entitled to exercise all vested stock options until the earlier of (i) one (1) year after termination of employment due to Disability, and (ii) the original term of the option. For purposes of this Agreement, “ Disability ” shall mean the absence of the Employee from the Employee’s duties with the Innovative Industrial Entities on a full-time basis for ninety (90) consecutive days or on a total of one hundred eighty (180) days in any twelve (12) month period, in either case as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company and reasonably acceptable to the Employee or the Employee’s legal representative.
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11. Payments to Specified Employees . Notwithstanding any other Section of this Agreement, if the Employee is a Specified Employee at the time of the Employee’s Separation from Service, payments or distribution of property to the Employee provided under this Agreement, to the extent considered amounts deferred under a non-qualified deferred compensation plan (as defined in Code Section 409A) shall be deferred until the six (6) month anniversary of such Separation from Service to the extent required in order to comply with Code Section 409A and Treasury Regulation 1.409A-3(i)(2).
12. Reductions in Base Salary . For purposes of this Agreement, in the event there is a reduction in the Employee’s base salary that would constitute the basis for a termination for Good Reason, the base salary used for purposes of calculating the severance payable pursuant to Sections 3 or 4(a), as the case may be, shall be the amounts in effect immediately prior to such reduction.
13. Other Payments and Benefits . On any termination of employment, including, without limitation, termination due to the Employee’s death or Disability (as defined in Section 10) or for Cause, the Employee shall receive any accrued but unpaid salary, reimbursement of any business or other expenses incurred prior to termination of employment but for which the Employee had not received reimbursement (provided that such expenses have been previously approved in writing or comply with the terms of any expense reimbursement policy then in effect), and any other rights, compensation and/or benefits as may be due the Employee in accordance with the terms and provisions of any agreements, plans or programs of the Company or the Partnership (but in no event shall the Employee be entitled to duplicative rights, compensation and/or benefits).
14. Set Off; Mitigation . The obligation of the Company or the Partnership to pay or provide the Employee the amounts or benefits under this Agreement shall be subject to set-off, counterclaim or recoupment of amounts owed by the Employee to the Company or the Partnership. In addition, except as provided in Section 7 with respect to the Scaled Back Amount, if applicable, the Employee shall not be required to mitigate the amount of any payments or benefits provided to the Employee hereunder by securing other employment or otherwise, nor will such payments and/or benefits be reduced by reason of the Employee securing other employment or for any other reason.
15. Release . Notwithstanding any provision herein to the contrary, none of the Innovative Industrial Entities shall have any obligation to pay any amount or provide any benefit (other than those amounts set forth in Section 13), as the case may be, under this Agreement, unless the Employee executes, delivers to the Partnership, and does not revoke (to the extent the Employee is allowed to do so as set forth in the General Release), a General Release within sixty (60) days of the Employee’s termination of employment.
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16. Restrictive Covenants and Consulting Arrangement .
(a) The Employee will hold in a fiduciary capacity all secret or confidential information, knowledge or data relating to any Innovative Industrial Entity, and each of their respective businesses (the “ Confidential Information ”), except in furtherance of the business of the Innovative Industrial Entities or except as may be required by law. Additionally, and without limiting the foregoing, the Employee agrees not to participate in or facilitate the dissemination to the media or any other third party (i) of the Confidential Information, or (ii) of any damaging or defamatory information concerning any Innovative Industrial Entity or the Employee’s experiences as an employee of any Innovative Industrial Entity, without the Company’s prior written consent, except as may be required by law. Notwithstanding the foregoing, this Section 16(a) does not apply to information which is already in the public domain other than pursuant to acts of the Employee or representatives of the Employee in violation of this Agreement.
(b) During the Employee’s employment and during the one (1) year period after the date that the Employee ceases to be employed by any of the Innovative Industrial Entities for any reason (the “ Termination Date ”), the Employee agrees that the Employee shall not directly or knowingly and intentionally through another party recruit, induce, solicit or assist any other Person in recruiting, inducing or soliciting (A) any other employee of any Innovative Industrial Entity to leave such employment or (B) any other Person with which any Innovative Industrial Entity was actively conducting negotiations for employment on the Termination Date.
(c) For a six (6) month period following any termination of employment, the Employee agrees to make himself available and, upon and as requested by the Company or the Partnership from time to time, to provide consulting services with respect to any projects the Employee was involved in prior to such termination and/or to provide such other consulting services as the Company or the Partnership may reasonably request. The Employee will be reimbursed for reasonable travel and miscellaneous expenses incurred in connection with the provision of requested consulting services hereunder. The Company or the Partnership will provide the Employee reasonable advance notice of any request to provide consulting services, and will make all reasonable accommodations necessary to prevent the Employee’s commitment hereunder from materially interfering with the Employee’s employment obligations, if any. In no event will the Employee be required to provide more than twenty (20) hours of consulting services in any one month to the Company and the Partnership pursuant to this provision.
(d) The parties agree that any breach of this Section 16 will result in irreparable harm to the non-breaching party which cannot be fully compensated by monetary damages and accordingly, in the event of any breach or threatened breach of this Section 16, the non-breaching party shall be entitled to injunctive relief. Should any provision of this Section 16 be determined by a court of law or equity to be unreasonable or unenforceable, the parties agree that to the extent it is valid and enforceable, they shall be bound by the same, the intention of the parties being that the parties be given the broadest protection allowed by law or equity with respect to such provision.
17. Survival . The provisions of Sections 3 through 22 shall survive the termination of this Agreement to the extent necessary to enforce the rights and obligations described therein.
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18. Compliance with Code Section 409A . For purposes of applying the provisions of Code Section 409A to this Agreement, each separately identified amount to which the Employee is entitled under this Agreement shall be treated as a separate payment. In addition, to the extent permissible under Code Section 409A, any series of installment payments under this Agreement shall be treated as a right to a series of separate payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be within the sole discretion of the Company or the Partnership, as the case may be.
19. Withholding . The Company or the Partnership shall be entitled to withhold from all payments to the Employee hereunder all amounts required to be withheld under applicable local, state or federal income and employment tax laws.
20. Clawbacks . All incentive-based compensation paid to the Employee hereunder will be subject to the policies of the Company and the Partnership regarding clawbacks of erroneously awarded incentive-based compensation triggered by an accounting restatement, as required by law and approved by the Board in the case of the Company.
21. Dispute Resolution . Any dispute, controversy or claim between the Company or the Partnership and the Employee or other Person arising out of or relating to this Agreement shall be settled by arbitration conducted in San Diego, California, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association then in force and California law within thirty (30) days after written notice from one party to the other requesting that the matter be submitted to arbitration; provided that this Section 21 shall not apply to, and the Company and the Partnership shall be free to seek, injunctive or other equitable relief with respect to any actual or threatened violation by the Employee of his or her obligations under Section 16 hereof in any court of competent jurisdiction. The arbitration decision or award shall be binding and final upon the parties. The arbitration award shall be in writing and shall set forth the basis thereof. The parties hereto shall abide by all awards rendered in such arbitration proceedings, and all such awards may be enforced and executed upon in any court having jurisdiction over the party against whom enforcement of such award is sought. Each party shall be responsible for its own costs and expenses in any dispute or proceeding regarding the enforcement of this Agreement.
22. Miscellaneous . This Agreement shall be construed and enforced in accordance with the laws of the State of California (exclusive of conflict of law principles). In the event that any provision of this Agreement shall be invalid, illegal or unenforceable, the remainder shall not be affected thereby. This Agreement supersedes and terminates any prior employment agreement, severance agreement, change of control agreement or non-competition agreement between the Company or the Partnership and the Employee. It is intended that the payments and benefits provided under this Agreement are in lieu of, and not in addition to, termination, severance or change of control payments and benefits provided under the other termination or severance plans, policies or agreements, if any, of the Company or the Partnership. This Agreement shall be binding upon and inure to the benefit of the Employee and the Employee’s heirs and personal representatives, the Company and the Partnership, and their successors, assigns and legal representatives. Headings herein are inserted for convenience and shall not affect the interpretation of any provision of the Agreement. References to sections of the Exchange Act or the Code, or rules or regulations related thereto, shall be deemed to refer to any successor provisions, as applicable. The Company and the Partnership will require any successors thereto (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to expressly assume and agree to perform under this Agreement in the same manner and to the same extent that the Company and the Partnership would be required to perform if no such succession had taken place. This Agreement may not be terminated, amended, or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives.
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23. Counterparts . This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
(Signature pages to follow)
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IN WITNESS WHEREOF , the parties hereto have executed this Agreement as of the day and year first above written.
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INNOVATIVE INDUSTRIAL PROPERTIES, INC. | |
By: | ||
[ insert name ] | ||
[ insert title ] | ||
IIP OPERATING PARTNERSHIP, LP | ||
By: | INNOVATIVE INDUSTRIAL PROPERTIES, INC. | |
Its General Partner | ||
By: | ||
[ insert name ] | ||
[ insert title ] | ||
EMPLOYEE | ||
Brian J. Wolfe |
Exhibit 10.8
SEVERANCE AND CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT, effective as of the _____ day of _______________, 2016, is by and between Innovative Industrial Properties, Inc., a Maryland corporation (the “ Company ”), IIP Operating Partnership, LP, a Delaware limited partnership (the “ Partnership ”), and Andrew Fenton (the “ Employee ”).
WHEREAS, to induce the Employee to remain as an executive officer of the Company and a key employee of the Partnership, the Company, the Partnership and the Employee desire to enter into this Severance and Change Of Control Agreement (the “ Agreement ”); and
WHEREAS, the parties agree that the restrictive covenants underlying certain of the Employee’s obligations under this Agreement are necessary to protect the goodwill or other business interests of the Innovative Industrial Entities (as defined below) and that such restrictive covenants do not impose a greater restraint than is necessary to protect such goodwill or other business interests.
NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, including the Employee’s agreement to continue as an executive officer of the Company and as an employee of the Partnership, the Employee’s agreement to provide consulting services following termination of employment pursuant to the terms hereof, and the restrictive covenants contained herein, the Employee, the Company, and the Partnership agree as follows:
1. Definitions . The following words, when capitalized in this Agreement, shall have the meanings ascribed below and shall supersede the meanings given to any such terms in any other award agreement or related plan document in effect prior to the date of this Agreement, including but not limited to the definitions of “Cause,” “Change of Control,” or “Good Reason”:
(a) “ Affiliate ” shall have the meaning given to such term in Rule 12b-2 of the General Rules and Regulations of the Exchange Act.
(b) “ Average Annual Cash Bonus ” means the average of the annual cash bonus, if any, paid or payable to the Employee with respect to the three (3) most recently completed calendar years prior to termination of employment (or the period of the Employee’s employment, if shorter).
(c) “ Base Performance Share Value ” means the fair market value as of the date of the Change of Control of the number of unvested shares underlying the Employee’s outstanding performance share awards that would have been earned pursuant to the terms of the award if the performance period for each such award ended immediately prior to the Change of Control. For such purposes, the level of achievement of the performance goals established for each such award will be determined on the date immediately prior to the Change of Control as follows: (X) if the goal is a market-based goal, such as total stockholder return or stock price, then the actual performance to date shall be used, and (Y) if the goal is not a market-based goal, then the annualized forecasted number for such goal as most recently prepared by the Company prior to the date of the Change of Control shall be used and treated as if it were actual performance.
(d) “ Base Restricted Share Value ” means the fair market value as of the date of the Change of Control of the shares underlying all of the Employee’s unvested time-vesting restricted stock awards, restricted stock units or stock rights awards outstanding immediately prior to the Change of Control.
(e) “ Board ” means the Board of Directors of the Company.
(f) “ Cause ” means the termination of the Employee’s employment with all Innovative Industrial Entities by action of the Board or its delegate for one or more of the following reasons:
(i) The Employee’s willful and continued failure substantially to perform his duties with the Innovative Industrial Entities (other than any such failure resulting from the Employee’s incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Employee by the Board, which demand specifically identifies the manner in which the Board believes that the Employee has not substantially performed his duties;
(ii) The Employee’s willful commission of an act of fraud or dishonesty resulting in economic or financial damage to the Innovative Industrial Entities;
(iii) The Employee’s conviction of, or entry by the Employee of a guilty or no contest plea to, the commission of a felony or a crime involving moral turpitude;
(iv) A willful breach by the Employee of his fiduciary duty to the Company which results in economic or other damage to the Innovative Industrial Entities; or
(v) The Employee’s willful and material breach of the Employee’s covenants set forth in this Section 16 of this Agreement.
(g) “ Change of Control ” means the occurrence of an event or series of events which qualify as a change in control event for purposes of Code Section 409A and Treasury Regulation §1.409A-3(i)(5), including:
(i) A change in the ownership of the Company, which shall occur on the date that any one Person, or more than one Person Acting as a Group (as defined below), other than Excluded Person(s) (as defined below), acquires ownership of the stock of the Company that, together with the stock then held by such Person or group, constitutes more than fifty percent (50%) of the total fair market value of the stock of the Company. However, if any one Person or more than one Person Acting as a Group is considered to own more than fifty (50%) of the total fair market value of the stock of the Company, the acquisition of additional stock by the same Person or Persons is not considered to cause a Change of Control.
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(ii) A change in the effective control of the Company, which shall occur on the date that:
(1) Any one Person, or more than one Person Acting as a Group, other than Excluded Person(s), acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such Person or Persons) ownership of stock of the Company possessing thirty percent (30%) or more of the total voting power of the stock of the Company. However, if any one Person or more than one Person Acting as a Group is considered to own more than thirty percent (30%) of the total voting power of the stock of the Company, the acquisition of additional voting stock by the same Person or Persons is not considered to cause a Change of Control; or
(2) A majority of the members of the Board is replaced during any twelve (12) month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election.
(iii) A change in the ownership of a substantial portion of the Company’s assets, which shall occur on the date that any one Person, or more than one Person Acting as a Group, other than Excluded Person(s), acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such Person or Persons) assets from the Company that have a total Gross Fair Market Value (as defined below) equal to more than fifty percent (50%) of the total Gross Fair Market Value of all the assets of the Company immediately prior to such acquisition or acquisitions, other than an Excluded Transaction (as defined below).
For purposes of this Subsection (g):
“ Gross Fair Market Value ” means the value of the assets of the Company, or the value of the assets being disposed of, as applicable, determined without regard to any liabilities associated with such assets.
Persons will not be considered to be “ Acting as a Group ” solely because they purchase or own stock of the Company at the same time, or as a result of the same public offering, or solely because they purchase assets of the Company at the same time, or as a result of the same public offering, as the case may be. However, Persons will be considered to be Acting as a Group if they (i) are owners of an entity that enters into a merger, consolidation, purchase or acquisition of assets, or similar business transaction with the Company, or (ii) do so within the meaning of Section 13(d) of the Exchange Act, including any group acting for the purpose of acquiring, holding or disposing of securities (within the meaning of Rule 13d-5(b)(1) under the Exchange Act).
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The term “ Excluded Transaction ” means any transaction in which assets are transferred to: (A) a stockholder of the Company (determined immediately before the asset transfer) in exchange for or with respect to its stock; (B) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the Company (determined after the asset transfer); (C) a Person, or more than one Person Acting as a Group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company (determined after the asset transfer); or (D) an entity at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a Person described in clause (C) (determined after the asset transfer).
The term “ Excluded Person(s) ” means (A) the Company or any Innovative Industrial Entity; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Innovative Industrial Entity; (C) an underwriter temporarily holding securities pursuant to an offering of such securities; or (D) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock in the Company.
The term “ Change of Control ” as defined above shall be construed in accordance with Code Section 409A and the regulations promulgated thereunder. In no event shall a transaction described above constitute a “Change of Control” for purposes of this Agreement unless such transaction also satisfies the requirement to be a change in the ownership or effective control of a corporation, or a change in the ownership of a substantial portion of the assets of a corporation, as each of those terms are defined under Code Section 409A and the regulations promulgated thereunder.
(h) “ Code ” means the Internal Revenue Code of 1986, as amended.
(i) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.
(j) “ General Release ” means (i) a release of the Innovative Industrial Entities, in such form as the Partnership may reasonably request, of all claims against the Innovative Industrial Entities relating to the Employee’s employment and termination thereof, and (ii) an agreement to continue to comply with, and be bound by, the provisions of Section 16 hereof.
(k) “ Good Reason ” means any one or more of the following conditions:
(i) any material diminution of the Employee’s authority, duties or responsibilities;
(ii) a material diminution of the Employee’s annual base salary;
(iii) a material change in the geographic location at which the Employee must perform the Employee’s duties and responsibilities; or
(iv) any other action or inaction by the Company or the Partnership that constitutes a material breach of this Agreement or any other agreement pursuant to which the Employee provides services to the Company or the Partnership.
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A termination of the Employee’s employment for Good Reason shall be effective only if (X) such condition was not consented to by the Employee in advance or subsequently ratified by the Employee in writing, (Y) such condition remains in effect thirty (30) days after the Employee gives written notice to the Board of the Employee’s intention to terminate his employment for Good Reason, which notice specifically identifies such condition, and (Z) the Employee gives the notice referred to in (Y) above within ninety (90) days of the initial existence of such condition. If the Company or the Partnership, as applicable, does not cure the condition within the thirty (30) day cure period described in (Y) above, then the Employee’s termination will occur on the day immediately following the end of the cure period. If the Company or the Partnership, as applicable, cures the condition within such thirty (30) day cure period, then the Employee will be deemed to have withdrawn his notice of termination effective as of the date the cure is effected.
(l) “ Innovative Industrial Entity ” or “ Innovative Industrial Entities ” means the Company, the Partnership, any of their Affiliates, and any other entities that along with the Company or the Partnership is considered a single employer pursuant to Code Section 414(b) or (c) and the Treasury regulations promulgated thereunder, determined by applying the phrase “at least 50 percent” in place of the phrase “at least 80 percent” each place it appears in such Treasury regulations or Code Section 1563(a).
(m) “ Medical Benefits ” shall mean the monthly fair market value of benefits provided to the Employee and the Employee’s dependents under the major medical, dental and vision benefit plans sponsored and maintained by the Partnership, at the level of coverage in effect for such persons immediately prior to the Employee’s termination of employment date. The “monthly fair market value” of such benefits shall be equal to the monthly cost (including any applicable administrative fee) to the Employee as if the Employee elected COBRA continuation coverage at the level of coverage in effect at such time for the Employee and the Employee’s dependents at their own expense.
(n) “ Person ” means a “person” as used in Sections 3(a)(9) and 13(d) of the Exchange Act or any group of Persons acting in concert that would be considered “persons acting as a group” within the meaning of Treasury Regulation §1.409A-3(i)(5).
(o) “ Prime Rate ” means an annual rate, compounding annually, equal to the prime rate, as reported in The Wall Street Journal on the date of the Change of Control, or if not reported on that date, the last preceding date on which so reported, which rate shall be adjusted on each January 1 to the prime rate then in effect and shall remain in effect for the year.
(p) “ Qualifying Retirement ” means the Employee’s voluntary termination of employment after the Employee has (i) attained (X) age sixty-five (65), (Y) age fifty-five (55) with ten (10) Years of Service as a full-time employee of the Partnership or any of its Affiliates, or (Z) an age which, when added to such Years of Service of the Employee equals at least seventy-five (75), and (ii) previously delivered a written notice of retirement to the Partnership and on the date of retirement the Employee has satisfied the minimum applicable advance written notice requirement set forth below:
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Age at Voluntary Termination |
Number of Years of Advance Notice |
|
58 or younger | 3 years | |
59 | 2 years | |
60 or older | 1 year |
By way of illustration, and without limiting the foregoing, if (i) the Employee is eligible to retire at age fifty-nine (59) after ten (10) Years of Service, (ii) the Employee gives two (2) years notice at age fifty-eight (58) that the Employee intends to retire at age sixty (60), and (iii) the Employee later terminates employment at age fifty-nine (59), then the Employee’s retirement at age fifty-nine (59) would not constitute a Qualifying Retirement. However, if (i) the Employee is eligible to retire at age fifty-nine (59) after ten (10) Years of Service, (ii) the Employee gives two (2) years notice at age fifty-eight (58) that the Employee intends to retire at age sixty (60), and (iii) the Employee terminates employment upon reaching age sixty (60), then the Employee’s retirement at age sixty (60) would constitute a Qualifying Retirement.
(q) “ Separation from Service ” means the termination of the Employee’s employment with all Innovative Industrial Entities, provided that, notwithstanding such termination of the employment relationship between the Employee and all Innovative Industrial Entities, the Employee shall not be deemed to have had a Separation from Service where it is reasonably anticipated that the level of bona fide services that the Employee will perform (whether as an employee or independent contractor) following such termination from the Partnership and all Innovative Industrial Entities would be twenty percent (20%) or more of the average level of bona fide services performed by the Employee (whether as an employee or independent contractor) for the Innovative Industrial Entities over the immediately preceding thirty-six (36) month period (or such lesser period of actual service). In such event, Separation from Service shall mean the permanent reduction of the level of bona fide services to be performed by the Employee (whether as an employee or independent contractor) to a level that is less than twenty percent (20%) of the average level of bona fide services performed by the Employee (whether as an employee or independent contractor) during the thirty-six (36) month period (or such lesser period of actual service) immediately prior to the termination of the Employee’s employment relationship. A Separation from Service shall not be deemed to have occurred if the Employee is absent from active employment due to military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed the greater of (i) six (6) months or (ii) the period during which the Employee’s right to reemployment by any Innovative Industrial Entity is provided either by statute or contract.
(r) “ Specified Employee ” means an employee of any Innovative Industrial Entity who is a “specified employee” as defined in Code Section 409A(a)(2)(b)(i) and Treasury Regulation §1.409A-1(i). If the Employee is a key employee as of the applicable identification date, the Employee shall be treated as a Specified Employee for the twelve (12) month period beginning on the first day of the fourth month following such identification date. The applicable identification date for purposes of this Agreement shall be September 30 of each year.
(s) “ Unvested Equity Award ” has the meaning given to such term in Section 6(a).
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(t) “ Years of Service ” means the Employee’s total complete years of employment with an Innovative Industrial Entity, including years of employment with an entity that is acquired by an Innovative Industrial Entity prior to such acquisition. For this purpose, a “complete year of employment” shall begin on the Employee’s date of hire and end on each subsequent anniversary of such date.
2. Term of the Agreement . The term of this Agreement shall begin on the date hereof and end at 11:59 p.m. on December 31, 2019 and thereafter shall automatically renew for successive three (3) year terms unless either party delivers written notice of non-renewal to the other party at least ninety (90) days prior to the end of the then current term; provided, however, that if a Change of Control has occurred during the original or any extended term (including any extension resulting from a prior Change of Control), the term of the Agreement shall end no earlier than twenty-four (24) calendar months after the end of the calendar month in which the Change of Control occurs.
3. No Change of Control – Severance . Except in circumstances in which the Employee would be entitled to payments and benefits in connection with a Change of Control as provided in Section 4 below, in the event that during the term of this Agreement the Employee has a Separation from Service as a result of the Innovative Industrial Entities terminating the Employee’s employment without Cause or the Employee terminating the Employee’s employment for Good Reason, subject to Sections 11, 15 and 16 below:
(a) The Partnership shall pay to the Employee an amount equal to (i) 2.0 times the sum of (A) the Employee’s annual base salary in effect on the date the Employee’s employment terminates, plus (B) the Employee’s Average Annual Cash Bonus, plus (ii) eighteen (18) months of the Employee’s Medical Benefits. Payment shall be made in a lump sum on the first business day after sixty (60) days following the Employee’s Separation from Service;
(b) All of the Employee’s outstanding unvested stock options, restricted stock awards, restricted stock units and stock rights awards that vest solely on the basis of time shall become vested on a pro-rated basis, based on the portion of the vesting period that has elapsed as of the date of the Employee’s Separation from Service; and
(c) All of the Employee’s outstanding performance share awards shall be earned as of the date of Separation from Service based on the level of achievement of the performance goals established for such awards as of such date, but then pro-rated based on the portion of the performance period that has elapsed as of the date of the Employee’s Separation from Service. For purposes hereof, the level of achievement of the performance goals established for each such award will be determined on the date immediately prior to the Separation from Service as follows: (i) if the goal is a market-based goal, such as total stockholder return or stock price, then the actual performance to date shall be used, and (ii) if the goal is not a market-based goal, then the level of achievement of such goal shall be (X) based on the most recently reported number(s) by the Company in its reports filed with the Securities and Exchange Commission or (Y) if such numbers are not so filed, based on the numbers as prepared internally by the Company for the quarter ending prior to the date of the Separation from Service.
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Any shares issuable under awards that vest or are earned pursuant to subsections (b) and (c) shall be issued on the same date as the cash severance payment is made pursuant to subsection (a).
4. Change of Control – Severance . In the event that during the term of this Agreement the Innovative Industrial Entities terminate the Employee’s employment without Cause or the Employee terminates the Employee’s employment for Good Reason, in each case within two (2) years following a Change of Control, the following provisions shall apply:
(a) The Partnership shall pay to the Employee the amount set forth in Section 3(a);
(b) All outstanding unvested stock options, restricted stock, restricted stock units, stock rights awards and performance share awards then held by the Employee will vest (at the greater of actual performance to-date or target, for any awards subject to performance goals), and all outstanding equity awards that have not vested at the time of the Change of Control or been converted to the right to receive a cash payment pursuant to Section 6(c) will vest on the date the General Release in Section 15 becomes effective, and, if applicable, will be paid on the tenth (10th) business day following such time. Notwithstanding the foregoing, all such awards which are subject to Code Section 409A will be paid on the first (1st) business day after sixty (60) days following the Employee’s Separation from Service, provided the General Release in Section 15 has become effective; and
(c) With respect to those Unvested Equity Awards that have been exchanged pursuant to Sections 6(b) and 6(c) for the right to receive a contingent cash payment, subject to Section 11 below, the Employee shall receive a cash payment made in a lump sum on the first business day after sixty (60) days following the Employee’s Separation from Service equal to any portion of the unpaid Base Performance Share Value and Base Restricted Share Value that has not been paid pursuant to Sections 6(b) and 6(c), together with accrued but unpaid interest at the Prime Rate on such unpaid amount from the date of the Change of Control to the date of payment.
5. Entitlement to Severance .
(a) If the Employee becomes entitled to receive any severance payments or benefits described in Section 3 or Section 4 after the Employee has delivered written notice of what would otherwise have been a Qualifying Retirement to the Partnership had the Employee continued to be employed by the Partnership through the date of retirement set forth in the notice, then the amount of such payments and benefits shall be limited to (i) those that the Employee would have otherwise received had such employment continued through such date of retirement, and (ii) those provided by Section 9, if any.
(b) If the Employee dies after receiving notice from the Company that the Employee is being terminated without Cause, or after providing notice of termination for Good Reason, but prior to the date the Employee receives the payments and benefits described in Section 3 or Section 4, as the case may be, then the Employee’s estate, heirs and beneficiaries shall be entitled to the payments and benefits described in Section 3 or Section 4, as the case may be, at the same time such payments and benefits would have been paid or provided to the Employee had the Employee lived.
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6. Change of Control – Effect on Stock Rights .
(a) Except as otherwise provided in Sections 6(b) and 6(c) below (or in Sections 4(b) or 4(c), if applicable), the occurrence of a Change of Control shall not impact any existing unvested stock options, restricted stock awards, restricted stock units, stock rights awards or performance share awards (collectively, “ Unvested Equity Awards ”) unless such rights are cashed out pursuant to the terms of the applicable merger agreement or other agreement(s) pursuant to which such Change of Control is effected.
(b) With respect to Unvested Equity Awards that are performance share awards (“ Performance Awards ”), notwithstanding anything to the contrary contained in the related plan or award agreement, all of the Employee’s outstanding unvested Performance Awards shall be cancelled and, in consideration for the cancellation of such awards, the Employee shall receive a deferred contingent cash payment with respect to each such cancelled award equal to (X) the Base Performance Share Value determined for such cancelled award, plus (Y) interest on such unpaid Base Performance Share Value from the date of the Change of Control to the date of payment at the Prime Rate, such cash payment to be made on the last day of the applicable performance period for such award, provided that the Employee remains employed by the Partnership, an Affiliate, or one of their successors through the last day of the applicable performance period.
(c) With respect to Unvested Equity Awards that are not Performance Awards, if the stock underlying such awards is not readily tradable on an established securities market immediately after the Change of Control (after giving effect to any conversion, exchange or replacement pursuant to the applicable plan or award agreement of the stock underlying Unvested Equity Awards as a result of a reorganization, merger, consolidation, combination or other similar corporate transaction or event), then notwithstanding anything to the contrary contained in the related plan or award agreement, all of the Employee’s outstanding Unvested Equity Awards shall be cancelled and, in consideration for the cancellation of such awards, the Employee shall receive:
(i) a cash payment equal to (X) the fair market value of the shares underlying all of the Employee’s unvested stock options as of the date of the Change of Control, less (Y) the aggregate exercise price of such stock options, such cash payment to be made within thirty (30) days after the Change of Control; and
(ii) a deferred contingent cash payment equal to (X) the Base Restricted Share Value, plus (Y) interest on the unpaid Base Restricted Share Value from the date of the Change of Control to the date of payment at the Prime Rate, such cash payment of the Base Restricted Share Value to be made in installments on the applicable vesting dates with respect to the number of shares that would have been issued on that vesting date, plus all accrued but unpaid interest on the unpaid Base Restricted Share Value through such vesting date, provided that the Employee remains employed by the Partnership, an Affiliate, or one of their successors through the applicable date of vesting.
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7. Change of Control – Excise Tax .
(a) If in the opinion of Tax Counsel (as defined in Section 7(b)) the Employee will be subject to an excise tax under Code Section 4999 with respect to all or any portion of the payments and benefits to be made by the Company or any of its Affiliates to the Employee, whether upon a Change of Control or following a termination of the Employee’s employment, under this Agreement or otherwise (in the aggregate, “ Total Payments ”), then such parties agree that the Total Payments shall either be (i) delivered in full, or (ii) reduced to three (3) times the Employee’s “base amount” for purposes of Code Section 280G, less $1.00 (“ Scaled Back Amount ”), whichever of the foregoing results in the receipt by the Employee of the greatest benefit on an after-tax basis (taking into account the applicable federal, state and local income taxes and the excise tax). If the Employee is entitled to the Scaled Back Amount, then such payments and benefits shall be reduced or eliminated by applying the following principles, in order: (1) the payment or benefit with the higher ratio of the parachute payment value to present economic value (determined using reasonable actuarial assumptions) shall be reduced or eliminated before a payment or benefit with a lower ratio; (2) the payment or benefit with the later possible payment date shall be reduced or eliminated before a payment or benefit with an earlier payment date; and (3) cash payments shall be reduced prior to non-cash benefits; provided that if the foregoing order of reduction or elimination would violate Code Section 409A, then the reduction shall be made pro rata among the payments or benefits to be received by the Employee (on the basis of the relative present value of the parachute payments).
(b) For purposes of this Section 7, within forty (40) days after delivery of a written notice of termination by the Employee or by the Company pursuant to this Agreement within two (2) years of a Change of Control with respect to the Company (or, if an event other than termination of employment results in payment of parachute payments under Code Section 280G and it is reasonably possible that such parachute payments could result in an excise tax, within forty (40) days after such other event), the Company shall obtain, at its expense, the opinion (which need not be unqualified) of nationally recognized tax counsel (“ Tax Counsel ”) selected by the Compensation Committee of the Board, which sets forth (i) the “base amount” within the meaning of Code Section 280G; (ii) the aggregate present value of the payments in the nature of compensation to the Employee as prescribed in Code Section 280G(b)(2)(A)(ii); (iii) the amount and present value of any “excess parachute payment” within the meaning of Code Section 280G(b)(1); and (iv) as applicable, (X) the net after-tax proceeds to the Employee, taking into account the tax imposed by Code Section 4999 if the Total Payments were delivered in full, and (Y) the amount and nature of the parachute payments to be reduced or forfeited according to Section 7(a) in order for the total payments and benefits to equal the Scaled Back Amount. For purposes of such opinion, the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company’s independent auditors in accordance with the principles of Code Section 280G and regulations thereunder, which determination shall be evidenced in a certificate of such auditors addressed to the Company and the Employee. Such opinion shall be addressed to the Company and the Employee and shall be binding upon the Company, its Affiliates, and the Employee.
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8. Plan of Liquidation . If the stockholders of the Company approve a complete plan of liquidation or dissolution of the Company (“ Approved Liquidation Plan ”), all Unvested Equity Awards that are not Performance Awards will fully vest on the date of such approval and all such awards that are Performance Awards shall vest to the extent the performance goals established under such awards have been achieved on such date (as if the Employee had satisfied all employment conditions required to vest), with the corresponding performance period for such award(s) deemed completed as of the date immediately preceding the date of such approval. Shares of common stock that so vest will be deemed outstanding as of the close of business on the date of such approval, and certificates representing such shares shall be delivered to the Employee as promptly as practicable thereafter. Any Performance Awards not vesting on the date of such approval shall be immediately cancelled without consideration therefor. In addition, unless the Approved Liquidation Plan shall have been rescinded, if the Partnership terminates the Employee’s employment without Cause or the Employee terminates the Employee’s employment for Good Reason in each case following stockholder approval of the Approved Liquidation Plan, then the Employee shall receive the benefits provided in Sections 4(a), 4(b) and 4(c), as applicable.
9. Retirement and Performance Shares . If the Employee’s termination of employment constitutes a Qualifying Retirement, then the Employee’s unvested stock options, restricted stock, restricted stock units and stock rights awards (other than performance shares) will vest on the date of retirement set forth in the notice thereof, and if the Qualifying Retirement occurs on or after a Change of Control, then the provision of Section 4(c) shall also apply. Notwithstanding anything to the contrary in any related plan or award agreement, the Employee shall be entitled to exercise all vested stock options until the earlier of (a) three (3) years after the date of Qualifying Retirement, and (b) the original terms of the options. Unless an award agreement provides for more favorable treatment, upon a Qualifying Retirement, the Employee shall continue to have the right to earn unvested performance shares upon the achievement of the applicable performance goals over any remaining performance period, as if the Employee’s employment had not been terminated.
10. Death and Disability . In no event shall a termination of the Employee’s employment due to death or Disability constitute a termination by the Partnership without Cause or a termination by the Employee for Good Reason; however, upon termination of employment due to the Employee’s death or Disability, the Employee’s estate or the Employee, as applicable, shall receive the benefits provided in Section 4(b) or 4(c) with respect to unvested stock options, restricted stock, restricted stock units and stock rights awards (other than performance shares), and the Employee’s estate or the Employee, as applicable, shall continue to have the right to earn unvested performance shares upon the achievement of the applicable performance goals over any remaining performance period, as if the Employee’s employment had not been terminated. Notwithstanding anything to the contrary in any related plan or award agreement, (a) the Employee’s estate shall be entitled to exercise all vested stock options until the earlier of (i) three (3) years after termination of employment due to death, and (ii) the original term of the option, and (b) the Employee shall be entitled to exercise all vested stock options until the earlier of (i) one (1) year after termination of employment due to Disability, and (ii) the original term of the option. For purposes of this Agreement, “ Disability ” shall mean the absence of the Employee from the Employee’s duties with the Innovative Industrial Entities on a full-time basis for ninety (90) consecutive days or on a total of one hundred eighty (180) days in any twelve (12) month period, in either case as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company and reasonably acceptable to the Employee or the Employee’s legal representative.
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11. Payments to Specified Employees . Notwithstanding any other Section of this Agreement, if the Employee is a Specified Employee at the time of the Employee’s Separation from Service, payments or distribution of property to the Employee provided under this Agreement, to the extent considered amounts deferred under a non-qualified deferred compensation plan (as defined in Code Section 409A) shall be deferred until the six (6) month anniversary of such Separation from Service to the extent required in order to comply with Code Section 409A and Treasury Regulation 1.409A-3(i)(2).
12. Reductions in Base Salary . For purposes of this Agreement, in the event there is a reduction in the Employee’s base salary that would constitute the basis for a termination for Good Reason, the base salary used for purposes of calculating the severance payable pursuant to Sections 3 or 4(a), as the case may be, shall be the amounts in effect immediately prior to such reduction.
13. Other Payments and Benefits . On any termination of employment, including, without limitation, termination due to the Employee’s death or Disability (as defined in Section 10) or for Cause, the Employee shall receive any accrued but unpaid salary, reimbursement of any business or other expenses incurred prior to termination of employment but for which the Employee had not received reimbursement (provided that such expenses have been previously approved in writing or comply with the terms of any expense reimbursement policy then in effect), and any other rights, compensation and/or benefits as may be due the Employee in accordance with the terms and provisions of any agreements, plans or programs of the Company or the Partnership (but in no event shall the Employee be entitled to duplicative rights, compensation and/or benefits).
14. Set Off; Mitigation . The obligation of the Company or the Partnership to pay or provide the Employee the amounts or benefits under this Agreement shall be subject to set-off, counterclaim or recoupment of amounts owed by the Employee to the Company or the Partnership. In addition, except as provided in Section 7 with respect to the Scaled Back Amount, if applicable, the Employee shall not be required to mitigate the amount of any payments or benefits provided to the Employee hereunder by securing other employment or otherwise, nor will such payments and/or benefits be reduced by reason of the Employee securing other employment or for any other reason.
15. Release . Notwithstanding any provision herein to the contrary, none of the Innovative Industrial Entities shall have any obligation to pay any amount or provide any benefit (other than those amounts set forth in Section 13), as the case may be, under this Agreement, unless the Employee executes, delivers to the Partnership, and does not revoke (to the extent the Employee is allowed to do so as set forth in the General Release), a General Release within sixty (60) days of the Employee’s termination of employment.
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16. Restrictive Covenants and Consulting Arrangement .
(a) The Employee will hold in a fiduciary capacity all secret or confidential information, knowledge or data relating to any Innovative Industrial Entity, and each of their respective businesses (the “ Confidential Information ”), except in furtherance of the business of the Innovative Industrial Entities or except as may be required by law. Additionally, and without limiting the foregoing, the Employee agrees not to participate in or facilitate the dissemination to the media or any other third party (i) of the Confidential Information, or (ii) of any damaging or defamatory information concerning any Innovative Industrial Entity or the Employee’s experiences as an employee of any Innovative Industrial Entity, without the Company’s prior written consent, except as may be required by law. Notwithstanding the foregoing, this Section 16(a) does not apply to information which is already in the public domain other than pursuant to acts of the Employee or representatives of the Employee in violation of this Agreement.
(b) During the Employee’s employment and during the one (1) year period after the date that the Employee ceases to be employed by any of the Innovative Industrial Entities for any reason (the “ Termination Date ”), the Employee agrees that the Employee shall not directly or knowingly and intentionally through another party recruit, induce, solicit or assist any other Person in recruiting, inducing or soliciting (A) any other employee of any Innovative Industrial Entity to leave such employment or (B) any other Person with which any Innovative Industrial Entity was actively conducting negotiations for employment on the Termination Date.
(c) For a six (6) month period following any termination of employment, the Employee agrees to make himself available and, upon and as requested by the Company or the Partnership from time to time, to provide consulting services with respect to any projects the Employee was involved in prior to such termination and/or to provide such other consulting services as the Company or the Partnership may reasonably request. The Employee will be reimbursed for reasonable travel and miscellaneous expenses incurred in connection with the provision of requested consulting services hereunder. The Company or the Partnership will provide the Employee reasonable advance notice of any request to provide consulting services, and will make all reasonable accommodations necessary to prevent the Employee’s commitment hereunder from materially interfering with the Employee’s employment obligations, if any. In no event will the Employee be required to provide more than twenty (20) hours of consulting services in any one month to the Company and the Partnership pursuant to this provision.
(d) The parties agree that any breach of this Section 16 will result in irreparable harm to the non-breaching party which cannot be fully compensated by monetary damages and accordingly, in the event of any breach or threatened breach of this Section 16, the non-breaching party shall be entitled to injunctive relief. Should any provision of this Section 16 be determined by a court of law or equity to be unreasonable or unenforceable, the parties agree that to the extent it is valid and enforceable, they shall be bound by the same, the intention of the parties being that the parties be given the broadest protection allowed by law or equity with respect to such provision.
17. Survival . The provisions of Sections 3 through 22 shall survive the termination of this Agreement to the extent necessary to enforce the rights and obligations described therein.
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18. Compliance with Code Section 409A . For purposes of applying the provisions of Code Section 409A to this Agreement, each separately identified amount to which the Employee is entitled under this Agreement shall be treated as a separate payment. In addition, to the extent permissible under Code Section 409A, any series of installment payments under this Agreement shall be treated as a right to a series of separate payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be within the sole discretion of the Company or the Partnership, as the case may be.
19. Withholding . The Company or the Partnership shall be entitled to withhold from all payments to the Employee hereunder all amounts required to be withheld under applicable local, state or federal income and employment tax laws.
20. Clawbacks . All incentive-based compensation paid to the Employee hereunder will be subject to the policies of the Company and the Partnership regarding clawbacks of erroneously awarded incentive-based compensation triggered by an accounting restatement, as required by law and approved by the Board in the case of the Company.
21. Dispute Resolution . Any dispute, controversy or claim between the Company or the Partnership and the Employee or other Person arising out of or relating to this Agreement shall be settled by arbitration conducted in San Diego, California, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association then in force and California law within thirty (30) days after written notice from one party to the other requesting that the matter be submitted to arbitration; provided that this Section 21 shall not apply to, and the Company and the Partnership shall be free to seek, injunctive or other equitable relief with respect to any actual or threatened violation by the Employee of his or her obligations under Section 16 hereof in any court of competent jurisdiction. The arbitration decision or award shall be binding and final upon the parties. The arbitration award shall be in writing and shall set forth the basis thereof. The parties hereto shall abide by all awards rendered in such arbitration proceedings, and all such awards may be enforced and executed upon in any court having jurisdiction over the party against whom enforcement of such award is sought. Each party shall be responsible for its own costs and expenses in any dispute or proceeding regarding the enforcement of this Agreement.
22. Miscellaneous . This Agreement shall be construed and enforced in accordance with the laws of the State of California (exclusive of conflict of law principles). In the event that any provision of this Agreement shall be invalid, illegal or unenforceable, the remainder shall not be affected thereby. This Agreement supersedes and terminates any prior employment agreement, severance agreement, change of control agreement or non-competition agreement between the Company or the Partnership and the Employee. It is intended that the payments and benefits provided under this Agreement are in lieu of, and not in addition to, termination, severance or change of control payments and benefits provided under the other termination or severance plans, policies or agreements, if any, of the Company or the Partnership. This Agreement shall be binding upon and inure to the benefit of the Employee and the Employee’s heirs and personal representatives, the Company and the Partnership, and their successors, assigns and legal representatives. Headings herein are inserted for convenience and shall not affect the interpretation of any provision of the Agreement. References to sections of the Exchange Act or the Code, or rules or regulations related thereto, shall be deemed to refer to any successor provisions, as applicable. The Company and the Partnership will require any successors thereto (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to expressly assume and agree to perform under this Agreement in the same manner and to the same extent that the Company and the Partnership would be required to perform if no such succession had taken place. This Agreement may not be terminated, amended, or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives.
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23. Counterparts . This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
(Signature pages to follow)
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IN WITNESS WHEREOF , the parties hereto have executed this Agreement as of the day and year first above written.
INNOVATIVE INDUSTRIAL PROPERTIES, INC. | ||
By: | ||
[ insert name ] | ||
[ insert title ] | ||
IIP OPERATING PARTNERSHIP, LP | ||
By: | INNOVATIVE INDUSTRIAL PROPERTIES, INC. | |
Its General Partner | ||
By: | ||
[ insert name ] | ||
[ insert title ] | ||
EMPLOYEE | ||
Andrew Fenton |
Exhibit 10.9
SEVERANCE AND CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT, effective as of the _____ day of _______________, 2016, is by and between Innovative Industrial Properties, Inc., a Maryland corporation (the “ Company ”), IIP Operating Partnership, LP, a Delaware limited partnership (the “ Partnership ”), and Robert M. Sistek (the “ Employee ”).
WHEREAS, to induce the Employee to remain as an executive officer of the Company and a key employee of the Partnership, the Company, the Partnership and the Employee desire to enter into this Severance and Change Of Control Agreement (the “ Agreement ”); and
WHEREAS, the parties agree that the restrictive covenants underlying certain of the Employee’s obligations under this Agreement are necessary to protect the goodwill or other business interests of the Innovative Industrial Entities (as defined below) and that such restrictive covenants do not impose a greater restraint than is necessary to protect such goodwill or other business interests.
NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, including the Employee’s agreement to continue as an executive officer of the Company and as an employee of the Partnership, the Employee’s agreement to provide consulting services following termination of employment pursuant to the terms hereof, and the restrictive covenants contained herein, the Employee, the Company, and the Partnership agree as follows:
1. Definitions . The following words, when capitalized in this Agreement, shall have the meanings ascribed below and shall supersede the meanings given to any such terms in any other award agreement or related plan document in effect prior to the date of this Agreement, including but not limited to the definitions of “Cause,” “Change of Control,” or “Good Reason”:
(a) “ Affiliate ” shall have the meaning given to such term in Rule 12b-2 of the General Rules and Regulations of the Exchange Act.
(b) “ Average Annual Cash Bonus ” means the average of the annual cash bonus, if any, paid or payable to the Employee with respect to the three (3) most recently completed calendar years prior to termination of employment (or the period of the Employee’s employment, if shorter).
(c) “ Base Performance Share Value ” means the fair market value as of the date of the Change of Control of the number of unvested shares underlying the Employee’s outstanding performance share awards that would have been earned pursuant to the terms of the award if the performance period for each such award ended immediately prior to the Change of Control. For such purposes, the level of achievement of the performance goals established for each such award will be determined on the date immediately prior to the Change of Control as follows: (X) if the goal is a market-based goal, such as total stockholder return or stock price, then the actual performance to date shall be used, and (Y) if the goal is not a market-based goal, then the annualized forecasted number for such goal as most recently prepared by the Company prior to the date of the Change of Control shall be used and treated as if it were actual performance.
(d) “ Base Restricted Share Value ” means the fair market value as of the date of the Change of Control of the shares underlying all of the Employee’s unvested time-vesting restricted stock awards, restricted stock units or stock rights awards outstanding immediately prior to the Change of Control.
(e) “ Board ” means the Board of Directors of the Company.
(f) “ Cause ” means the termination of the Employee’s employment with all Innovative Industrial Entities by action of the Board or its delegate for one or more of the following reasons:
(i) The Employee’s willful and continued failure substantially to perform his duties with the Innovative Industrial Entities (other than any such failure resulting from the Employee’s incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Employee by the Board, which demand specifically identifies the manner in which the Board believes that the Employee has not substantially performed his duties;
(ii) The Employee’s willful commission of an act of fraud or dishonesty resulting in economic or financial damage to the Innovative Industrial Entities;
(iii) The Employee’s conviction of, or entry by the Employee of a guilty or no contest plea to, the commission of a felony or a crime involving moral turpitude;
(iv) A willful breach by the Employee of his fiduciary duty to the Company which results in economic or other damage to the Innovative Industrial Entities; or
(v) The Employee’s willful and material breach of the Employee’s covenants set forth in this Section 16 of this Agreement.
(g) “ Change of Control ” means the occurrence of an event or series of events which qualify as a change in control event for purposes of Code Section 409A and Treasury Regulation §1.409A-3(i)(5), including:
(i) A change in the ownership of the Company, which shall occur on the date that any one Person, or more than one Person Acting as a Group (as defined below), other than Excluded Person(s) (as defined below), acquires ownership of the stock of the Company that, together with the stock then held by such Person or group, constitutes more than fifty percent (50%) of the total fair market value of the stock of the Company. However, if any one Person or more than one Person Acting as a Group is considered to own more than fifty (50%) of the total fair market value of the stock of the Company, the acquisition of additional stock by the same Person or Persons is not considered to cause a Change of Control.
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(ii) A change in the effective control of the Company, which shall occur on the date that:
(1) Any one Person, or more than one Person Acting as a Group, other than Excluded Person(s), acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such Person or Persons) ownership of stock of the Company possessing thirty percent (30%) or more of the total voting power of the stock of the Company. However, if any one Person or more than one Person Acting as a Group is considered to own more than thirty percent (30%) of the total voting power of the stock of the Company, the acquisition of additional voting stock by the same Person or Persons is not considered to cause a Change of Control; or
(2) A majority of the members of the Board is replaced during any twelve (12) month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election.
(iii) A change in the ownership of a substantial portion of the Company’s assets, which shall occur on the date that any one Person, or more than one Person Acting as a Group, other than Excluded Person(s), acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such Person or Persons) assets from the Company that have a total Gross Fair Market Value (as defined below) equal to more than fifty percent (50%) of the total Gross Fair Market Value of all the assets of the Company immediately prior to such acquisition or acquisitions, other than an Excluded Transaction (as defined below).
For purposes of this Subsection (g):
“ Gross Fair Market Value ” means the value of the assets of the Company, or the value of the assets being disposed of, as applicable, determined without regard to any liabilities associated with such assets.
Persons will not be considered to be “ Acting as a Group ” solely because they purchase or own stock of the Company at the same time, or as a result of the same public offering, or solely because they purchase assets of the Company at the same time, or as a result of the same public offering, as the case may be. However, Persons will be considered to be Acting as a Group if they (i) are owners of an entity that enters into a merger, consolidation, purchase or acquisition of assets, or similar business transaction with the Company, or (ii) do so within the meaning of Section 13(d) of the Exchange Act, including any group acting for the purpose of acquiring, holding or disposing of securities (within the meaning of Rule 13d-5(b)(1) under the Exchange Act).
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The term “ Excluded Transaction ” means any transaction in which assets are transferred to: (A) a stockholder of the Company (determined immediately before the asset transfer) in exchange for or with respect to its stock; (B) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the Company (determined after the asset transfer); (C) a Person, or more than one Person Acting as a Group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company (determined after the asset transfer); or (D) an entity at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a Person described in clause (C) (determined after the asset transfer).
The term “ Excluded Person(s) ” means (A) the Company or any Innovative Industrial Entity; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Innovative Industrial Entity; (C) an underwriter temporarily holding securities pursuant to an offering of such securities; or (D) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock in the Company.
The term “ Change of Control ” as defined above shall be construed in accordance with Code Section 409A and the regulations promulgated thereunder. In no event shall a transaction described above constitute a “Change of Control” for purposes of this Agreement unless such transaction also satisfies the requirement to be a change in the ownership or effective control of a corporation, or a change in the ownership of a substantial portion of the assets of a corporation, as each of those terms are defined under Code Section 409A and the regulations promulgated thereunder.
(h) “ Code ” means the Internal Revenue Code of 1986, as amended.
(i) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.
(j) “ General Release ” means (i) a release of the Innovative Industrial Entities, in such form as the Partnership may reasonably request, of all claims against the Innovative Industrial Entities relating to the Employee’s employment and termination thereof, and (ii) an agreement to continue to comply with, and be bound by, the provisions of Section 16 hereof.
(k) “ Good Reason ” means any one or more of the following conditions:
(i) any material diminution of the Employee’s authority, duties or responsibilities;
(ii) a material diminution of the Employee’s annual base salary;
(iii) a material change in the geographic location at which the Employee must perform the Employee’s duties and responsibilities; or
(iv) any other action or inaction by the Company or the Partnership that constitutes a material breach of this Agreement or any other agreement pursuant to which the Employee provides services to the Company or the Partnership.
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A termination of the Employee’s employment for Good Reason shall be effective only if (X) such condition was not consented to by the Employee in advance or subsequently ratified by the Employee in writing, (Y) such condition remains in effect thirty (30) days after the Employee gives written notice to the Board of the Employee’s intention to terminate his employment for Good Reason, which notice specifically identifies such condition, and (Z) the Employee gives the notice referred to in (Y) above within ninety (90) days of the initial existence of such condition. If the Company or the Partnership, as applicable, does not cure the condition within the thirty (30) day cure period described in (Y) above, then the Employee’s termination will occur on the day immediately following the end of the cure period. If the Company or the Partnership, as applicable, cures the condition within such thirty (30) day cure period, then the Employee will be deemed to have withdrawn his notice of termination effective as of the date the cure is effected.
(l) “ Innovative Industrial Entity ” or “ Innovative Industrial Entities ” means the Company, the Partnership, any of their Affiliates, and any other entities that along with the Company or the Partnership is considered a single employer pursuant to Code Section 414(b) or (c) and the Treasury regulations promulgated thereunder, determined by applying the phrase “at least 50 percent” in place of the phrase “at least 80 percent” each place it appears in such Treasury regulations or Code Section 1563(a).
(m) “ Medical Benefits ” shall mean the monthly fair market value of benefits provided to the Employee and the Employee’s dependents under the major medical, dental and vision benefit plans sponsored and maintained by the Partnership, at the level of coverage in effect for such persons immediately prior to the Employee’s termination of employment date. The “monthly fair market value” of such benefits shall be equal to the monthly cost (including any applicable administrative fee) to the Employee as if the Employee elected COBRA continuation coverage at the level of coverage in effect at such time for the Employee and the Employee’s dependents at their own expense.
(n) “ Person ” means a “person” as used in Sections 3(a)(9) and 13(d) of the Exchange Act or any group of Persons acting in concert that would be considered “persons acting as a group” within the meaning of Treasury Regulation §1.409A-3(i)(5).
(o) “ Prime Rate ” means an annual rate, compounding annually, equal to the prime rate, as reported in The Wall Street Journal on the date of the Change of Control, or if not reported on that date, the last preceding date on which so reported, which rate shall be adjusted on each January 1 to the prime rate then in effect and shall remain in effect for the year.
(p) “ Qualifying Retirement ” means the Employee’s voluntary termination of employment after the Employee has (i) attained (X) age sixty-five (65), (Y) age fifty-five (55) with ten (10) Years of Service as a full-time employee of the Partnership or any of its Affiliates, or (Z) an age which, when added to such Years of Service of the Employee equals at least seventy-five (75), and (ii) previously delivered a written notice of retirement to the Partnership and on the date of retirement the Employee has satisfied the minimum applicable advance written notice requirement set forth below:
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Age at
Voluntary Termination |
Number of Years of
Advance Notice |
|
58 or younger
59 60 or older |
3 years
2 years 1 year |
By way of illustration, and without limiting the foregoing, if (i) the Employee is eligible to retire at age fifty-nine (59) after ten (10) Years of Service, (ii) the Employee gives two (2) years notice at age fifty-eight (58) that the Employee intends to retire at age sixty (60), and (iii) the Employee later terminates employment at age fifty-nine (59), then the Employee’s retirement at age fifty-nine (59) would not constitute a Qualifying Retirement. However, if (i) the Employee is eligible to retire at age fifty-nine (59) after ten (10) Years of Service, (ii) the Employee gives two (2) years notice at age fifty-eight (58) that the Employee intends to retire at age sixty (60), and (iii) the Employee terminates employment upon reaching age sixty (60), then the Employee’s retirement at age sixty (60) would constitute a Qualifying Retirement.
(q) “ Separation from Service ” means the termination of the Employee’s employment with all Innovative Industrial Entities, provided that, notwithstanding such termination of the employment relationship between the Employee and all Innovative Industrial Entities, the Employee shall not be deemed to have had a Separation from Service where it is reasonably anticipated that the level of bona fide services that the Employee will perform (whether as an employee or independent contractor) following such termination from the Partnership and all Innovative Industrial Entities would be twenty percent (20%) or more of the average level of bona fide services performed by the Employee (whether as an employee or independent contractor) for the Innovative Industrial Entities over the immediately preceding thirty-six (36) month period (or such lesser period of actual service). In such event, Separation from Service shall mean the permanent reduction of the level of bona fide services to be performed by the Employee (whether as an employee or independent contractor) to a level that is less than twenty percent (20%) of the average level of bona fide services performed by the Employee (whether as an employee or independent contractor) during the thirty-six (36) month period (or such lesser period of actual service) immediately prior to the termination of the Employee’s employment relationship. A Separation from Service shall not be deemed to have occurred if the Employee is absent from active employment due to military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed the greater of (i) six (6) months or (ii) the period during which the Employee’s right to reemployment by any Innovative Industrial Entity is provided either by statute or contract.
(r) “ Specified Employee ” means an employee of any Innovative Industrial Entity who is a “specified employee” as defined in Code Section 409A(a)(2)(b)(i) and Treasury Regulation §1.409A-1(i). If the Employee is a key employee as of the applicable identification date, the Employee shall be treated as a Specified Employee for the twelve (12) month period beginning on the first day of the fourth month following such identification date. The applicable identification date for purposes of this Agreement shall be September 30 of each year.
(s) “ Unvested Equity Award ” has the meaning given to such term in Section 6(a).
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(t) “ Years of Service ” means the Employee’s total complete years of employment with an Innovative Industrial Entity, including years of employment with an entity that is acquired by an Innovative Industrial Entity prior to such acquisition. For this purpose, a “complete year of employment” shall begin on the Employee’s date of hire and end on each subsequent anniversary of such date.
2. Term of the Agreement . The term of this Agreement shall begin on the date hereof and end at 11:59 p.m. on December 31, 2019 and thereafter shall automatically renew for successive three (3) year terms unless either party delivers written notice of non-renewal to the other party at least ninety (90) days prior to the end of the then current term; provided, however, that if a Change of Control has occurred during the original or any extended term (including any extension resulting from a prior Change of Control), the term of the Agreement shall end no earlier than twenty-four (24) calendar months after the end of the calendar month in which the Change of Control occurs.
3. No Change of Control – Severance . Except in circumstances in which the Employee would be entitled to payments and benefits in connection with a Change of Control as provided in Section 4 below, in the event that during the term of this Agreement the Employee has a Separation from Service as a result of the Innovative Industrial Entities terminating the Employee’s employment without Cause or the Employee terminating the Employee’s employment for Good Reason, subject to Sections 11, 15 and 16 below:
(a) The Partnership shall pay to the Employee an amount equal to (i) 2.0 times the sum of (A) the Employee’s annual base salary in effect on the date the Employee’s employment terminates, plus (B) the Employee’s Average Annual Cash Bonus, plus (ii) eighteen (18) months of the Employee’s Medical Benefits. Payment shall be made in a lump sum on the first business day after sixty (60) days following the Employee’s Separation from Service;
(b) All of the Employee’s outstanding unvested stock options, restricted stock awards, restricted stock units and stock rights awards that vest solely on the basis of time shall become vested on a pro-rated basis, based on the portion of the vesting period that has elapsed as of the date of the Employee’s Separation from Service; and
(c) All of the Employee’s outstanding performance share awards shall be earned as of the date of Separation from Service based on the level of achievement of the performance goals established for such awards as of such date, but then pro-rated based on the portion of the performance period that has elapsed as of the date of the Employee’s Separation from Service. For purposes hereof, the level of achievement of the performance goals established for each such award will be determined on the date immediately prior to the Separation from Service as follows: (i) if the goal is a market-based goal, such as total stockholder return or stock price, then the actual performance to date shall be used, and (ii) if the goal is not a market-based goal, then the level of achievement of such goal shall be (X) based on the most recently reported number(s) by the Company in its reports filed with the Securities and Exchange Commission or (Y) if such numbers are not so filed, based on the numbers as prepared internally by the Company for the quarter ending prior to the date of the Separation from Service.
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Any shares issuable under awards that vest or are earned pursuant to subsections (b) and (c) shall be issued on the same date as the cash severance payment is made pursuant to subsection (a).
4. Change of Control – Severance . In the event that during the term of this Agreement the Innovative Industrial Entities terminate the Employee’s employment without Cause or the Employee terminates the Employee’s employment for Good Reason, in each case within two (2) years following a Change of Control, the following provisions shall apply:
(a) The Partnership shall pay to the Employee the amount set forth in Section 3(a);
(b) All outstanding unvested stock options, restricted stock, restricted stock units, stock rights awards and performance share awards then held by the Employee will vest (at the greater of actual performance to-date or target, for any awards subject to performance goals), and all outstanding equity awards that have not vested at the time of the Change of Control or been converted to the right to receive a cash payment pursuant to Section 6(c) will vest on the date the General Release in Section 15 becomes effective, and, if applicable, will be paid on the tenth (10th) business day following such time. Notwithstanding the foregoing, all such awards which are subject to Code Section 409A will be paid on the first (1st) business day after sixty (60) days following the Employee’s Separation from Service, provided the General Release in Section 15 has become effective; and
(c) With respect to those Unvested Equity Awards that have been exchanged pursuant to Sections 6(b) and 6(c) for the right to receive a contingent cash payment, subject to Section 11 below, the Employee shall receive a cash payment made in a lump sum on the first business day after sixty (60) days following the Employee’s Separation from Service equal to any portion of the unpaid Base Performance Share Value and Base Restricted Share Value that has not been paid pursuant to Sections 6(b) and 6(c), together with accrued but unpaid interest at the Prime Rate on such unpaid amount from the date of the Change of Control to the date of payment.
5. Entitlement to Severance .
(a) If the Employee becomes entitled to receive any severance payments or benefits described in Section 3 or Section 4 after the Employee has delivered written notice of what would otherwise have been a Qualifying Retirement to the Partnership had the Employee continued to be employed by the Partnership through the date of retirement set forth in the notice, then the amount of such payments and benefits shall be limited to (i) those that the Employee would have otherwise received had such employment continued through such date of retirement, and (ii) those provided by Section 9, if any.
(b) If the Employee dies after receiving notice from the Company that the Employee is being terminated without Cause, or after providing notice of termination for Good Reason, but prior to the date the Employee receives the payments and benefits described in Section 3 or Section 4, as the case may be, then the Employee’s estate, heirs and beneficiaries shall be entitled to the payments and benefits described in Section 3 or Section 4, as the case may be, at the same time such payments and benefits would have been paid or provided to the Employee had the Employee lived.
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6. Change of Control – Effect on Stock Rights .
(a) Except as otherwise provided in Sections 6(b) and 6(c) below (or in Sections 4(b) or 4(c), if applicable), the occurrence of a Change of Control shall not impact any existing unvested stock options, restricted stock awards, restricted stock units, stock rights awards or performance share awards (collectively, “ Unvested Equity Awards ”) unless such rights are cashed out pursuant to the terms of the applicable merger agreement or other agreement(s) pursuant to which such Change of Control is effected.
(b) With respect to Unvested Equity Awards that are performance share awards (“ Performance Awards ”), notwithstanding anything to the contrary contained in the related plan or award agreement, all of the Employee’s outstanding unvested Performance Awards shall be cancelled and, in consideration for the cancellation of such awards, the Employee shall receive a deferred contingent cash payment with respect to each such cancelled award equal to (X) the Base Performance Share Value determined for such cancelled award, plus (Y) interest on such unpaid Base Performance Share Value from the date of the Change of Control to the date of payment at the Prime Rate, such cash payment to be made on the last day of the applicable performance period for such award, provided that the Employee remains employed by the Partnership, an Affiliate, or one of their successors through the last day of the applicable performance period.
(c) With respect to Unvested Equity Awards that are not Performance Awards, if the stock underlying such awards is not readily tradable on an established securities market immediately after the Change of Control (after giving effect to any conversion, exchange or replacement pursuant to the applicable plan or award agreement of the stock underlying Unvested Equity Awards as a result of a reorganization, merger, consolidation, combination or other similar corporate transaction or event), then notwithstanding anything to the contrary contained in the related plan or award agreement, all of the Employee’s outstanding Unvested Equity Awards shall be cancelled and, in consideration for the cancellation of such awards, the Employee shall receive:
(i) a cash payment equal to (X) the fair market value of the shares underlying all of the Employee’s unvested stock options as of the date of the Change of Control, less (Y) the aggregate exercise price of such stock options, such cash payment to be made within thirty (30) days after the Change of Control; and
(ii) a deferred contingent cash payment equal to (X) the Base Restricted Share Value, plus (Y) interest on the unpaid Base Restricted Share Value from the date of the Change of Control to the date of payment at the Prime Rate, such cash payment of the Base Restricted Share Value to be made in installments on the applicable vesting dates with respect to the number of shares that would have been issued on that vesting date, plus all accrued but unpaid interest on the unpaid Base Restricted Share Value through such vesting date, provided that the Employee remains employed by the Partnership, an Affiliate, or one of their successors through the applicable date of vesting.
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7. Change of Control – Excise Tax .
(a) If in the opinion of Tax Counsel (as defined in Section 7(b)) the Employee will be subject to an excise tax under Code Section 4999 with respect to all or any portion of the payments and benefits to be made by the Company or any of its Affiliates to the Employee, whether upon a Change of Control or following a termination of the Employee’s employment, under this Agreement or otherwise (in the aggregate, “ Total Payments ”), then such parties agree that the Total Payments shall either be (i) delivered in full, or (ii) reduced to three (3) times the Employee’s “base amount” for purposes of Code Section 280G, less $1.00 (“ Scaled Back Amount ”), whichever of the foregoing results in the receipt by the Employee of the greatest benefit on an after-tax basis (taking into account the applicable federal, state and local income taxes and the excise tax). If the Employee is entitled to the Scaled Back Amount, then such payments and benefits shall be reduced or eliminated by applying the following principles, in order: (1) the payment or benefit with the higher ratio of the parachute payment value to present economic value (determined using reasonable actuarial assumptions) shall be reduced or eliminated before a payment or benefit with a lower ratio; (2) the payment or benefit with the later possible payment date shall be reduced or eliminated before a payment or benefit with an earlier payment date; and (3) cash payments shall be reduced prior to non-cash benefits; provided that if the foregoing order of reduction or elimination would violate Code Section 409A, then the reduction shall be made pro rata among the payments or benefits to be received by the Employee (on the basis of the relative present value of the parachute payments).
(b) For purposes of this Section 7, within forty (40) days after delivery of a written notice of termination by the Employee or by the Company pursuant to this Agreement within two (2) years of a Change of Control with respect to the Company (or, if an event other than termination of employment results in payment of parachute payments under Code Section 280G and it is reasonably possible that such parachute payments could result in an excise tax, within forty (40) days after such other event), the Company shall obtain, at its expense, the opinion (which need not be unqualified) of nationally recognized tax counsel (“ Tax Counsel ”) selected by the Compensation Committee of the Board, which sets forth (i) the “base amount” within the meaning of Code Section 280G; (ii) the aggregate present value of the payments in the nature of compensation to the Employee as prescribed in Code Section 280G(b)(2)(A)(ii); (iii) the amount and present value of any “excess parachute payment” within the meaning of Code Section 280G(b)(1); and (iv) as applicable, (X) the net after-tax proceeds to the Employee, taking into account the tax imposed by Code Section 4999 if the Total Payments were delivered in full, and (Y) the amount and nature of the parachute payments to be reduced or forfeited according to Section 7(a) in order for the total payments and benefits to equal the Scaled Back Amount. For purposes of such opinion, the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company’s independent auditors in accordance with the principles of Code Section 280G and regulations thereunder, which determination shall be evidenced in a certificate of such auditors addressed to the Company and the Employee. Such opinion shall be addressed to the Company and the Employee and shall be binding upon the Company, its Affiliates, and the Employee.
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8. Plan of Liquidation . If the stockholders of the Company approve a complete plan of liquidation or dissolution of the Company (“ Approved Liquidation Plan ”), all Unvested Equity Awards that are not Performance Awards will fully vest on the date of such approval and all such awards that are Performance Awards shall vest to the extent the performance goals established under such awards have been achieved on such date (as if the Employee had satisfied all employment conditions required to vest), with the corresponding performance period for such award(s) deemed completed as of the date immediately preceding the date of such approval. Shares of common stock that so vest will be deemed outstanding as of the close of business on the date of such approval, and certificates representing such shares shall be delivered to the Employee as promptly as practicable thereafter. Any Performance Awards not vesting on the date of such approval shall be immediately cancelled without consideration therefor. In addition, unless the Approved Liquidation Plan shall have been rescinded, if the Partnership terminates the Employee’s employment without Cause or the Employee terminates the Employee’s employment for Good Reason in each case following stockholder approval of the Approved Liquidation Plan, then the Employee shall receive the benefits provided in Sections 4(a), 4(b) and 4(c), as applicable.
9. Retirement and Performance Shares . If the Employee’s termination of employment constitutes a Qualifying Retirement, then the Employee’s unvested stock options, restricted stock, restricted stock units and stock rights awards (other than performance shares) will vest on the date of retirement set forth in the notice thereof, and if the Qualifying Retirement occurs on or after a Change of Control, then the provision of Section 4(c) shall also apply. Notwithstanding anything to the contrary in any related plan or award agreement, the Employee shall be entitled to exercise all vested stock options until the earlier of (a) three (3) years after the date of Qualifying Retirement, and (b) the original terms of the options. Unless an award agreement provides for more favorable treatment, upon a Qualifying Retirement, the Employee shall continue to have the right to earn unvested performance shares upon the achievement of the applicable performance goals over any remaining performance period, as if the Employee’s employment had not been terminated.
10. Death and Disability . In no event shall a termination of the Employee’s employment due to death or Disability constitute a termination by the Partnership without Cause or a termination by the Employee for Good Reason; however, upon termination of employment due to the Employee’s death or Disability, the Employee’s estate or the Employee, as applicable, shall receive the benefits provided in Section 4(b) or 4(c) with respect to unvested stock options, restricted stock, restricted stock units and stock rights awards (other than performance shares), and the Employee’s estate or the Employee, as applicable, shall continue to have the right to earn unvested performance shares upon the achievement of the applicable performance goals over any remaining performance period, as if the Employee’s employment had not been terminated. Notwithstanding anything to the contrary in any related plan or award agreement, (a) the Employee’s estate shall be entitled to exercise all vested stock options until the earlier of (i) three (3) years after termination of employment due to death, and (ii) the original term of the option, and (b) the Employee shall be entitled to exercise all vested stock options until the earlier of (i) one (1) year after termination of employment due to Disability, and (ii) the original term of the option. For purposes of this Agreement, “ Disability ” shall mean the absence of the Employee from the Employee’s duties with the Innovative Industrial Entities on a full-time basis for ninety (90) consecutive days or on a total of one hundred eighty (180) days in any twelve (12) month period, in either case as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company and reasonably acceptable to the Employee or the Employee’s legal representative.
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11. Payments to Specified Employees . Notwithstanding any other Section of this Agreement, if the Employee is a Specified Employee at the time of the Employee’s Separation from Service, payments or distribution of property to the Employee provided under this Agreement, to the extent considered amounts deferred under a non-qualified deferred compensation plan (as defined in Code Section 409A) shall be deferred until the six (6) month anniversary of such Separation from Service to the extent required in order to comply with Code Section 409A and Treasury Regulation 1.409A-3(i)(2).
12. Reductions in Base Salary . For purposes of this Agreement, in the event there is a reduction in the Employee’s base salary that would constitute the basis for a termination for Good Reason, the base salary used for purposes of calculating the severance payable pursuant to Sections 3 or 4(a), as the case may be, shall be the amounts in effect immediately prior to such reduction.
13. Other Payments and Benefits . On any termination of employment, including, without limitation, termination due to the Employee’s death or Disability (as defined in Section 10) or for Cause, the Employee shall receive any accrued but unpaid salary, reimbursement of any business or other expenses incurred prior to termination of employment but for which the Employee had not received reimbursement (provided that such expenses have been previously approved in writing or comply with the terms of any expense reimbursement policy then in effect), and any other rights, compensation and/or benefits as may be due the Employee in accordance with the terms and provisions of any agreements, plans or programs of the Company or the Partnership (but in no event shall the Employee be entitled to duplicative rights, compensation and/or benefits).
14. Set Off; Mitigation . The obligation of the Company or the Partnership to pay or provide the Employee the amounts or benefits under this Agreement shall be subject to set-off, counterclaim or recoupment of amounts owed by the Employee to the Company or the Partnership. In addition, except as provided in Section 7 with respect to the Scaled Back Amount, if applicable, the Employee shall not be required to mitigate the amount of any payments or benefits provided to the Employee hereunder by securing other employment or otherwise, nor will such payments and/or benefits be reduced by reason of the Employee securing other employment or for any other reason.
15. Release . Notwithstanding any provision herein to the contrary, none of the Innovative Industrial Entities shall have any obligation to pay any amount or provide any benefit (other than those amounts set forth in Section 13), as the case may be, under this Agreement, unless the Employee executes, delivers to the Partnership, and does not revoke (to the extent the Employee is allowed to do so as set forth in the General Release), a General Release within sixty (60) days of the Employee’s termination of employment.
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16. Restrictive Covenants and Consulting Arrangement .
(a) The Employee will hold in a fiduciary capacity all secret or confidential information, knowledge or data relating to any Innovative Industrial Entity, and each of their respective businesses (the “ Confidential Information ”), except in furtherance of the business of the Innovative Industrial Entities or except as may be required by law. Additionally, and without limiting the foregoing, the Employee agrees not to participate in or facilitate the dissemination to the media or any other third party (i) of the Confidential Information, or (ii) of any damaging or defamatory information concerning any Innovative Industrial Entity or the Employee’s experiences as an employee of any Innovative Industrial Entity, without the Company’s prior written consent, except as may be required by law. Notwithstanding the foregoing, this Section 16(a) does not apply to information which is already in the public domain other than pursuant to acts of the Employee or representatives of the Employee in violation of this Agreement.
(b) During the Employee’s employment and during the one (1) year period after the date that the Employee ceases to be employed by any of the Innovative Industrial Entities for any reason (the “ Termination Date ”), the Employee agrees that the Employee shall not directly or knowingly and intentionally through another party recruit, induce, solicit or assist any other Person in recruiting, inducing or soliciting (A) any other employee of any Innovative Industrial Entity to leave such employment or (B) any other Person with which any Innovative Industrial Entity was actively conducting negotiations for employment on the Termination Date.
(c) For a six (6) month period following any termination of employment, the Employee agrees to make himself available and, upon and as requested by the Company or the Partnership from time to time, to provide consulting services with respect to any projects the Employee was involved in prior to such termination and/or to provide such other consulting services as the Company or the Partnership may reasonably request. The Employee will be reimbursed for reasonable travel and miscellaneous expenses incurred in connection with the provision of requested consulting services hereunder. The Company or the Partnership will provide the Employee reasonable advance notice of any request to provide consulting services, and will make all reasonable accommodations necessary to prevent the Employee’s commitment hereunder from materially interfering with the Employee’s employment obligations, if any. In no event will the Employee be required to provide more than twenty (20) hours of consulting services in any one month to the Company and the Partnership pursuant to this provision.
(d) The parties agree that any breach of this Section 16 will result in irreparable harm to the non-breaching party which cannot be fully compensated by monetary damages and accordingly, in the event of any breach or threatened breach of this Section 16, the non-breaching party shall be entitled to injunctive relief. Should any provision of this Section 16 be determined by a court of law or equity to be unreasonable or unenforceable, the parties agree that to the extent it is valid and enforceable, they shall be bound by the same, the intention of the parties being that the parties be given the broadest protection allowed by law or equity with respect to such provision.
17. Survival . The provisions of Sections 3 through 22 shall survive the termination of this Agreement to the extent necessary to enforce the rights and obligations described therein.
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18. Compliance with Code Section 409A . For purposes of applying the provisions of Code Section 409A to this Agreement, each separately identified amount to which the Employee is entitled under this Agreement shall be treated as a separate payment. In addition, to the extent permissible under Code Section 409A, any series of installment payments under this Agreement shall be treated as a right to a series of separate payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be within the sole discretion of the Company or the Partnership, as the case may be.
19. Withholding . The Company or the Partnership shall be entitled to withhold from all payments to the Employee hereunder all amounts required to be withheld under applicable local, state or federal income and employment tax laws.
20. Clawbacks . All incentive-based compensation paid to the Employee hereunder will be subject to the policies of the Company and the Partnership regarding clawbacks of erroneously awarded incentive-based compensation triggered by an accounting restatement, as required by law and approved by the Board in the case of the Company.
21. Dispute Resolution . Any dispute, controversy or claim between the Company or the Partnership and the Employee or other Person arising out of or relating to this Agreement shall be settled by arbitration conducted in San Diego, California, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association then in force and California law within thirty (30) days after written notice from one party to the other requesting that the matter be submitted to arbitration; provided that this Section 21 shall not apply to, and the Company and the Partnership shall be free to seek, injunctive or other equitable relief with respect to any actual or threatened violation by the Employee of his or her obligations under Section 16 hereof in any court of competent jurisdiction. The arbitration decision or award shall be binding and final upon the parties. The arbitration award shall be in writing and shall set forth the basis thereof. The parties hereto shall abide by all awards rendered in such arbitration proceedings, and all such awards may be enforced and executed upon in any court having jurisdiction over the party against whom enforcement of such award is sought. Each party shall be responsible for its own costs and expenses in any dispute or proceeding regarding the enforcement of this Agreement.
22. Miscellaneous . This Agreement shall be construed and enforced in accordance with the laws of the State of California (exclusive of conflict of law principles). In the event that any provision of this Agreement shall be invalid, illegal or unenforceable, the remainder shall not be affected thereby. This Agreement supersedes and terminates any prior employment agreement, severance agreement, change of control agreement or non-competition agreement between the Company or the Partnership and the Employee. It is intended that the payments and benefits provided under this Agreement are in lieu of, and not in addition to, termination, severance or change of control payments and benefits provided under the other termination or severance plans, policies or agreements, if any, of the Company or the Partnership. This Agreement shall be binding upon and inure to the benefit of the Employee and the Employee’s heirs and personal representatives, the Company and the Partnership, and their successors, assigns and legal representatives. Headings herein are inserted for convenience and shall not affect the interpretation of any provision of the Agreement. References to sections of the Exchange Act or the Code, or rules or regulations related thereto, shall be deemed to refer to any successor provisions, as applicable. The Company and the Partnership will require any successors thereto (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to expressly assume and agree to perform under this Agreement in the same manner and to the same extent that the Company and the Partnership would be required to perform if no such succession had taken place. This Agreement may not be terminated, amended, or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives.
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23. Counterparts . This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
(Signature pages to follow)
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IN WITNESS WHEREOF , the parties hereto have executed this Agreement as of the day and year first above written.
INNOVATIVE INDUSTRIAL PROPERTIES, INC. | ||
By: | ||
[ insert name ] | ||
[ insert title ] | ||
IIP OPERATING PARTNERSHIP, LP | ||
By: | INNOVATIVE INDUSTRIAL PROPERTIES, INC. | |
Its General Partner | ||
By: | ||
[ insert name ] | ||
[ insert title ] | ||
EMPLOYEE | ||
Robert M. Sistek |
Exhibit 10.10
FUNDING AGREEMENT
THIS FUNDING AGREEMENT (this “ Agreement ”) is made and executed as of October 17, 2016 (the “ Execution Date ”), by and between IGP Advisers LLC, a California limited liability company (“ IGP Advisers ”), and Innovative Industrial Properties, Inc., a Maryland corporation (together with its subsidiaries, “ IIP ”).
RECITALS
A. WHEREAS, IIP was formed for the purpose of acquiring, owning and managing specialized industrial properties leased to operators of cannabis facilities.
B. WHEREAS, IIP has incurred and is expected to continue to incur costs, including but not limited to costs relating to its organization, fundraising and evaluation of potential properties for acquisition (collectively, “ Costs ”).
C. WHEREAS, IGP Advisers desires to fund such Costs of IIP directly to IIP or on IIP’s behalf, pursuant to the terms and conditions that follow.
AGREEMENT
NOW, THEREFORE, IGP Advisers and IIP, in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, agree as follows:
1. Funding Costs . IGP Advisers agrees to fund Costs incurred prior to, on and after the Execution Date incurred by IIP, subject to IGP Advisers’ consent.
2. Reimbursement to IGP Advisers . IGP Advisers shall be entitled to reimbursement by IIP of such Costs funded by IGP Advisers, which Costs shall be refunded to IGP Advisers as soon as reasonably practicable following the completion of a financing transaction by IIP.
3. Miscellaneous .
3.1. Persons Benefited and Bound . This Agreement shall be binding upon and shall inure to the benefit of IGP Advisers and IIP, and their respective permitted successors and assigns.
3.2. Governing Law . The provisions hereof shall be governed by the law of the state of California.
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3.3. Entire Agreement . This Agreement contains the entire understanding and agreement between the parties and may not be altered or amended except by a writing signed by both IGP Advisers and IIP.
3.4. Counterparts . This Agreement may be executed in one or more counterparts, each of which, when taken together, shall constitute one and the same document.
3.5. Signatures . A facsimile, electronic or portable document format (PDF) signature on this Agreement shall be equivalent to, and have the same force and effect as, an original signature.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written.
IGP ADVISERS
IGP Advisers LLC,
a California limited liability company
By: | /s/ Paul E. Smithers | |
Name: | Paul E. Smithers | |
Title: | Member |
IIP
Innovative Industrial Properties, Inc.
a Maryland corporation
By: | /s/ Paul E. Smithers | |
Name: | Paul E. Smithers | |
Title: | Chief Executive Officer |
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Exhibit 10.11
CONSULTING AGREEMENT
This Consulting Agreement (“ Consulting Agreement ”) is entered into this 17 th day of October, 2016 (the “ Effective Date ”), by and between IGP Advisers LLC, a California limited liability company (“ Consultant ”), and Innovative Industrial Properties, Inc., a Maryland corporation (“ IIP ”), and IIP Operating Partnership, LP, a Delaware limited partnership (“ Partnership ”). IIP and the Partnership are collectively referred to herein as the “ Company .”
NOW, THEREFORE , in consideration of the covenants and promises contained herein, Consultant and the Company agree as follows:
I. Engagement . The Company and Consultant have been operating with the understanding that upon successful completion of an initial public offering of IIP’s common stock (the “ IPO ”), that the Company would compensate Consultant for certain consulting services provided by Consultant to the Company, commencing on April 1, 2016, in contemplation of the IPO. The parties desire to evidence the foregoing understanding by entering into this Consulting Agreement. Accordingly, IIP hereby engages Consultant, and Consultant hereby accepts such engagement, upon the terms and conditions hereinafter set forth, for the period commencing on April 1, 2016 and continuing until this Consulting Agreement is terminated in accordance with Section IV (such period is referred to as the “ Consulting Term ”).
II. Service . Consultant shall provide consulting services to assist the Company in completing an IPO (the “ Consulting Services ”). Consultant agrees to cause any of its employees or subcontractors who perform services for the Company on behalf of Consultant pursuant to this Consulting Agreement to professionally, honestly and faithfully present and conduct themselves at all times during the performance of the Consulting Services. Consultant agrees to truthfully and faithfully account for and deliver to the Company all property (including, without limitation, monies, materials, securities, etc.) belonging to the Company, which Consultant may receive from or on account of the Company. Furthermore, upon the end of the Consulting Term, or the Company’s demand at any other time, Consultant will immediately deliver to the Company all property belonging to the Company then in Consultant’s possession or otherwise previously provided to Consultant.
III. Compensation . As payment and consideration for Consultant’s performance of the Consulting Services, the Company shall pay Consultant a fee of $500,000.00 (the “ Base Consulting Fee ”) following the closing of an IPO resulting in gross proceeds to the Company of at least $75 million (the “ Qualified IPO ”). If a Qualified IPO closes after November 15, 2016, the Company shall also pay to Consultant an amount equal to $3,300.00 per day (the “ Per Diem Amount ”) for each day of the Consulting Term following November 15, 2016 through and including the closing date of the Qualified IPO. The Base Consulting Fee and Per Diem Amount are collectively referred to herein as the “ Consulting Fee .” Payment of the Consulting Fee due hereunder, will be made within ten days following the closing date of the Qualified IPO. If the closing of a Qualified IPO does not occur on or before January 31, 2017, then the Company will pay Consultant a fee of $5,000.00 within ten days of such date as payment and consideration for Consultant’s performance of the Consulting Services.
IV. Termination .
A. Automatic Termination . The Consulting Agreement will terminate automatically upon payment to the Consultant in accordance with Section III.
B. Early Termination . Either the Company or Consultant may terminate the Consulting Agreement with no less than 30 days’ notice to the other party. Upon such termination, the Company shall have no further obligation to Consultant other than to pay to Consultant a $1,000.00 lump sum payment for Consulting Services rendered, provided however, that in the event of any termination of this Consulting Agreement by the Company pursuant to this Section IV B, Consultant shall continue to be entitled to the full amount of the Consulting Fee provided for in Section III, if there is a closing of a Qualified IPO within 90 days following any such termination.
V. Relationship . Consultant shall operate at all times as an independent contractor of the Company on a “fee for service” basis. Nothing in this Consulting Agreement shall be construed as creating an employer/employee relationship. Consultant shall have no authority to act as an agent of the Company, except on authority specifically so delegated by the Company’s board of directors, and Consultant shall not represent to the contrary. Consultant shall only consult, render advice and perform such tasks as Consultant determines are necessary to achieve the results specified by the Company.
VI. Taxes . Consultant and the Company agree that Consultant is not an employee for state or federal tax purposes. Consultant shall be solely responsible for any and all income, unemployment, social security, worker’s compensation, FICA or any other taxes or amounts payable with respect to the Consulting Fee and any other compensation paid or provided to Consultant pursuant to this Consulting Agreement. Consultant agrees to defend and indemnify the Company from and against any tax or other liability that any of them may have with respect to any such payment and against any and all losses or liabilities, including defense costs, arising out of Consultant’s failure to pay any taxes due with respect to any such payment. In addition, the Company and Consultant agree that Consultant shall be solely responsible for any and all compensation and benefits payable to all employees of Consultant who may provide services to the Company on Consultant’s behalf, and Consultant shall be solely responsible for any and all tax and other withholdings and payments due in connection with employment by Consultant of such employees.
VII. Confidential Information
A. Use . Consultant shall not use (except to the extent that such use is directly related to and required by Consultant’s performance of the Consulting Services) or disclose at any time, either during the Consulting Term or thereafter, any Confidential Information (as defined in Section X.A), whether or not such information is developed by Consultant. Consultant will take all appropriate steps to safeguard Confidential Information in Consultant’s possession and to protect it against disclosure, misuse, espionage, loss and theft. Notwithstanding the foregoing, Consultant may truthfully respond to a lawful and valid subpoena or other legal process, but shall give the Company the earliest possible notice thereof and shall, as much in advance of the return date as possible, make available to the Company and its counsel the documents and other information sought, and shall assist the Company and such counsel in resisting or otherwise responding to such process. Consultant agrees, during the Consulting Term and for six months thereafter, not to accept any assignments or provide any services or advice or otherwise act upon any potential investment opportunities that were reviewed by Consultant in connection with the Consulting Services or that were made known to Consultant in such capacity and based on Confidential Information, other than with the prior written consent of the Company.
B. Enforcement . Consultant agrees that Consultant’s services are unique and that Consultant has access to Confidential Information. Accordingly, Consultant agrees that a breach by Consultant of any of the covenants in this Section VII would cause immediate and irreparable harm to the Company that would be difficult or impossible to measure, and that damages to the Company for any such injury would therefore be an inadequate remedy for any such breach. Therefore, Consultant agrees that in the event of any breach or threatened breach of any provision of this Section VII, the Company shall be entitled, in addition to and without limitation upon all other remedies the Company may have under this Consulting Agreement, at law or otherwise, to obtain specific performance, injunctive relief and/or other appropriate relief (without posting any bond or deposit) in order to enforce or prevent any violations of the provisions of this Section VII.
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VIII. Ownership . Consultant will use its own tools and property to perform the Consulting Services, however, in the event Consultant has access to or uses any software, hardware, equipment, or records, including all copies or extracts of them which Consultant prepares, uses or sees during the Consulting Term that are the property of the Company, in relation to the performance of services hereunder, such property shall be and remain the sole property of the Company.
IX. Freedom to Enter Agreement . Consultant represents and warrants to the Company that: (i) the execution and delivery of this Consulting Agreement by Consultant and the performance by Consultant of the Consulting Services do not and shall not constitute a breach of, conflict with, or otherwise contravene or cause a default under, the terms of any other agreement or policy which Consultant, or any employee, agent or representative of Consultant, is a party to or otherwise bound by or any judgment, order or decree to which Consultant or any employee, agent or representative of Consultant is subject and (ii) neither Consultant nor any employee, agent or representative of Consultant is bound by any employment, consulting, non-compete, confidentiality, trade secret or similar agreement with any other Person, in each case, that would conflict with this Consulting Agreement.
X. Definitions . As used in this Consulting Agreement, the following terms shall have the meanings set forth below.
A. Confidential Information . “ Confidential Information ” means information that is not generally known to the public and that is used, developed or obtained by the Company in connection with its or their business, including, but not limited to, information, observations and data obtained by Consultant while providing services to the Company (including any such information obtained prior to the Effective Date) concerning (i) the business or affairs of the Company, (ii) the business or affairs of business that are being reviewed as an investment of the Company, (iii) fees, costs and pricing structures, (iv) designs, (v) analyses, (vi) drawings, photographs and reports, (vii) computer software, including operating systems, applications and listings, (viii) flow charts, manuals and documentation, (ix) data bases, (x) accounting and business methods, (xi) inventions, devices, new developments, methods and processes, whether patentable or unpatentable and whether or not reduced to practice, (xii) customers and clients and customer or client lists, (xiii) other copyrightable works, (xiv) all production methods, processes, technology and trade secrets, and (xv) all similar and related information and work product, in whatever form. Confidential Information will not include any information that has been published (other than through a disclosure by Consultant in breach of this Consulting Agreement) in a form generally available to the public prior to the date Consultant proposes to disclose or use such information. Confidential Information will not be deemed to have been published merely because individual portions of the information have been separately published, but will be deemed to have been published only if all material features comprising such information have been published.
B. Person . “ Person ” shall be construed broadly and includes, without limitation, an individual, a partnership, a limited liability company, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof.
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XI. Miscellaneous .
A. Successors . This Consulting Agreement shall not, without the prior written consent of the Company, be assignable by Consultant. This Consulting Agreement shall inure to the benefit of and be binding upon the Company and its respective successors and assigns and any such successor or assignee shall be deemed substituted for the Company under the terms of this Consulting Agreement for all purposes. As used herein, “successor” and “assignee” shall include any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly acquires the ownership of the Company or to which the Company assigns this Consulting Agreement by operation of law or otherwise.
B. Waiver . Neither the failure nor any delay on the part of a party to exercise any right, remedy, power or privilege under this Consulting Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be binding unless in writing and signed by the party asserted to have granted such waiver.
C. Modification / Complete Agreement . This Consulting Agreement may not be amended or modified other than by a written agreement executed by Consultant and the Company. This Consulting Agreement a contains the entire agreement and final understanding concerning Consultant’s relationship with the Company and the other subject matters addressed herein between the parties, and supersedes and replaces all prior negotiations and all agreements proposed or otherwise, whether written or oral, concerning the subject matters hereof.
D. Severability . It is the desire and intent of the parties hereto that the provisions of this Consulting Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Consulting Agreement shall be adjudicated by a court of competent jurisdiction or an arbitrator, as the case may be, to be invalid, prohibited or unenforceable under any present or future law, and if the rights and obligations of any party under this Consulting Agreement will not be materially and adversely affected thereby, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Consulting Agreement or affecting the validity or enforceability of such provision in any other jurisdiction, and to this end the provisions of this Consulting Agreement are declared to be severable; furthermore, in lieu of such invalid or unenforceable provision there will be added automatically as a part of this Consulting Agreement, a legal, valid and enforceable provision as similar in terms to such invalid or unenforceable provision as may be possible. Notwithstanding the foregoing, if such provision could be more narrowly drawn (as to geographic scope, period of duration or otherwise) so as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Consulting Agreement or affecting the validity or enforceability of such provision in any other jurisdiction.
E. Governing Law / Jurisdiction . This Consulting Agreement shall, without regard to principles of conflict of laws, be governed by the laws of the State of California as to all matters, including but not limited to matters of validity, construction, effect and performance. Any judicial proceeding seeking to enforce any provision of, or based on any right arising out of, this Consulting Agreement or any agreement identified herein may be brought only in state or federal courts of the State of California, and by the execution and delivery of this Consulting Agreement, each of the parties hereto accepts for themselves the exclusive jurisdiction of the aforesaid courts and irrevocably consents to the jurisdiction of such courts (and the appropriate appellate courts) in any such proceedings, waives any objection to venue laid therein and agrees to be bound by the judgment rendered thereby in connection with this Consulting Agreement or any agreement identified herein.
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F. Counterparts . This Consulting Agreement may be executed in counterparts, and each counterpart, when executed, shall have the efficacy of a signed original. Photographic copies of such signed counterparts may be used in lieu of the originals for any purpose.
G. Supplementary Documents . All parties agree to cooperate fully and to execute any and all supplementary documents and to take all additional actions that may be necessary or appropriate to give full force to the basic terms and intent of this Consulting Agreement and which are not inconsistent with its terms.
H. Headings; Construction . The section and paragraph headings and titles contained in this Consulting Agreement are inserted for convenience only, and they neither form a part of this Consulting Agreement nor are they to be used in the construction or interpretation of this Consulting Agreement. Where the context requires, the singular shall include the plural, the plural shall include the singular, and any gender shall include all other genders. Where specific language is used to clarify by example a general statement contained herein, such specific language shall not be deemed to modify, limit or restrict in any manner the construction of the general statement to which it relates.
[ Remainder of page intentionally left blank. ]
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IN WITNESS WHEREOF, the parties have duly executed this Consulting Agreement as of the Effective Date.
“Consultant” | ||
IGP Advisers LLC, a California limited liability company | ||
By: | ||
Its: | ||
“IIP” | ||
Innovative Industrial Properties, Inc., a Maryland corporation | ||
/s/ Paul E. Smithers | ||
By: | Paul E. Smithers | |
Its: | Chief Executive Officer |
“Partnership” | |||
IIP Operating Partnership, LP, a Delaware limited partnership | |||
By: Innovative Industrial Properties, Inc., its sole general partner | |||
/s/ Paul E. Smithers | |||
By: | Paul E. Smithers | ||
Its: | Chief Executive Officer |
[ Signature page to Consulting Agreement ]
Exhibit 10.12
PURCHASE AGREEMENT
BETWEEN
Pharmacann llc
AND
IIP operating partnership, LP
August 22, 2016
PURCHASE AGREEMENT
THIS AGREEMENT (this “ Agreement ”) is entered into as of the 22nd day of August, 2016 (“ Contract Date ”), by and among PharmaCann LLC, an Illinois Limited Liability Company, 1140 Lake Street, Suite 304, Oak Park, Ill. (Seller ”), and IIP Operating Partnership, LP, 17190 Bernardo Center Drive, San Diego, Ca. (“ Buyer ”).
RECITALS
Seller owns and is offering for sale the land and improvements commonly known as 600 Neelytown Road, Hudson Valley Crossing, Montgomery, NY, and more completely described below. Buyer has offered to buy the foregoing property, and the parties are entering into this Agreement to set forth the terms and conditions of the sale to Buyer.
NOW, THEREFORE, in consideration of the foregoing and the agreements set forth below, the parties hereto agree as follows:
1. | Agreement of Sale . |
1.1 Seller hereby agrees to sell to Buyer, and Buyer hereby agrees to purchase from Seller, Seller’s right, title and interest in that certain real property with the street address 600 Neelytown Road, Hudson Valley Crossing, Montgomery, NY, and more particularly described in attached Exhibit A. In addition, each Seller hereby agrees to sell to Buyer, and Buyer hereby agrees to purchase from Seller, Seller’s right, title and interest in the following, which together with the Land, shall be termed the “ Property ” herein:
(a) the building located at the Land owned by Seller (collectively, the “ Buildings ”) and all fixtures and other improvements located upon such Land (collectively, the “ Improvements ”);
(b) all fixtures owned by such Seller that are necessary for the operation of the Property owned by such Seller and that are located on the Property;
(c) all easements, rights of way, privileges, licenses, appurtenances and other rights and benefits of such Seller belonging to or in any way related to the Land owned by such Seller;
(d) the Lease and Service Contracts (as such terms are hereinafter defined) to which such Seller is a party;
(e) all transferable or assignable certificate(s) of occupancy, building or equipment permits, consents, authorizations, variances, waivers, permits, and certificates from any governmental or quasi-governmental authority necessary for the ownership of the Land or the Improvements owned by such Seller (collectively, the “ Approvals ”); and
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(f) all transferable or assignable warranties (the “ Warranties ”) relating to the ownership, development, use and operation of the Land and Improvements owned by such Seller;
Buyer has no right to purchase, and Seller have no obligation to sell, less than all of the Property, it being the express agreement and understanding of Buyer and Seller that, as a material inducement to Seller and Buyer to enter into this Agreement, Buyer has agreed to purchase, and Seller have agreed to sell, all of the Property, subject to and in accordance with the terms and conditions of this Agreement.
2. Purchase Price and Lease Back . The purchase price for the Property is thirty million dollars ($30,000,000.00) (the “ Purchase Price ”) and shall be paid in cash by Buyer at the Closing (as defined in Section 10.1 below). Concurrent with the Closing Date as defined in Section 10.1, Seller shall enter into a Lease Agreement as tenant for the Property with Buyer as Landlord, in a form substantially as that attached hereto as Exhibit C (the “Lease”).
3. | Deposit and Independent Consideration |
3.1 Refundable Payment and Deposit . Within three (3) business days after the Contract Date, Buyer shall deposit in an escrow (the “ Escrow ”) established for the transaction contemplated by this Agreement with Chicago Title Insurance Company (the “ Title Company ”) the sum of five hundred thousand dollars ($500,000) (the “ Deposit ”). The amount so deposited, shall, at Purchaser's election, be credited against the Purchase Price at Closing, or returned to Purchaser at Closing. The Deposit shall not be refundable except as otherwise provided herein. In the event Buyer defaults in its obligations to close the purchase of the Property, then Seller's sole and exclusive remedy (and in lieu of any other remedy, legal or equitable in nature) shall be to seek payment of the Deposit, it being understood that Seller's actual damages in the event of such default are difficult to ascertain and that such proceeds represent the parties' best current estimate of such damages. Seller shall have no other remedy for any default by Buyer.
3.2 IPO Contingency. The Deposit shall be refundable in the event that buyer does not successfully complete Buyer’s Initial Public Offering (IPO) in an amount not less than $75,000,000.00 on or before October 1, 2016, and as otherwise provided herein. Buyer agrees to keep Seller advised as to the status of the IPO and/or other capital raises.
3.3 A portion of the Deposit in the amount of One Hundred Dollars ($100.00) shall be immediately released to Seller and shall serve as independent consideration (the “ Independent Consideration ”) for Seller’s execution of this Agreement and agreement to sell the Property to Buyer on and subject to the terms and conditions of this Agreement, including, without limitation, the grant to Buyer of the right to conduct its due diligence investigations of the Property. The Independent Consideration is applicable to the Purchase Price, but shall be retained by Seller in the event of any termination of this Agreement. The Independent Consideration shall not constitute a part of the Deposit. Buyer acknowledges that Seller would not have entered into this Agreement had Buyer not made the Independent Consideration to Seller on the terms set forth in this Section 3.2.
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4. | Due Diligence Documents . |
4.1 Due Diligence Deliveries . Seller will provide Buyer with copies of the materials and documents identified on Exhibit B attached hereto.
4.2 Title Report . Seller have also provided Buyer with, and Buyer acknowledges receipt of those certain preliminary title reports for the Property prepared under Order No. [__________], together with a copy of each document referred to therein (collectively, the “ Preliminary Title Reports ”).
4.3 Additional Property Documents . Buyer shall have the right, at Buyer’s sole cost and expense and with at least two (2) business days’ prior notice, to review Seller’ permanent real property transaction files (excluding any privileged or confidential information and excluding any valuation and appraisal information) and plans and specification files relating to the Property during regular business hours.
4.4 Service Contracts . Buyer acknowledges that Seller have provided Buyer with copies of the service, maintenance, management and other contracts and agreements related to the operation and management of the Property, which are listed on Exhibit B , excluding the property management agreement and listing agreement which will not be assigned at Closing. Buyer shall notify Seller prior to the expiration of the Due Diligence Period whether Buyer will assume any such contracts or agreements as of the Closing, provided that Buyer shall be required to assume such contracts and agreements if they are not terminable at Closing without payment of a termination fee. Buyer’s failure to so notify Seller shall constitute Buyer’s election to have all such agreements and contracts terminated at Closing, provided that Buyer shall assume all such contracts and agreements that are not terminable at Closing without payment of a termination fee. All agreements and contracts that Buyer elects or is required to assume are hereinafter referred to as the “ Service Contracts .”
4.5 Survey . Seller shall deliver copies of any existing surveys in Seller’ possession to Buyer (the “ Survey ”). Buyer may, at its sole cost and expense, update and recertify the Survey.
4.6 Natural Hazards Disclosure Report and Additional Disclosures . At least 24 hours prior to Buyer’s execution of this Agreement, Seller provided Buyer with, and Buyer acknowledges receipt of, copies of the materials and documents identified in Exhibit B attached hereto.
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Unless Seller specifically and expressly otherwise agrees in writing, Buyer agrees that, except as required by law or as necessary for Buyer to enforce its rights under this Agreement, (1) the results of all inspections, analyses, studies and similar reports relating to the Property prepared by or for Buyer utilizing any information acquired in whole or in part through the exercise of Buyer’s inspection rights; and (2) all information regarding the Property of whatsoever nature made available to Buyer by Seller or Seller’ agents or representatives is confidential and shall not be disclosed to any other person except those assisting Buyer with the transaction, or Buyer’s lender, if any, and then only upon Buyer making such persons aware of the confidentiality restriction and procuring such persons’ agreement to be bound thereby. Except as otherwise provided above, Buyer agrees not to use or allow to be used any such information for any purpose other than to determine whether to proceed with the contemplated purchase. Further, if the transaction contemplated hereby fails to close for any reason whatsoever, Buyer agrees to return to Seller, or cause to be returned to Seller, all materials delivered to Buyer pursuant to this Section 4. Notwithstanding any other term of this Agreement, the confidentiality provisions of this Section 4 shall survive the termination of this Agreement but shall not survive the Closing.
5. | Title . |
5.1 Title Commitment . Buyer shall obtain, no later than the end of the Due Diligence Period, a commitment from the Title Company to issue at Closing a policy or policies of title insurance in a form acceptable to Buyer, which is not conditioned on the performance by any party or third party of any actions other than the express obligations of the parties under this Agreement (the “ Commitment ”). Buyer shall deliver the Commitment to Seller together with a letter from Buyer to Seller stating that the exceptions to title reflected in the Commitment are approved by Buyer. If Buyer does not provide Seller with the Commitment and such letter prior to the expiration of the Due Diligence Period, the title reflected in the Preliminary Title Reports (or any updated title reports) shall be deemed approved. Seller shall have no duty to cure, and Buyer shall not be entitled to any offset or credit against the Purchase Price due to, any defect in the title to the Property or any condition or aspect of the Property, to which Buyer may object, except as may be agreed by Seller in writing, in its sole and absolute discretion; provided, however, that Seller shall remove, bond over, or obtain a title endorsement for any monetary liens voluntarily created by Seller that affect the Property (“ Seller Liens ”), other than liens for taxes or assessments to the extent accruing on or after the Closing or liens created by, or resulting from the actions of, Buyer or any third party. Any cure that Seller has so agreed to perform or are obligated to perform shall become a condition precedent to Closing in favor of Buyer and shall be cured by the Closing Date. If such cure is not accomplished by the Closing Date, Buyer, as its sole and exclusive remedy, may either terminate this Agreement, in which case the Deposit shall be returned to Buyer, or waive such objection and complete the Closing subject to such exception, provided that if Seller refuses to remove a Seller Lien at Closing, Buyer shall have the right to instruct the Title Company, as escrow agent, to apply a portion of the Purchase Price sufficient to discharge such Seller Lien at Closing.
5.2 Permitted Exceptions . The following shall constitute the “ Permitted Exceptions ”: (a) the Title Company’s standard exceptions; (b) all exceptions that are shown on the Commitment (or if buyer does not obtain the Commitment prior to the end of the Due Diligence Period, then on the Preliminary Title Reports deemed approved pursuant to Section 5.1, above, as updated as of such date); (c) all exceptions that arise after the expiration of the Due Diligence Period that are not Seller Liens and that are not caused to appear of record by Seller.
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5.3 Title Policy . Evidence of title shall be the issuance by the Title Company at Closing of a policy or policies of title insurance in the form of the Commitment, subject only to the Permitted Exceptions (collectively, the “ Title Policy ”); provided that if Buyer does not obtain the Commitment prior to the end of the Due Diligence Period and satisfy the conditions set forth in the Commitment (other than those that Seller are expressly obligated to perform in connection with this Agreement), then the “Title Policy” shall be an ALTA standard coverage owner’s policy of title insurance subject to the standard printed exceptions and the exceptions listed in the Preliminary Title Reports and any other Permitted Exceptions. Buyer shall be responsible for all costs of the Title Policy and for providing any necessary surveys to the Title Company at Buyer’s expense.
5.4 No Recording . Neither this Agreement nor any memorandum of this Agreement shall be recorded by, or on behalf of, Buyer in the Official Records. If Buyer violates the terms of this Section 5.4 by recording or attempting to record this Agreement or a memorandum thereof, such act shall not operate to bind or cloud the title to the Property, shall constitute a material breach and default by Buyer under this Agreement, and shall entitle Seller to terminate this Agreement by written notice to Buyer, which termination notice may be recorded against the Property.
6. | Access . |
6.1 Access Terms . Provided that Buyer has complied with the insurance requirements in Section 6.3 and gives the applicable Seller at least two (2) business days prior notice (oral or written), Seller shall allow Buyer and authorized representatives of Buyer reasonable access, at reasonable times, to the Property for the purposes of satisfying Buyer with respect to the Property. In performing its examinations and inspections of the Property, Buyer shall use reasonable efforts to minimize any interference with Seller’ use and occupancy of the Property. Seller shall have the right at all times to have a representative of Seller accompany any of Buyer or Buyer’s employees, agents, contractors, consultants, officers, directors, representatives, managers or members (collectively, “ Buyer’s Agents ”) while such persons are on the Property. Buyer shall not contact the occupants of the Property without the applicable Seller’s prior written consent. Buyer’s breach of this Section 6.1 (and all subsections) shall constitute a material breach and default by Buyer of this Agreement. All investigations and inspections shall be performed in compliance with this Section 6 and all local, state and federal laws, rules and regulations, including, without limitation, any and all permits required thereunder, which permits shall be obtained by and at the sole cost of Buyer. Notwithstanding anything contained herein to the contrary, Buyer shall have no access to the Property until such a time as the applicable State of New York agency or department has issued a written authorization permitting such access to the Property.
6.2 | Inspection and Testing |
(i) Buyer shall not conduct or allow any physically intrusive or destructive testing of, on or under the Property, without the Seller’s prior written consent, which consent may be withheld at Seller’ sole and absolute discretion. Buyer shall provide the Seller with two (2) days written notice prior to the commencement of any physically intrusive or destructive testing, accompanied by a detailed work plan describing the nature, scope, location and purpose of the proposed work. Buyer acknowledges and agrees that any Seller’s review of Buyer’s work plan is solely for the purpose of protecting Seller’ interests, and shall not be deemed to create any liability of any kind on the part of Seller in connection with such review that, for example, the work plan is adequate or appropriate for any purpose, or complies with applicable legal requirements. All work and investigations shall be performed in compliance with all local, state and federal laws, rules and regulations, including, without limitation, any and all permits required thereunder, all of which shall be at the sole cost and expense of Buyer.
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(ii) During the performance of Buyer’s investigations, Buyer shall promptly remove and properly dispose of all samples, substances and materials extracted from or generated by Buyer at the Property and, upon the completion of its investigations, shall return the Property to its original condition, including the removal of all equipment and materials used or generated during its investigations. Buyer shall name itself as the generator on any waste manifests required to dispose of said materials and shall obtain its own waste generator identification number with respect thereto. If Buyer fails to perform or cause such restoration, and such failure shall continue for two (2) days after Buyer receives written notice from the applicable Seller demanding the cure thereof, Seller may perform or cause to be performed such restoration work, and Buyer shall reimburse Seller for all the costs and expenses thereof within two (2) days after receipt of bills therefor.
6.3 Indemnification . Notwithstanding anything in this Agreement to the contrary, any entry upon, inspection, or investigation of the Property by Buyer or Buyer’s Agents shall be performed at the sole risk and expense of Buyer, and Buyer shall be solely and absolutely responsible for the acts or omissions of any of Buyer’s Agents. Furthermore, Buyer shall protect, indemnify, defend and hold Seller, and their successors, assigns, and affiliates harmless from and against any and all losses, damages (whether general, punitive or otherwise), liabilities, claims, causes of action, judgments, costs and legal or other expenses (including, but not limited to, attorneys’ fees and costs) (collectively, “ Access Claims ”) suffered or incurred by any or all of such indemnified parties to the extent resulting from any act or omission of Buyer or Buyer’s Agents in connection with: (i) Buyer’s inspection or investigations of the Property; (ii) Buyer’s entry upon the Property; (iii) any activities, studies or investigations conducted at, to, or on the Property by Buyer or Buyer’s Agents; or (iv) the presence by Buyer or Buyer’s Agents at or on the Property. If at any time prior to Closing, Buyer or Buyer’s Agents cause any damage to the Property, Buyer shall, at its sole expense, immediately restore the Property to the same condition as existed immediately prior to the occurrence of such damage as determined by the applicable Seller in its reasonable discretion. Buyer’s obligations under this Section 6.2 shall survive the termination of this Agreement or the Closing, as the case may be, notwithstanding any other provisions herein to the contrary, and shall not be limited by the terms of Section 3. Buyer shall, at all times, keep the Property free and clear of any mechanics’, materialmen’s or design professional’s claims or liens arising out of or relating to its investigations of the Property.
6.4 Insurance . Prior to any entry onto the Property by Buyer or Buyer’s Agents, any time prior to Closing, Buyer shall procure and maintain for at least eighteen (18) months after the Contract Date, public liability insurance covering Buyer, Seller, and the Property, and providing for a combined single limit in the minimum amount of $2,000,000.00 per occurrence per location, and issued by companies with a rating reasonably satisfactory to Seller. Prior to any entry onto the Property by Buyer or Buyer’s Agents, such insurance policies (or certificates evidencing such insurance) shall be delivered to Seller for approval, which approval shall not be unreasonably conditioned, delayed, or withheld. Seller shall be named as an additional insured under all such liability insurance.
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7. Due Diligence Period . Subject to Section 6, Buyer shall have sixty (60) days following the complete execution of this Agreement (the “ Due Diligence Period ”), to inspect and investigate the Property, including roof, plumbing, soils, electrical, sprinkler, water, sewer, mechanical, engineering, heating, ventilation and air conditioning and life safety systems, structural integrity of the Improvements, measurement of the square footage of the Land and Improvements, legal status and requirements pertaining to the Property (including applicable building codes, zoning, environmental, public health and fire safety laws), hazardous substance inspections including preparation of an environmental assessment, suitability of the Property for Buyer’s purposes and all other matters of significance to Buyer. Consistent with the terms and conditions of Section 4 above, Buyer agrees to keep the results of such testing and inspections confidential, except to the extent that disclosure is required by law (in which case Buyer will notify Seller in writing prior to making any such disclosure), which obligation shall survive the termination of this Agreement. If so requested by any Seller in writing, Buyer shall, at no cost to Seller, provide such Seller, as and when Buyer receives same, with a copy of all due diligence materials, reports, plans, surveys and inspections performed by or on behalf of Buyer or Buyer’s Agents, which obligation shall survive termination of this Agreement. Buyer shall order and pay for all costs and expenses with respect to such inspections and investigations.
If, at any time during the Due Diligence Period, Buyer determines, in its sole discretion, that the results of the inspections do not meet Buyer’s criteria for the purchase or operation of the Property in the manner contemplated by Buyer, Buyer may terminate this Agreement by written notice to Seller given not later than the expiration of the Due Diligence Period, and Buyer and Seller shall promptly direct the Title Company to have the Deposit returned to Buyer, and thereafter the parties hereto shall have no further rights or obligations hereunder, except for those rights and obligations which, by their terms, survive the termination hereof. Failure of Buyer to notify Seller as provided for herein of its election to terminate this Agreement prior to the expiration of the Due Diligence Period shall constitute Buyer’s satisfaction of the condition of the Property and Buyer’s due diligence with respect to the Property .
Seller agrees that it will not accept any offers to purchase the subject property during the due diligence period.
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8. Acceptance of Property “As Is” . ACKNOWLEDGING BUYER’S OPPORTUNITY TO INSPECT AND INVESTIGATE THE PROPERTY AS PROVIDED IN THIS AGREEMENT, BUYER AGREES TO TAKE THE PROPERTY “AS IS” WITH ALL FAULTS AND CONDITIONS THEREON. ANY INFORMATION, REPORTS, STATEMENTS, DOCUMENTS OR RECORDS (“ DISCLOSURES ”) PROVIDED OR MADE TO BUYER OR ITS CONSTITUENTS BY SELLER, their AGENTS, REPRESENTATIVES OR EMPLOYEES CONCERNING THE PROPERTY, OTHER THAN THE EXPRESS REPRESENTATIONS SET FORTH IN SECTION 11.1, SHALL NOT CONSTITUTE REPRESENTATIONS OR WARRANTIES. BUYER SHALL NOT RELY ON SUCH DISCLOSURES BUT, RATHER, BUYER SHALL RELY SOLELY ON ITS OWN INSPECTION OF THE PROPERTY. ACCORDINGLY, BUYER’S WAIVER OF THE DUE DILIGENCE PERIOD AS SET FORTH ABOVE, SHALL CONSTITUTE BUYER’S ACKNOWLEDGMENT AND AGREEMENT TO THE FOLLOWING: (i) BUYER HAS REVIEWED, EVALUATED AND VERIFIED THE DISCLOSURES AND DOCUMENTS AND HAS CONDUCTED ALL INSPECTIONS, INVESTIGATIONS, TESTS, ANALYSES, APPRAISALS AND EVALUATIONS OF THE PROPERTY (INCLUDING FOR TOXIC OR HAZARDOUS MATERIALS, SUBSTANCES OR WASTES (DEFINED AND REGULATED AS SUCH PURSUANT TO THE RESOURCE CONSERVATION AND RECOVERY ACT, THE COMPREHENSIVE ENVIRONMENTAL RESPONSE COMPENSATION AND LIABILITY ACT OF 1980, AS AMENDED ( “CERCLA” ) OR ANY SIMILAR LAWS AND ALL REGULATIONS PROMULGATED THEREUNDER)) AS BUYER CONSIDERS NECESSARY OR APPROPRIATE TO SATISFY ITSELF FULLY WITH RESPECT TO THE CONDITION AND ACCEPTABILITY OF THE PROPERTY (ALL OF SUCH INSPECTIONS, INVESTIGATIONS AND REPORTS BEING HEREIN COLLECTIVELY CALLED THE “ INVESTIGATIONS ”); (ii) SELLER HAS PERMITTED BUYER ACCESS TO THE PROPERTY AND HAS DELIVERED TO, OR MADE AVAILABLE TO, BUYER ALL OF THE MATERIALS REFERENCED IN SECTION 4 (INCLUDING THE DOCUMENTS AND MATERIALS IDENTIFIED ON EXHIBIT B ) (COLLECTIVELY, THE “ DOCUMENTS ”) SUFFICIENT FOR BUYER TO COMPLETE THE INVESTIGATIONS AND MAKE AN INFORMED DECISION TO PROCEED WITH THE PURCHASE OF THE PROPERTY PURSUANT TO THE TERMS OF THIS AGREEMENT; AND (iii) BUYER HAS COMPLETED ITS DUE DILIGENCE WITH RESPECT TO THE PROPERTY AND THE DOCUMENTS TO ITS SATISFACTION, IS THOROUGHLY FAMILIAR WITH THE PHYSICAL CONDITION OF THE PROPERTY, AND IS ACQUIRING THE PROPERTY BASED EXCLUSIVELY UPON ITS OWN INVESTIGATIONS AND INSPECTIONS OF THE PROPERTY AND THE DOCUMENTS AND THE EXPRESS REPRESENTATIONS AND WARRANTIES SET FORTH IN SECTION 11.1. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, BUYER SHALL FURTHER BE DEEMED TO HAVE ACKNOWLEDGED AND AGREED THAT (A) SELLER, BY MAKING AVAILABLE THE DOCUMENTS AND PERMITTING BUYER TO PERFORM THE INVESTIGATIONS, HAS FULLY COMPLIED WITH ALL DISCLOSURE REQUIREMENTS UNDER LOCAL, STATE AND FEDERAL LAWS, (COLLECTIVELY, THE “ DISCLOSURE LAWS ”), AND (B) BUYER’S RIGHTS AND REMEDIES WITH RESPECT TO THE PROPERTY SHALL BE LIMITED TO THE RIGHTS AND REMEDIES (INCLUDING ALL CONDITIONS AND LIMITATIONS PLACED THEREON) EXPRESSLY SET FORTH IN THIS AGREEMENT, AND BUYER HEREBY WAIVES ALL RIGHTS AND REMEDIES THAT MIGHT OTHERWISE BE AVAILABLE TO BUYER UNDER THE DISCLOSURE LAWS.
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FURTHER, BUYER’S WAIVER OF THE DUE DILIGENCE PERIOD ABOVE, SHALL CONSTITUTE BUYER’S ACKNOWLEDGMENT AND AGREEMENT TO THE PROVISIONS OF THIS SECTION 8 AND THAT, REGARDLESS OF THE CONTENT OF ANY OF THE DOCUMENTS OR ANY STATEMENTS THAT SELLER, THEIR AGENTS, EMPLOYEES, OFFICERS, CONTRACTORS, PARTNERS OR MEMBERS MAY HAVE MADE TO BUYER, ITS AGENTS, EMPLOYEES, OFFICERS, CONTRACTORS, PARTNERS OR MEMBERS PRIOR TO OR DURING THE DUE DILIGENCE PERIOD, OTHER THAN THE EXPRESS REPRESENTATIONS AND WARRANTIES SET FORTH IN SECTION 11.1, SELLER HAVE NOT MADE, DO NOT MAKE AND SPECIFICALLY DISCLAIM ANY REPRESENTATIONS, WARRANTIES, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR CHARACTER WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT OR FUTURE, OF, AS TO, CONCERNING OR WITH RESPECT TO: (1) THE NATURE, QUALITY OR CONDITION OF THE PROPERTY, INCLUDING, WITHOUT LIMITATION, THE WATER, SOIL AND GEOLOGY; (2) THE INCOME TO BE DERIVED FROM THE PROPERTY; (3) THE SUITABILITY OF THE PROPERTY FOR ANY AND ALL ACTIVITIES AND USES THAT BUYER MAY CONDUCT THEREON; (4) THE COMPLIANCE OF OR BY THE PROPERTY OR ITS OPERATION WITH ANY LAWS, RULES, ORDINANCES OR REGULATIONS OF ANY APPLICABLE GOVERNMENTAL AUTHORITY OR BODY; (5) THE HABITABILITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE PROPERTY; OR (6) ANY OTHER MATTER WITH RESPECT TO THE PROPERTY. BUYER SPECIFICALLY DISCLAIMS ANY REPRESENTATIONS REGARDING TERMITES OR WASTES, AS DEFINED BY THE U.S. ENVIRONMENTAL PROTECTION AGENCY REGULATIONS AT 40 C.F.R., OR ANY HAZARDOUS SUBSTANCE, AS DEFINED BY CERCLA AND REGULATIONS PROMULGATED THEREUNDER. BUYER, ITS SUCCESSORS AND ASSIGNS, HEREBY WAIVE, RELEASE AND AGREE NOT TO MAKE ANY CLAIM OR BRING ANY COST RECOVERY ACTION OR CLAIM FOR CONTRIBUTION OR OTHER ACTION OR CLAIM AGAINST SELLER OR THEIR RELATED ENTITIES (COLLECTIVELY OR INDIVIDUALLY), AND THEIR MEMBERS, MANAGERS, PARTNERS, DIRECTORS, OFFICERS, SHAREHOLDERS, TRUSTEES, BENEFICIARIES, ATTOPRNEYS, AGENTS, EMPLOYEES, REPRESENTATIVES, SUCCESSORS, HEIRS AND ASSIGNS (COLLECTIVELY, “ SELLER AND THEIR AFFILIATES ”) BASED ON, (x) ANY FEDERAL, STATE, OR LOCAL ENVIRONMENTAL OR HEALTH AND SAFETY LAW OR REGULATION, INCLUDING CERCLA OR ANY STATE EQUIVALENT, OR ANY SIMILAR LAW NOW EXISTING OR HEREAFTER ENACTED; (y) ANY DISCHARGE, DISPOSAL, RELEASE, OR ESCAPE OF ANY CHEMICAL, OR ANY MATERIAL WHATSOEVER, ON, AT, TO, OR FROM THE PROPERTY; OR (z) ANY CONDITIONS WHATSOEVER ON, IN, UNDER, OR IN THE VICINITY OF THE PROPERTY. EXCEPT WITH RESPECT TO ANY CLAIMS ARISING OUT OF ANY BREACH OF COVENANTS, REPRESENTATIONS OR WARRANTIES EXPRESSLY SET FORTH IN THIS AGREEMENT OR THE DOCUMENTS EXECUTED IN CONNECTION WITH THIS AGREEMENT, BUYER, ON BEHALF OF ITSELF AND ITS PARTNERS, MEMBERS, MANAGERS, DIRECTORS, OFFICERS, SHAREHOLDERS, TRUSTEES, BENEFICIARIES, AGENTS, EMPLOYEES, REPRESENTATIVES, SUCCESSORS, HEIRS AND ASSIGNS HEREBY RELEASES, SELLER AND THEIR AFFILIATES, FROM ANY AND ALL CLAIMS OF ANY KIND WHATSOEVER, KNOWN OR UNKNOWN, WITH RESPECT TO ANY ASPECT OF THE PROPERTY, INCLUDING THE FOREGOING MATTERS.
BUYER AND SELLER REPRESENT AND ACKNOWLEDGE THAT THIS SECTION 8 WAS EXPLICITLY NEGOTIATED AND BARGAINED FOR AS A MATERIAL PART OF BUYER’S CONSIDERATION BEING PAID. Terms appearing in this Section 8 in all capital letters that have been defined elsewhere in this Agreement shall have the meanings set forth in such definitions.
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9. | Conditions to Closing . |
9.1 Buyer’s Conditions to Closing . Buyer’s obligation to purchase the Property is conditioned upon the satisfaction of each of the following conditions each of which is for the exclusive benefit of Buyer. Buyer may, at any time or times before the Closing, waive one or more of the following conditions, without affecting its rights and remedies with respect to the remaining conditions:
(i) Seller’ performance in all material respects of all their obligations hereunder;
(ii) The truth, completeness and accuracy, in all material respects, of each representation and warranty made by Seller as of the Contract Date and the Closing; and
(iii) The unconditional commitment of the Title Company to issue the Title Policy as required by Buyer.
(iv) The success of Buyer’s IPO as fully described in Section 3.2 above.
If Buyer elects to proceed with the Closing notwithstanding the fact that one or more of the foregoing conditions has not been satisfied, Buyer shall be deemed to have waived such condition and shall have no further rights or remedies on account of the failure of such condition or conditions.
9.2 Seller’ Conditions . Seller’s obligation to sell the Property is conditioned upon the satisfaction of each of the following conditions, each of which is for the exclusive benefit of Seller. Seller may, at any time before the Closing, waive one or more of the following conditions, without affecting its right, and remedies with respect to the remaining conditions:
(i) The performance by Buyer of all its obligations hereunder in all material respects; and
(ii) The truth, completeness and accuracy, in all material respects, of each representation and warranty made by Buyer as of the Contract Date and the Closing.
If Seller elect to proceed with the Closing notwithstanding the fact that one or more of the foregoing conditions has not been satisfied, Seller shall be deemed to have waived such condition and shall have no further rights or remedies on account of the failure of such condition or conditions.
9.3 Seller Default . If, at the Closing, the Closing fails to occur by reason of Seller’ failure or refusal to perform its obligations hereunder in any material respect in a prompt and timely manner, and any such circumstance continues for five (5) business days after written notice from Buyer to Seller, which written notice shall detail such default, untruth or failure, as applicable, then Buyer shall have the right, to elect, as its sole and exclusive remedy, at law or equity, to (a) terminate this Agreement by written notice to Seller, promptly after which the Deposit shall be returned to Buyer and, thereafter, the parties shall have no further rights or obligations hereunder except for obligations which expressly survive the termination of this Agreement, or (b) waive the condition and proceed to Closing, or (c) terminate the agreement and bring a suit for damages to recover those reasonable out of pocket expenses actually incurred by Buyer in reliance upon Seller’s performance. By proceeding with the Closing, Buyer shall be deemed to have elected to have waived the condition.
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10. | Closing . |
10.1 Closing Date . The consummation of the purchase and sale of the Property (the “ Closing ”) shall be conducted through the Escrow thirty (30) days after the end of the Due Diligence Period (the “ Closing Date ”). Buyer may extend the Closing Date once for up to one (1) month by giving Seller written notice no later than five (5) business days prior to the scheduled Closing Date.
10.2 Seller’ Deposits Into Escrow . Seller shall deposit the following documents and items into escrow at least one (1) business day prior to the Closing Date:
(i) a duly executed and acknowledged grant deed conveying the Land and Improvements owned by such Seller to Buyer in the form of the attached Exhibit E (the “ Grant Deeds ”);
(ii) a duly executed bill of sale and general assignment, in the form of the attached Exhibit F (the “ Assignments ”), transferring such Seller’s interest in the Personal Property, Service Contracts, Approvals, and Warranties to Buyer;
(iii) an affidavit in the form of the attached Exhibit G stating that such Seller is not a “foreign person” under Section 1445(f)(3) of the Internal Revenue Code of 1986, as amended (“ IRC ”);
(iv) such Seller’s share of the prorations and closing costs as described in Sections 10.4 and 10.5 or instructions to Title Company to deduct same from the Purchase Price;
(b) an owner’s title affidavit in the form of the attached Exhibit I ; and
(c) such other documents as may reasonably be required to complete the Closing.
10.3 Buyer’s Deposits into Escrow . Buyer shall deposit the following into escrow at least one (1) business day prior to the Closing Date:
(a) the balance of the Purchase Price in immediately available funds;
(b) Buyer’s share of the prorations, closing costs and Amendment Expenses as described in Sections 10.4, and 10.5
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(c) two original duly executed counterparts of the Assignments; and
(d) such other documents as may reasonably be required to complete the Closing.
10.4 Adjustment and Proration .
(a) Accounts Payable . All sums due for accounts payable which were owing or accrued by the Property for any period prior to the Closing and for all agreements and contracts not assumed by Buyer will be paid by Seller. Buyer will furnish to Seller for payment any bills received after the Closing that apply to any period prior to the Closing with respect to such accounts, agreements and contracts. Payments due under any Service Contracts shall be prorated as of the Closing Date, and Buyer shall be liable for all payments accruing thereunder after the Closing.
(b) Property Taxes . All real and personal property ad valorem taxes and special assessments, if any, will be prorated to the Closing Date, based on the latest available tax rate and assessed valuation. With respect to any property tax appeal or reassessment filed by Seller for tax years (or portions thereof) prior to the Closing, Seller shall be entitled to the full amount of any refund or rebate resulting therefrom applicable to the period before the Closing Date, except to the extent such amounts are payable to, or otherwise accrue to the benefit of, the Tenant pursuant to the Lease. After the Closing, Buyer shall provide Seller with a copy of all notices or correspondence Buyer receives concerning any real estate tax relief or refunds for the Property and shall cooperate with Seller in obtaining such refunds. This provision shall survive the Closing.
(c) Utility Charges . All utility (including electricity, gas, water, sewer and telephone) charges will be prorated to the Closing Date. All utility security deposits, if any, will be retained by Seller.
(d) Post-Closing . If the amount of any proration cannot be determined at the Closing, the adjustments will be made between the parties as soon after Closing as possible.
(e) This Section 10.4 shall survive the Closing.
10.5 Closing Costs . The Closing costs for this transaction shall be paid as follows:
(a) Seller shall pay: (i) all documentary transfer taxes; (ii) all recording fees; (iii) one-half (1/2) of the escrow fees; (iv) the premium for ALTA standard coverage owner’s policies of title insurance; and (v) all other costs and expenses allocated to Seller pursuant to this Agreement.
(b) Buyer shall pay (i) the cost of the Title Policy above the amount Seller is obligated to pay, including the cost of any endorsements requested by Buyer, and the premium for any policy of lender’s title insurance, (ii) one-half of the escrow fees, and (iii) all other costs and expenses allocated to Buyer pursuant to this Agreement.
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10.6 Closing . Pursuant to Section 10.1 above, Title Company shall close the escrow for this transaction when it is in a position to issue the Title Policy and has received from Seller and Buyer the items required of each in Sections 10.2 and 10.3 above. Title Company shall close escrow by doing the following:
(a) Delivering to Seller the amount due Seller as shown on the Closing Statement, the original documents listed in Section 10.3 above, and a signed original of Seller’ Closing Statement;
(b) Recording the Grant Deeds in the Official Records; and
(c) Delivering to Buyer the Title Policy, the original documents and items listed in Section 10.2 above, and a closing statement for the escrow consistent with this Agreement and signed by Buyer and Seller (the “ Closing Statement ”), and any refund due Buyer.
10.7 Possession . Seller shall deliver possession of the Property to Buyer on the Closing Date, subject to the Lease and the rights of the tenant hereunder. In addition, outside of escrow, Seller shall deliver to Buyer such property files and records located at the Property or at Seller’s, including originals or copies of any Service Contracts.
11. | Representations and Warranties . |
11.1 Representations and Warranties of Seller . Seller hereby makes the following representations and warranties to Buyer, which representations and warranties shall survive the Closing, and all of which (i) are material and are being relied upon by Buyer, and (ii) are true, complete and accurate as of the date hereof.
(a) Such Seller is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Illinois and authorized to transact business and in good standing under the laws of the State of New York.
(b) This Agreement has been duly authorized, executed, and delivered by such Seller; the obligations of such Seller under this Agreement are legal, valid, and binding obligations of such Seller; and this Agreement does not, and at the time of Closing will not, violate any provision of any agreement to which such Seller is a party or to which it is subject or any law, judgment or order applicable to such Seller.
(c) All documents executed by such Seller which are to be delivered to Buyer at the Closing will be, at the time of Closing, duly authorized, executed, and delivered by such Seller; the obligations of such Seller under such documents will be, at the time of Closing, legal, valid, and binding obligations of such Seller; and such documents will not, at the time of Closing, to the best of Seller’s knowledge, violate any provision of any agreement to which such Seller is a party or to which it is subject or any law, judgment or order applicable to such Seller.
(d) Such Seller is not a “foreign person” within the meaning of IRC Section 1445(f)(3).
(e) No proceedings under any federal or state bankruptcy or insolvency laws have been commenced by or against such Seller which have not been terminated; no general assignment for the benefit of creditors has been made by such Seller; and no trustee or receiver of such Seller’s property has been appointed.
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(f) Except as disclosed in writing to Buyer, no litigation or proceeding is pending that materially and adversely affects the Property owned by such Seller or such Seller’s ability to consummate the transactions contemplated by this Agreement.
(g) Except as disclosed in writing to Buyer, such Seller, to such Seller’s Actual Knowledge, has not received any written notice that the condition of the Property owned by such Seller is in violation of any applicable material rule, regulation, ordinance or government directive from any administrative or governmental authority that has not been cured.
(h) There are no leases affecting the Property, except as of the Closing, the Lease.
11.2 Material Changes; Survival . If, prior to the Closing, Seller obtains Actual Knowledge of any fact or circumstance that would materially change a representation or warranty made by Seller in this Agreement, then Seller shall promptly, and in all events at least five (5) days prior to the Closing Date (which date shall be extended if necessary to give Buyer five days to review such material change), give written notice of such changed fact or circumstance to Buyer. If, prior to Closing, upon Seller’s notice or otherwise, Buyer becomes aware of the material untruth or inaccuracy of, or facts or circumstances that would change materially, any representation or warranty of Seller in this Agreement, then Buyer shall have the option of: (i) waiving such breach of representation or warranty and completing its purchase of the Property pursuant to this Agreement; (ii) reaching agreement with Seller to adjust the terms of this Agreement to compensate Buyer for such change; or (iii) terminating this Agreement and receiving the return of the Deposit as Buyer’s sole and exclusive remedy, at law or equity, prior to Closing pursuant to Section 9.3; provided, however, if Buyer elects to complete Closing, Buyer will be deemed to have waived such breach, and if Buyer does not make an election by the earlier of the date three (3) days after Buyer becomes aware of such material untruth or inaccuracy or the Closing Date, this Agreement will be deemed terminated, in which case the Deposit shall be returned to Buyer and the parties shall have no further obligations under this Agreement other than those obligations that expressly survive a termination of this Agreement. All of Seller’ representations and warranties shall survive the Closing for a period of six (6) months, but only with respect to written claims alleging a specific breach of one or more of those representations and warranties received by Seller within such six (6)-month period. For the purposes of this Section 11.2, a matter shall be deemed material only if it would cause a reduction in the value of the Property of more than five percent (5%) of the Purchase Price.
11.3 Representations and Warranties of Buyer . Buyer hereby makes the following representations and warranties to Seller, which representations and warranties shall survive the Closing and all of which (i) are material and are being relied upon by Seller, and (ii) are true, complete and accurate in all respects as of the date hereof and shall be true, complete and accurate as of the Closing Date:
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(a) Buyer is a limited liability company, duly organized, validly existing and in good standing under the laws of the State of California and authorized to transact business and in good standing under the laws of the State of California.
(b) This Agreement has been duly authorized, executed, and delivered by Buyer; the obligations of Buyer under this Agreement are legal, valid, and binding obligations of Buyer; and this Agreement does not, and at the time of Closing will not, violate any provision of any agreement to which Buyer is a party or to which it is subject or any law, judgment or order applicable to Buyer.
(c) All documents executed by Buyer that are to be delivered to Seller at the Closing will be, at the time of Closing, duly authorized, executed, and delivered by Buyer; the obligations of Buyer under such documents will be, at the time of Closing, legal, valid, and binding obligations of Buyer; and such documents will not, at the time of Closing, violate any provision of any agreement to which Buyer is a party or to which it is subject or any law, judgment or order applicable to Buyer.
(d) No proceedings under any federal or state bankruptcy or insolvency laws have been commenced by or against Buyer which have not been terminated; no general assignment for the benefit of creditors has been made by Buyer; and no trustee or receiver of Buyer’s property has been appointed.
12. | Risk of Loss; Insurance Proceeds; Condemnation . |
12.1 Damage or Destruction . In the event of damage or destruction of the Improvements that occurs prior to the Closing Date that would require the expenditure of an amount less than fifteen percent (15%) of the Purchase Price to repair, Buyer and Seller shall consummate this Agreement, and the applicable Seller shall assign to Buyer at Closing all rights to insurance proceeds on account of such damage or destruction, including any insurance proceeds previously received by such Seller with respect to such damage or destruction. In the event such damage or destruction would require the expenditure of an amount in excess of fifteen percent (15%) of the Purchase Price to repair, either Buyer or Seller may elect to terminate this Agreement by written notice to the other, given no later than the date ten (10) days after occurrence of such damage or destruction. If neither party elects to terminate this Agreement, the parties shall consummate this Agreement, and the applicable Seller shall assign to Buyer at Closing all rights to insurance proceeds on account of such damage or destruction, including any insurance proceeds previously received by such Seller with respect to such damage or destruction.
12.2 Eminent Domain . If, prior to the Closing, there is a substantial taking by eminent domain of the Land and Improvements that materially and adversely interferes with the use of any of the Buildings for their current permitted uses, Buyer shall have the right, by delivering written notice to Seller within ten (10) days after such taking, to terminate this Agreement, in which event the Deposit shall be returned to Buyer. If Buyer does not terminate this Agreement or if the taking is not substantial, or it does not materially and adversely interfere with the use of any of the Buildings for their current permitted uses, then this Agreement shall remain in effect, and the applicable Seller shall assign to Buyer at Closing their rights to the compensation and damages due such Seller on account of such taking (and will not settle any proceedings relating to such taking without Buyer’s prior written consent). Seller shall promptly (and in any event prior to the Closing) notify Buyer of any condemnation affecting the Property.
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The provisions of this Section 12 shall supersede the provisions of any applicable laws with respect to the subject matter of this Section 12.
13. Assignment . Buyer may not, at any time, assign this Agreement or Buyer’s rights or obligations under this Agreement, either directly or indirectly, without the prior written consent of Seller, which Seller may withhold in their sole and absolute discretion. Notwithstanding the foregoing, Buyer shall have a one (1)-time right to assign this Agreement to an Affiliate of Buyer (as defined below), without the consent of Seller, provided that Buyer delivers written notice of such assignment and the name and ownership of the assignee Affiliate of Buyer at least three (3) business days prior to the Closing Date, such assignee assumes in writing all of Buyer’s obligations hereunder, and such assignee will continue to be an Affiliate of Buyer immediately following the Closing. (An “Affiliate of Buyer” is an entity that controls, is controlled by, or is under common control with Buyer.) Subject to the foregoing, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by the parties hereto and their respective heirs, devisees, executors, administrators, legal representatives, successors and assigns. In connection with any approved assignment, the assignee shall assume the assignor’s obligations hereunder, but assignor shall nevertheless remain liable therefor.
14. Seller’s Covenants During Contract Period . Between Seller’s execution of this Agreement and the Closing, or earlier termination of this Agreement as permitted hereunder, Seller shall (i) maintain the Property owned by Seller in good order, condition and repair, reasonable wear and tear excepted, but in no event shall Seller be obligated to make any capital repairs, replacements or improvements; (ii) not make any material physical changes to the Improvements; (iii) continue to manage the Property owned by such Seller in the manner in which it is being managed; (iv) not enter into any lease, except the Lease, amendment of lease or other occupancy agreement pertaining to the Property owned by such Seller; and (v) after the end of the Due Diligence Period, not offer the Property owned by such Seller for sale publicly or otherwise solicit, make, pursue, negotiate or accept offers for the sale of the Property owned by Seller to or from any party.
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15. ARBITRATION OF DISPUTES . IN THE EVENT OF ANY DISPUTE BETWEEN THE PARTIES ARISING UNDER OR RELATED TO THIS AGREEMENT, SUCH DISPUTE, SHALL BE RESOLVED BY BINDING ARBITRATION BEFORE A SINGLE ARBITRATOR. SUCH ARBITRATION MAY BE INITIATED BY EITHER PARTY BY DELIVERING WRITTEN NOTICE OF INTENT TO ARBITRATE TO THE OTHER PARTY AND TO THE OFFICE OF THE AMERICAN ARBITRATION ASSOCIATION (“ AAA ”) CLOSEST TO WHERE THE PROPERTY IS LOCATED, WHICH NOTICE SHALL DESCRIBE THE DISPUTE AND THE PARTY’S PROPOSAL FOR RESOLVING THE DISPUTE IN DETAIL. WITHIN THIRTY (30) DAYS AFTER DELIVERY OF SUCH NOTICE EACH PARTY SHALL PROVIDE ALL RELEVANT DOCUMENTS AND MATERIALS THAT PERTAIN TO THE DISPUTE. THE PARTIES SHALL FIRST ENDEAVOR TO AGREE ON THE ARBITRATOR, BUT IF THEY ARE UNABLE TO DO SO WITHIN TEN (10) DAYS AFTER THE ARBITRATION HAS BEEN INITIATED, THE ARBITRATOR SHALL BE SELECTED, WITHIN THIRTY (30) DAYS AFTER THE ARBITRATION WAS INITIATED, USING THE AAA PROCEDURES. THE ARBITRATOR SHALL BE A LICENSED, PRACTICING ATTORNEY WHO IS SUBSTANTIALLY FAMILIAR WITH THE REAL ESTATE LAW, CUSTOM, PRACTICE, OR PROCEDURE, IN THE AREA IN WHICH THE PROPERTY IS LOCATED, PERTINENT TO THE DISPUTE BEING ARBITRATED. IN ESTABLISHING WHETHER AN ARBITRATOR IS ABLE TO SERVE, THE PARTIES SHALL ADVISE HIM OR HER OF THE NAMES OF ALL PARTIES AND THEIR AFFILIATES AND PRINCIPAL OFFICERS AND OWNERS, AND CONFIRM THAT THERE IS NO CONFLICT OF INTEREST, WHICH FOR PURPOSES HEREOF SHALL MEAN NO BUSINESS OR PERSONAL CONNECTIONS WITH THE ARBITRATOR, OR HIS OR HER FIRM, WITH ANY OF SUCH PARTIES EITHER CURRENTLY OR AT ANY TIME DURING THE IMMEDIATELY PRECEDING THREE (3) YEARS. THE ARBITRATION SHALL BE CONDUCTED PURSUANT TO THE AAA’S COMMERCIAL ARBITRATION RULES, AS MODIFIED BY THIS SECTION 15, OR BY SUCH OTHER ORGANIZATION AND RULES AS THE PARTIES MAY MUTUALLY AGREE UPON. ALL ARBITRATION PROCEEDINGS SHALL BE CONFIDENTIAL, AND NEITHER PARTY NOR THE ARBITRATOR MAY DISCLOSE THE CONTENT OR RESULTS OF ANY ARBITRATION HEREUNDER WITHOUT THE WRITTEN CONSENT OF BOTH PARTIES. THE ARBITRATOR SHALL FOLLOW THE LAW (INCLUDING APPLICABLE STATUTES OF LIMITATIONS) AND ALL RULES OF EVIDENCE UNLESS THE PARTIES STIPULATE TO THE CONTRARY. ANY PROVISIONAL REMEDY (INCLUDING PRELIMINARY OR PERMANENT INJUNCTIONS AND WRITS OF ATTACHMENT AND POSSESSION) WHICH WOULD BE AVAILABLE FROM A COURT OF LAW OR EQUITY SHALL BE AVAILABLE FROM THE ARBITRATOR PENDING COMPLETION OF THE ARBITRATION. THE BENEFITED PARTY OF SUCH PROVISIONAL REMEDY SHALL BE ENTITLED TO ENFORCE SUCH REMEDY IN COURT IMMEDIATELY; EVEN THOUGH A FINAL ARBITRATION AWARD HAS NOT YET BEEN RENDERED. WITHIN THIRTY (30) DAYS AFTER HIS OR HER APPOINTMENT, THE ARBITRATOR SHALL HEAR AND DECIDE THE DISPUTE SUBMITTED TO ARBITRATION HEREUNDER AND SHALL PROMPTLY PREPARE A WRITTEN DECISION ON THE MERITS OF THE MATTERS IN DISPUTE, WHICH DECISION SHALL STATE THE FACTS AND LAW RELIED UPON AND THE REASONS FOR THE ARBITRATOR’S DECISION. THE ARBITRATOR MAY, AT HIS OR HER DISCRETION, ELECT WHETHER TO MEET WITH THE PARTIES AND WHETHER TO CONDUCT A HEARING ATTENDED BY ALL PARTIES; PROVIDED, HOWEVER, THAT FOR DISPUTES INVOLVING $50,000.00 OR MORE, THE ARBITRATOR SHALL CONDUCT A HEARING. DISCOVERY SHALL BE ALLOWED IN ACCORDANCE WITH APPLICABLE NEW YORK LAW. THE ARBITRATOR SHALL HAVE COMPLETE DISCRETION TO RESOLVE DISCOVERY DISPUTES, TO ORDER THE PRODUCTION OF DOCUMENTS AND PRESENTATION OF WITNESSES AND TO LIMIT SUCH DISCOVERY, INCLUDING THE NUMBER AND SCOPE OF DEPOSITIONS THAT MAY BE TAKEN BY THE PARTIES. PRIOR TO ISSUING HIS OR HER FINAL WRITTEN DECISION, THE ARBITRATOR SHALL INFORM THE PARTIES, IN WRITING, OF THE ARBITRATOR’S EXPECTED DECISION ON THE MATTER AND THE REASONS THEREFORE AND GIVE THE PARTIES FIVE (5) BUSINESS DAYS TO SUBMIT ADDITIONAL ARGUMENTS OR INFORMATION, IN WRITING, TO THE ARBITRATOR AND THE OTHER PARTIES. THE AWARD OR DECISION OF THE ARBITRATOR, WHICH MAY INCLUDE AN ORDER OF SPECIFIC PERFORMANCE, SHALL BE FINAL AND BINDING ON ALL PARTIES AND ENFORCEABLE IN ANY COURT OF COMPETENT JURISDICTION; PROVIDED, HOWEVER, THAT THE AWARD MAY BE VACATED OR CORRECTED FOR ANY OF THE REASONS PERMITTED UNDER AND PURSUANT TO APPLICABLE NEW YORK LAW. THE ARBITRATOR SHALL HAVE NO AUTHORITY TO MODIFY ANY OF THE TERMS OF THIS AGREEMENT. THE FEES AND EXPENSES OF THE ARBITRATOR AND THE COSTS AND ATTORNEYS’ FEES OF THE PREVAILING PARTY SHALL BE PAID BY THE PARTY WHO IS NOT THE PREVAILING PARTY, AS DEFINED IN SECTION 16.7 (ATTORNEYS’ FEES) AND DETERMINED BY THE ARBITRATOR IN ITS DECISION.
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NOTICE : BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE ‘ARBITRATION OF DISPUTES’ PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY NEW YORK LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE ‘ARBITRATION OF DISPUTES’ PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE NEW YORK CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THIS “ARBITRATION OF DISPUTES” PROVISION TO NEUTRAL ARBITRATION
/s/ TS | /s/ PS | |
Seller | Buyer |
THIS ARBITRATION OF DISPUTES PROVISION SHALL SURVIVE THE CLOSING OR TERMINATION OF THIS AGREEMENT.
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16. | Miscellaneous . |
16.1 Notice . All notices and any other communications permitted or required under this Agreement must be in writing and will be effective (i) immediately upon delivery in person or by facsimile, provided delivery is made during regular business hours or receipt is acknowledged by a person reasonably believed by the delivering party to be employed by the recipient and that for all facsimiles, good and complete transmission is confirmed by the sending facsimile machine; (ii) immediately upon delivery if delivery is made by electronic mail transmission (“Email”) (so long as any Email notice contains the following in the Subject line in all caps: “OFFICIAL NOTICE UNDER IGP-PHARMACANN PSA ”) completed before 5:00 p.m. Central time on a business day, as evidenced by the transmission confirmation generated by the sending Email system; and otherwise on the business day next following the date of completed transmission; provided, however, that any communication by Email to be effective must be confirmed two (2) business days after transmission by duplicate notice delivered as otherwise provided herein unless the recipient confirms receipt by return Email; (iii) upon the actual delivery as evidenced by executed receipt of the recipient if delivered by a nationally recognized delivery service for overnight delivery, provided delivery is made during regular business hours or receipt is acknowledged by a person reasonably believed by the delivering party to be employed by the recipient; or (iv) or the date shown on the return receipt if delivered by the United States Postal Service, certified mail, return receipt requested, postage prepaid and with the return receipt returned to the sender marked as delivered, undeliverable or rejected. The inability to deliver because of a changed address of which no notice was given, or rejection or other refusal to accept any notice, shall be deemed to be the receipt of the notice as of the first date of such inability to deliver or rejection or refusal to accept. Any notice to be given by any party hereto may be given by the counsel for such party. All notices must be properly addressed and delivered to the parties at the addresses set forth below, or at such other addresses as either party may subsequently designate by written notice given in the manner provided in this Section 16.1:
Seller: | PharmaCann LLC |
1140 Lake Street, Suite 304 | |
Oak Park, Illinois, 60301 | |
Attention: Teddy Scott, Manager | |
teddy.scott@pharmacannis.com | |
708.919.5641 | |
With a copy to: | Thompson Coburn LLP |
55 East Monroe Street, 37 th Floor | |
Chicago, Illinois 60603 | |
Attention: Gary L. Plotnick | |
gplotnick@thompsoncoburn.com | |
Buyer: | IIP Operating Partnership, LP |
17190 Bernardo Center Drive | |
San Diego, CA. 92128 | |
Attention: Paul E. Smithers, CEO | |
Paul.smithers@igprop.com | |
858.692.1800 |
16.2 Headings . The headings used herein are for purposes of convenience only and should not be used in construing the provisions hereof.
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16.3 Covenant of Further Assurances . The parties hereby agree to execute and deliver such other reasonable documents and instruments (including, without limitation, additional escrow instructions in conformity with this Agreement), and to take such other actions, whether before or after Closing, as may reasonably be required and which may be necessary to consummate this transaction and to otherwise effectuate the agreements of the parties hereto; provided that such additional documents, instruments, or actions shall not impose upon the parties any obligations, duties, liabilities or responsibilities which are not expressly provided for in this Agreement.
16.4 Entire Agreement . This document represents the final, entire and complete agreement between the parties with respect to the subject matter hereof and supersedes all other prior or contemporaneous agreements, communications or representations, whether oral or written, express or implied, including any letters of intent. The parties acknowledge and agree that they may not and are not relying on any representation, promise, inducement, or other statement, whether oral or written and by whomever made, that is not contained expressly in this Agreement. This Agreement may only be modified by a written instrument signed by representatives authorized to bind both parties. Oral modifications are unenforceable.
16.5 Partial Invalidity . If any term, covenant or condition of this Agreement or its application to any person or circumstances shall be held to be illegal, invalid or unenforceable, the remainder of this Agreement or the application of such term or provisions to other persons or circumstances shall not be affected, and each term hereof shall be legal, valid and enforceable to the fullest extent permitted by law, unless an essential purpose of this Agreement would be defeated by the loss of the illegal, unenforceable, or invalid provision. In the event of such partial invalidity, the parties shall seek in good faith to agree on replacing any such legally invalid provisions with valid provisions which, in effect, will, from an economic viewpoint, most nearly and fairly approach the effect of the invalid provision and the intent of the parties in entering into this Agreement.
16.6 No Waiver . Except as otherwise provided in this Agreement, no consent or waiver by either party to or of any breach or non-performance of any representation, condition, covenant or warranty shall be enforceable unless in a writing signed by the party entitled to enforce performance, and such signed consent or waiver shall not be construed as a consent to or waiver of any other breach or non-performance of the same or any other representation, condition, covenant, or warranty.
16.7 Attorneys’ Fees . In the event of any arbitration or litigation between the parties, whether based on contract, tort or other cause of action or involving bankruptcy or similar proceedings, in any way related to this Agreement, the non-prevailing party shall pay to the prevailing party all reasonable attorneys’ fees and costs and expenses of any type, without restriction by statute, court rule or otherwise, incurred by the prevailing party in connection with any action or proceeding (including arbitration proceedings, any appeals and the enforcement of any judgment or award), whether or not the dispute is litigated or prosecuted to final judgment. The “prevailing party” shall be determined based upon an assessment of which party’s major arguments or positions taken in the action or proceeding could fairly be said to have prevailed (whether by compromise, settlement, abandonment by the other party of its claim or defense, final decision, after any appeals, or otherwise) over the other party’s major arguments or positions on major disputed issues. This Section 16.7 shall survive the Closing or termination of this Agreement.
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16.8 Brokers and Finders . Each party represents that it has not had any contact or dealings regarding the Property, through any licensed real estate broker or other persons who can claim a right to a commission or finder’s fee in connection with this transaction.
16.9 Time of the Essence . Time is of the essence of this Agreement.
16.10 Governing Law; Forum . This Agreement is entered into and shall be governed by and construed in accordance with the laws of the State of New York (without giving effect to its choice of law principles). The parties agree that, except as otherwise provided in Section 15, all suits or actions of any kind brought to interpret or enforce the terms of, or otherwise arising out of or relating to, this Agreement shall be filed and litigated solely in the state or federal courts in the City of New York. Each party hereby consents to the personal and subject matter jurisdiction of said courts.
16.11 Interpretation . All parties have been represented by counsel in the preparation and negotiation of this Agreement, and this Agreement shall be construed according to the fair meaning of its language. The rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be employed in interpreting this Agreement. Unless the context clearly requires otherwise, (i) the plural and singular numbers shall each be deemed to include the other; (ii) the masculine, feminine, and neuter genders shall each be deemed to include the others; (iii) “shall,” “will,” or “agrees” are mandatory, and “may” is permissive; (iv) “or” is not exclusive; (v) “includes” and “including” are not limiting; and (vi) “days” means calendar days unless specifically provided otherwise.
16.12 IRS Form 1099-S Designation . In order to comply with information reporting requirements of IRC Section 6045(e) and the Treasury Regulations thereunder, the parties agree (i) to execute one or more IRS Form 1099-S Designation Agreements to designate the Title Company (the “ Designee ”) as the party who shall be responsible for reporting the contemplated sale of the Property to the Internal Revenue Service (the “ IRS ”) on IRS Form 1099-S; and (ii) to provide the Designee with the information necessary to complete Form 1099-S.
16.13 Third Party Beneficiaries . This Agreement has been made solely for the benefit of the parties hereto and their respective successors and permitted assigns, and nothing in this Agreement is intended to, or shall, confer upon any other person any benefits, rights or remedies under or by reason of this Agreement.
16.14 Compliance With Laws . Each party shall comply with all applicable laws, rules, regulations, orders, consents and permits in the performance of all of their obligations under this Agreement.
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16.15 Counterparts . This Agreement may be signed in any number of counterparts with the same effect as if the signatures to each counterpart were upon a single instrument, and is intended to be binding when all parties have delivered their signatures to the other parties. Signatures may be delivered by facsimile transmission or by e-mail in a portable document format ( pdf ). All counterparts shall be deemed an original of this Agreement.
16.16 Exhibits . All Recitals and Exhibits referred to in this Agreement are incorporated herein by reference and shall be deemed part of this Agreement.
16.17 Authority . The individuals executing this Agreement on behalf of Seller and Buyer individually represent and warrant that he or she has been authorized to do so and has the power to bind the party for whom they are signing.
16.18 Exchange Transaction . Each party agrees upon the request of the other party to cooperate with the other party in closing all or part of this transaction as an exchange pursuant to IRC Section 1031, provided that:
(a) The non-exchanging party shall incur no additional expense or liability in connection therewith and shall not be required to hold title to any property other than the Property;
(b) The exchanging party shall indemnify, protect, defend and hold the non-exchanging harmless from any claims, demands, causes of action, judgments, expenses, costs and attorneys’ fees which result from the non-exchanging party’s compliance with this paragraph, which obligation shall survive the Closing or termination of this Agreement; and
(c) The Closing is not materially delayed by the exchange.
16.19 Acceptance of Deed . Acceptance by Buyer at Closing of the Grant Deeds shall constitute an acknowledgment by Buyer of full performance by Seller of all of Seller’ obligations under this Agreement, except for the obligations of Seller which are expressly provided in this Agreement to survive Closing. Any of Buyer’s obligations under this Agreement that are expressly provided in this Agreement to survive Closing shall survive Closing and delivery of the Grant Deeds, notwithstanding any presumption to the contrary.
16.20 Confidentiality . Except as required by law or as necessary to perform their obligations under this Agreement, Buyer and Seller shall keep this Agreement and the transactions contemplated hereby, including the identities of Buyer and Seller and their respective affiliates, and the terms of this of this Agreement (collectively, “ Confidential Information ”) strictly confidential and shall not, without the prior written consent of the other party, disclose any Confidential Information to any other party or use any Confidential Information for any purpose other than evaluating the transaction described herein. However, each party may disclose Confidential Information to its affiliates and their respective officers, employees, advisors, agents, actual and prospective investors and lenders, consultants, title companies, surveyors and other contractors, provided that the party making the disclosure (1) shall provide Confidential Information to such persons only to the extent needed in connection with the transaction contemplated hereby and (2) shall instruct the recipient to keep such Confidential Information confidential. The confidentiality obligations contained in this Section shall survive the Closing, with the exception that, after the Closing, either party may disclose the fact that the Property was sold, but may not disclose any other Confidential Information except to the extent such Confidential Information is publicly available other than as a result of a breach of a party’s obligations under this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Contract Date.
SELLER: | PHARMACANN LLC | |
By: | /s/ Teddy Scott | |
Name: | Teddy Scott | |
Title: | Manager | |
BUYER: | IIP Operating partnership, LP | |
By: | /s/ Paul E. Smithers | |
Name: | Paul E. Smithers | |
Title: | CEO |
NOTE: BOTH PARTIES MUST INITIAL THE AGREEMENT AT SECTION 15.
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EXHIBIT A
DESCRIPTION OF property
PARCEL A:
ALL THAT PARCEL OF LAND LYING, SITUATE, AND BEING IN THE TOWN OF HAMPTONBURGH, COUNTY OF ORANGE, AND STATE OF NEW YORK AND BEING MORE ACCURATELY DESCRIBED AS FOLLOWS:
BEGINNING AT A REBAR FOUND ON THE NORTHERLY SIDE OF EAGER ROAD BEING ALSO A POINT IN COMMON WITH LANDS NOW OR FORMERLY OF BYRONS (L. 2622, P.33);
THENCE ALONG SAID LANDS THE FOLLOWING N 88° 56’ 54" E 150.67’ TO A REBAR FOUND;
THENCE N 77° 05’ 35" E 156.60’ TO A POINT;
THENCE ALONG SAID LANDS AND THE LANDS NOW OR FORMERLY OF MAJOR, CUPO (L. 2904, P.27) AND LANDS NOW OR FORMERLY OF EAGER (L. 784, P. 512) N 07° 40’ 50" E 1019.90’ TO A POINT;
THENCE ALONG THE LAST MENTIONED LANDS N 65° 58’ 33" W 109.47’ TO A POINT BEING IN COMMON WITH LANDS NOW OR FORMERLY OF CONSOLIDATED RAIL CORP. (L. 2110, P.852);
THENCE ALONG SAID LANDS ON A CURVE TO THE LEFT WITH A RADIUS OF 1942.86’, A CHORD BEARING OF N 27° 14’ 22" E, AND A CHORD DISTANCE OF 450.24’ TO A POINT BEING IN COMMON WITH LANDS NOW OR FORMERLY OF TOBIAS (L. 2262, P.564);
THENCE ALONG SAID LANDS AND PARTIALLY ALONG A STONE WALL S 38° 24’ 31" E 1395.45’ TO AN INTERSECTION OF STONE WALLS BEING A POINT IN COMMON WITH LANDS NOW OR FORMERLY OF NEELYTOWN CEMETERY (NO DEED);
THENCE ALONG SAID LANDS AND FOLLOWING A STONE WALL THE FOLLOWING:
1. | S 43° 04’ 47" W 37.37’ TO AN ANGLE POINT IN SAID WALL; THENCE |
2. | S 30° 49’ 01" W 49.21’ TO AN ANGLE POINT IN SAID WALL; THENCE |
3. | S 16° 18’ 47" W 119.84’ TO AN ANGLE POINT IN SAID WALL; THENCE |
4. | S 50° 09’ 25" E 75.65’ TO A POINT ON THE NORTHERLY SIDE OF EAGER ROAD; |
THENCE ALONG SAID ROAD THE FOLLOWING:
1. | S 53° 30’ 40" W 209.99’ TO A POINT; THENCE |
2. | S 55° 41’ 51" W 399.84’ TO A POINT; THENCE |
3. | S 57° 17’ 02" W 189.98’ TO A POINT; THENCE |
4. | S 71° 27’ 26" W 79.42’ TO A POINT; THENCE |
5. | S 85° 18’ 51" W 83.51’ TO A POINT; THENCE |
6. | N 72° 41’ 30" W 197.99’ TO A POINT; THENCE |
7. | N 70° 09’ 15" W 218.65’ TO A POINT; THENCE |
8. | N 60° 59’ 32" W 96.48’ TO A POINT; THENCE |
9. | N 41° 49’ 10" W 89.73’ TO A POINT, THENCE |
10. N. 22° 45’ 59" W 77.35’ TO SAID POINT BEING THE PLACE AND POINT OF BEGINNING AS SURVEYED BY HUDSON ENGINEERING ASSOCIATES ON JULY 7, AUGUST 1, 1988.
PARCEL B:
AND ALSO ALL THAT PARCEL OF LAND LYING, SITUATE, AND BEING IN THE TOWN OF HAMPTONBURGH, COUNTY OF ORANGE, AND STATE OF NEW YORK AND BEING MORE ACCURATELY DESCRIBED AS FOLLOWS:
BEGINNING AT A POINT AT THE END OF A STONE WALL ON THE SOUTHERLY SIDE OF EAGER ROAD SAID POINT ALSO BEING IN COMMON WITH LANDS NOW OR FORMERLY OF PITTS (L. 178, P. 137);
THENCE ALONG SAID LANDS AND PARTIALLY ALONG A STONE WALL S 53° 56’ 57" W 816.17’ TO A POINT BEING IN COMMON WITH LANDS NOW OR FORMERLY OF VARRICHO (L. 2535, P. 187);
THENCE ALONG SAID LANDS AND FOLLOWING A STONE WALL N 39° 06’ 34" W 499.22’ TO AN IRON PIPE FOUND BEING A POINT IN COMMON WITH LANDS NOW OR FORMERLY OF CONSOLIDATED RAIL CORP. (L. 2110, P. 852);
THENCE ALONG SAID LANDS THE FOLLOWING COURSES AND DISTANCES:
1. ON A CURVE TO THE RIGHT WITH A RADIUS OF 7614.44', A CHORD BEARING OF N 47° 40’ 45" E
AND A CHORD DISTANCE OF 405.19’ TO A POINT; THENCE
2. | S 40° 47’ 57" E 35.00’ TO A POINT; THENCE |
3. N 49° 47’ 44" E 513.64’ TO A POINT NEAR THE SOUTHERLY SIDE OF EAGER ROAD; THENCE ALONG SAID ROAD THE FOLLOWING COURSES AND DISTANCES:
1. | S 68° 02’ 08" E 138.18’ TO A POINT; THENCE |
2. | S 56° 53’ 25" E 79.63’ TO A POINT; THENCE |
3. | S 29° 19’ 46" E 36.19’ TO A POINT; THENCE |
4. | S 10° 35’ 45" E 73.52’ TO A POINT; THENCE |
5. | S 00° 24’ 42" W 143.85’ TO A POINT; THENCE |
6. | S 07° 14’ 00" E 73.96’ TO A POINT; THENCE |
7. | S 14° 47’ 40" E 21.16’ TO A POINT; THENCE |
8. S 22° 45’ 59" E 52.32’ TO SAID POINT BEING THE PLACE AND POINT OF BEGINNING AS SURVEYED BY HUDSON ENGINEERING ASSOCIATES, P.C. ON JULY 7 - AUGUST 1, 1988.
PARCEL C:
AND ALSO ALL THAT PARCEL OF LAND LYING, SITUATE, AND BEING IN THE TOWN OF HAMPTONBURGH AND THE TOWN OF MONTGOMERY, COUNTY OF ORANGE, AND STATE OF NEW YORK AND DESIGNATED AS THE NORTHERLY PORTION OF LOT 1 ON A CERTAIN MAP ENTITLED "PHASE 1 PLAN FOR PYRAMID SUBDIVISION, TOWN OF HAMPTONBURGH AND TOWN OF MONTGOMERY" AND FILED IN THE OFFICE OF THE CLERK OF ORANGE COUNTY 7/13/2004 AS MAP NO. 465-04, BEING MORE ACCURATELY DESCRIBED AS FOLLOWS:
BEGINNING AT A CONCRETE MONUMENT ON THE SOUTHERLY SIDE OF NEELYTOWN ROAD (ORANGE COUNTY ROUTE 99) AT THE NORTHWESTERLY LINE OF LANDS NOW OR FORMERLY OF CONSOLIDATED RAIL CORP.;
THENCE ALONG SAID LANDS THE FOLLOWING COURSES AND DISTANCES:
SOUTHERLY ON A CURVE TO THE LEFT WITH A RADIUS OF 1942.86’, A CHORD DISTANCE OF 616.73’ TO A POINT;
THENCE S 13° 31’ 03" W, 280.59’ TO THE TOWN LINE BETWEEN THE TOWNS OF MONTGOMERY AND HAMPTONBURGH AND THE NORTHEASTERLY CORNER OF THE PREMISES ABOUT TO BE DESCRIBED, THE TRUE POINT OR PLACE OF BEGINNING;
RUNNING THENCE ALONG SAID LANDS NOW OR FORMERLY OF CONSOLIDATED RAIL CORP THE FOLLOWING 5 COURSES AND DISTANCES:
1. | S 13° 31’ 03” W, 693.86’; |
2. | SOUTHERLY ON A CURVE TO THE RIGHT WITH A RADIUS OF 1876.86’, A CHORD DISTANCE OF 922.01’; |
3. | S 48° 11’ 06" E, 8.00’; |
4. | SOUTHERLY ON A CURVE TO THE RIGHT WITH A RADIUS OF 1884.86’, A CHORD DISTANCE OF 260.54’; |
5. | S 49° 47’ 48" W, 17.28’; |
THENCE N 72° 47’ 17" W, 483.04’;
THENCE N 73° 47’ 52" W, 35.52’;
THENCE N 68° 37’ 43" W, 646.99’;
THENCE N 68° 55’ 54" W; 209.03’;
THENCE N 64° 43’ 59" W, 149.59’;
THENCE N 60° 38’ 04" W, 414.09’;
THENCE N 62° 13’ 16" W, 151.22’;
THENCE N 74° 49’ 21" W, 150.32’;
THENCE N 87° 28’ 15" W, 236.83’;
THENCE N 81° 49’ 34" W, 261.73’;
THENCE NORTHEASTERLY ON A CURVE TO THE RIGHT WITH A RADIUS OF 12489.00’, AN ARC DISTANCE OF 205.32’;
THENCE N 39° 04’ 25" E, 704.70’;
THENCE NORTHEASTERLY ON A CURVE TO THE RIGHT WITH A RADIUS OF 1322.00’, AN ARC DISTANCE OF 88.01’;
THENCE N 43° 01’ 24" E, 590.89’;
THENCE NORTHEASTERLY ON A CURVE TO THE RIGHT WITH A RADIUS OF 6760.00’, AN ARC DISTANCE OF 300.60’;
THENCE S 38° 52’ 21" E, 399.79’; THENCE N 50° 46’ 32" E, 748.00’;
THENCE N 47° 23’ 20” E, 230.88’ TO A POINT BEING APPROXIMATELY ON THE TOWN LINE OF HAMPTONBURGH AND MONTGOMERY;
THENCE ALONG SAID APPROXIMATE TOWN LINE S 49° 17’ 30" E, 1461.61’ TO LAND NOW OR FORMERLY OF CONSOLIDATED RAIL CORP., THE POINT OR PLACE OF BEGINNING.
TOGETHER WITH AN EASEMENT FOR INGRESS AND EGRESS OVER THE FOLLOWING DESCRIBED PREMISES TO NEELYTOWN ROAD (COUNTY ROAD 99);
PARCEL D (RIGHT OF WAY PARCEL):
ALL THAT CERTAIN LOT, PIECE OR PARCEL OF LAND SITUATE IN THE TOWN OF MONTGOMERY, COUNTY OF ORANGE, STATE OF NEW YORK, AS SHOWN ON A PLAN ENTITLED "EASEMENT MAP FOR GREEN ACRES DEVELOPMENT GROUP" AS PREPARED BY EUSTANCE & HOROWITZ, P.C. DATED 8/8/2006 AND LAST REVISED ON 1/10/2008 AND BEING MORE PARTICULARLY BOUNDED AND DESCRIBED AS FOLLOWS:
BEGINNING AT A POINT ON THE SOUTHWESTERLY LINE OF COUNTY ROAD 99, SAID POINT OF BEGINNING BEING LOCATED, S 35° 59’ 04” E 121.00’ ALONG THE SOUTHWESTERLY LINE OF COUNTY ROAD 99 FROM THE NORTHERLY CORNER OF LANDS OF GREEN ACRES DEVELOPMENT GROUP;
THENCE FROM SAID POINT OF BEGINNING AND RUNNING ALONG THE SOUTHWESTERLY LINE OF COUNTY ROAD 99, S 48° 11’ 04” E 80.01’;
THENCE PASSING THROUGH THE LANDS OF GREEN ACRES DEVELOPMENT GROUP ON THE FOLLOWING FOUR COURSES AND DISTANCES:
1. S 42° 31’ 24” W 46.36’ TO A POINT OF CURVATURE;
2. THENCE ON A CURVE TO THE LEFT HAVING A RADIUS OF 285.00’, AN ARC DISTANCE OF 205.00; TO A POINT OF TANGENCY;
3. THENCE SOUTH 01° 18’ 41” W 784.89’ TO A POINT OF CURVATURE;
4. THENCE ON A CURVE TO THE RIGHT HAVING A RADIUS OF 440.00’, AN ARC DISTANCE OF 6.86’ TO A POINT ON THE APPROXIMATE TOWN LINE BETWEEN THE TOWN OF MONTGOMERY AND THE TOWN OF HAMPTONBURGH;
THENCE ALONG A PORTION OF THE TOWN LINE, N 49° 17’ 30” W 103.45’;
THENCE CONTINUING THROUGH LANDS OF GREEN ACRES DEVELOPMENT GROUP ON THE REMAINING THREE COURSES AND DISTANCES:
1. N 01° 18’ 41” E 726.09’ TO A POINT OF CURVATURE;
2. THENCE ON A CURVE TO THE RIGHT HAVING A RADIUS OF 365.00’, AN ARC DISTANCE OF 262.54’;
3. THENCE N 42° 31’ 24” E 45.37 FEET TO THE POINT OR PLACE OF BEGINNING.
TOGETHER WITH THE BENEFITS OF A GRADING AND CONSTRUCTION EASEMENT MADE BY AND BETWEEN GREEN ACRES DEVELOPMENT GROUP AND HUDSON VALLEY CROSSINGS, LLC DATED 4/7/2008 TO BE RECORDED.
TOGETHER WITH THE BENEFITS OF A DECLARATION OF DRAINAGE EASEMENT MADE BY GREEN ACRES DEVELOPMENT GROUP DATED 4/7/2008 (TO BE RECORDED).
EXHIBIT B
DOCUMENTS DELIVERED TO BUYER
01-Building and Property
1. A_complete_set of CAD_files_for_all_buildings.
2. Most recent existing survey of the Property.
3. Most recent Seller's issued policy of title insurance, and a current title report issued by the Title Company, together with copies of all listed exceptions.
4. Engineering, environmental and physical inspection reports generated by third parties in Seller's possession or control regarding the Property, including soil reports and maintenance records for mechanical equipment.
5. A list providing all capital items and maintenance and repair expenses incurred during the past twelve months.
6. Copies of current property tax bills and assessor's statements of current assessed value.
7. Statement of insurance coverage by policy type, a list of all claims against such policies over the past three years and copies of the actual insurance policies.
8. Copies of all leasing and brokerage agreements pursuant to which commissions remain owing or are anticipated to become owing after Closing.
9. List of personal property to be conveyed.
10. Copies of all warranty agreements in Seller's possession or control covering all real or personal property to be conveyed to be delivered upon closing.
02-Financial Information
1. Audited financial statements for the last three fiscal years.
2. Quarterly income statements for the last fiscal year and current fiscal year to date.
3. Financial or operating budgets or projections, with quarterly information for the last two fiscal years (and beyond. if any).
Exhibit B, Page 1 |
4. A description of all changes in accounting methods or principles during the last three fiscal years. 5. Any documents relating to material write-downs or write-offs other than in the ordinary course during the last three fiscal years.
6. Management's letters or special reports by auditors and any response thereto for the last three fiscal years.
7. Letter of counsel to the Company delivered to auditors for the last three fiscal years.
8. Detailed breakdown of G&A expenses for the last three fiscal years.
9. Copies of any valuations of the Company's stock.
lo. Description of all current and contingent liabilities.
03-Taxation
1. Any notice of assessment, revenue agents' reports, etc. from federal or state authorities with respect to any currently "open years.
2. State and Federal tax returns for the last three years;
3. Whether the Company was audited by any tax authorities and the date and result of such audit.
04-Litigation
1. Copies of any pleadings or correspondence for threatened or pending lawsuits, including any arbitration or mediation.
2. Summary of disputes with suppliers, competitors, or customers regarding any claims for an amount in excess of $5,000.
3 . Correspondence with auditor regarding threatened or pending litigation, assessment or claims.
4. Correspondence concerning inquiries from federal or state tax authorities.
5. Decrees, orders or judgments of courts or govemmental! agencies.
6. Settlement documentation.
1 Exhibit B, Page 2 |
EXHIBIT C
LEASE
DATED
___________ ___, 2016
BETWEEN
IIP Operating Partnership, LP
AS LANDLORD
AND
PharmaCann LLC
AS TENANT
Exhibit C, Page 1 |
BASIC LEASE INFORMATION
TERMS OF LEASE | DESCRIPTION | ||
Effective Date : | ________________, 2016 (Concurrent with closing of the Purchase and Sale Agreement) | ||
Premises (Article 1) . | That certain building containing approximately 130,000 square feet located at 600 Neelytown Road, Hudson Valley Crossing, Montgomery, NY. | ||
“ Term ”: | The period commencing on the Commencement Date and ending one hundred and eighty (180) months after the Commencement Date (plus any partial month at the beginning of the Term). | ||
“ Commencement Date”: ”: | The date that is concurrent with the closing of the Purchase and Sale Agreement. | ||
“ Base Rent ” (Article 2) | Base Rent for the first twelve (12) months of term of the Lease shall be equal to a monthly rate of Three Hundred Nineteen Thousand Five Hundred Eighty and No/100 Dollars ($319,580.00) plus fifteen percent (15%) of the closing costs incurred by Landlord in Landlord’s acquisition of the Premises divided by twelve (12). Base rent shall be adjusted annually at the rate of four percent (4%), or 75% of CPI, whichever is greater. | ||
“Supplemental Base Rent”: | Supplemental Base Rent shall be those payments as shown in Exhibit E, attached hereto. | ||
“ CPI” | As used herein, the “Consumer Price Index” (CPI) shall mean the Revised Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W): US City Average, All Items as published by the Bureau of Labor Statistics of the U.S. Department of Labor. | ||
“Operating Expenses ”: (Article 2) | The Lease shall be Absolute NNN, tenant to pay taxes maintenance, insurance, structural repairs and such other terms as provided herein. Tenant will be responsible for Additional Rent, as defined in Section 2.2, operating expenses and real estate taxes upon the Rent Commencement Date. In addition, Tenant will pay to Landlord a property management fee in the amount of 1.5% of the Base Rent. |
Exhibit C, Page 2 |
“Annual Adjustments”: (Section 2.5) | Base rent shall be adjusted annually on the anniversary of the Rent Commencement Date at the rate of four percent (4%) of the then current Base Rent, or seventy-five percent (75%) of CPI, whichever is greater. |
“ Security Deposit ” (Section 2.4) :
|
Tenant shall deposit with Landlord a Security Deposit in the amount of $2,112,474.00. At the beginning of month seven of the rental period, and up until month sixty of the rental period, the Security Deposit shall be reduced to $1,056,237.00, provided that Tenant achieves a revenue target as follows: Annualized EBITDA of $10,000,000.00 for a continuous six-month period. | ||
“ Permitted Use ” (Article 3) :
|
Agricultural growth and processing of agricultural materials, to include cannabis, Industrial and office space, consistent with current zoning for the premises and all applicable state and local laws. Permitted use shall include the cultivation and processing of cannabis plant parts and resins into products, and the storage of same for transport, and such other use or uses permitted under applicable law or ordinance. For clarification purposes, Permitted Use does not include the dispensing of any cannabis related materials that are prohibited by applicable Law. |
Exhibit C, Page 3 |
“License” | As used herein, the term “License” shall mean and refer to that certain license issued by _______________________, which license authorizes Tenant to grow and process agricultural materials including but not limited cannabis, and known as License Number _____________________, as amended from time to time. | ||
Address of Tenant (Article 11) : | Before the Commencement Date: | ||
PharmaCann LLC | |||
1140 Lake Street, Suite 304 | |||
Oak Park, Ill. 60301 | |||
With a copy to: | |||
Gary L. Plotnick | |||
Thompson Coburn LLP | |||
55 East Monroe Street | |||
37 th Floor | |||
Chicago, Illinois 60603 | |||
Address of Landlord (Article 11) | Rent by Mail to: | ||
IIP Operating Partnership, LP | |||
17190 Bernardo Center Drive | |||
San Diego, CA. 92128 | |||
Attn: Paul E. Smithers | |||
Or, Rent by Wire Transfer to: | |||
Comerica Bank | |||
5450 Jackson Drive | |||
La Mesa, CA 91942 | |||
(858) 676-1635 | |||
Innovative Greenhouse Properties | |||
ABA#: [ ] | |||
Acct #: [_ ] |
Exhibit C, Page 4 |
TABLE OF CONTENTS
ARTICLE 1 LEASE OF PREMISES; TERM | 7 | |
1.1 | Lease | 7 |
1.2 | Holdover | 7 |
1.3 | Extension Option | 7 |
ARTICLE 2 RENT | 8 | |
2.1 | Base Rent | 8 |
2.2 | Expenses and Taxes; Triple-Net | 9 |
2.3 | Late Charge | 9 |
2.4 | Security Deposit | 10 |
ARTICLE 3 USE, COMPLIANCE WITH LAWS, HAZARDOUS MATERIALS | 10 | |
3.1 | Use | 10 |
3.3 | Hazardous Materials | 11 |
ARTICLE 4 ALTERATIONS | 11 | |
4.1 | Alterations | 11 |
ARTICLE 5 REPAIR AND MAINTENANCE; SERVICES | 12 | |
5.1 | Tenant Repair and Maintenance Obligations | 12 |
5.2 | Condition of Premises on Surrender | 13 |
5.3 | Services | 13 |
ARTICLE 6 ASSIGNMENT AND SUBLETTING | 13 | |
6.1 | General Prohibition on Transfers | 13 |
6.2 | Conditions to Effectiveness | 14 |
6.3 | Transfer Premium | 15 |
6.4 | Permitted Transfers | 15 |
6.5 | Miscellaneous | 15 |
ARTICLE 7 INDEMNIFICATION; INSURANCE | 15 | |
7.1 | Indemnification | 15 |
7.2 | Tenant Insurance | 16 |
7.3 | Waivers | 17 |
ARTICLE 8 THIRD PARTIES | 17 | |
8.1 | Subordination | 17 |
8.2 | Attornment | 18 |
8.3 | Mortgagee’s Right to Cure | 18 |
8.4 | Sale of the Premises | 18 |
8.5 | Estoppel Certificates | 18 |
8.6 | Liens | 19 |
Exhibit C, Page 5 |
ARTICLE 9 EVENTS OF DEFAULT & REMEDIES | 19 | |
9.1 | Events of Default | 19 |
9.1.1 | Events of Default | 19 |
9.2 | Remedies | 19 |
ARTICLE 10 CASUALTY & CONDEMNATION | 21 | |
10.1 | Casualty | 21 |
10.2 | Condemnation | 22 |
ARTICLE 11 MISCELLANEOUS | 22 | |
11.1 | Notices | 22 |
11.2 | OFAC/FCPA | 22 |
11.3 | Financial Statements | 23 |
11.4 | Brokers | 23 |
11.5 | Limitation of Landlord’s Liability | 23 |
11.6 | No Waivers | 23 |
11.7 | Entry into Premises | 24 |
11.8 | Other Provisions | 24 |
11.9 | Interpretation | 25 |
11.10 | Tenant’s Signage | 26 |
Exhibit C, Page 6 |
LEASE AGREEMENT
This Lease Agreement (this “ Lease ”), dated ______________, 2016, is made between IIP Operating Partnership, LP (“ Landlord ”), and PharmaCann LLC., an Illinois Limited Liability Company (“ Tenant ”).
ARTICLE 1
LEASE OF PREMISES; TERM
1.1 Lease . Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord the Premises, as more particularly shown on Exhibit A, attached hereto for the Term. Promptly after Landlord’s request, Tenant shall execute and deliver to Landlord a Commencement Date Memorandum in the form attached as Exhibit B . Landlord and Tenant acknowledge that Tenant is in possession of the Premises.
1.2 As Is; No Representations . Tenant’s lease of the Premises is on an “AS IS” basis. Landlord has not made any representation or warranty to Tenant regarding (a) the condition or suitability of the Premises for the conduct of Tenant’s business, or (b) the restrictions that may affect the conduct of Tenant’s business in, or Tenant’s use of, the Premises, or any other rights or benefits under this Lease.
1.2 Holdover . If Tenant retains possession of any portion of the Premises after the Termination Date, then Landlord shall be entitled to exercise all remedies that may be available under this Lease or at law or in equity, and Tenant shall (a) be a tenant at sufferance only, (b) be liable to perform all of the obligations of Tenant set forth in this Lease, and (c) pay Base Rent at a rate of one hundred twenty five- percent (125%) of the monthly Base Rent in effect immediately prior to the Termination Date, prorated on a daily basis. “ Termination Date ” means the date on which this Lease terminates for any reason, including expiration of the Term. The provisions of this Section 1.2 shall not operate as a waiver by Landlord of any right of re-entry provided in this Lease.
1.3 Extension Option .
1.3.1 Generally, . Tenant shall have two (2) options (the “ Extension Option ”) to extend the Term of this Lease for a period of five (5) years each (the “ Extension Period ”), on the same terms and conditions in effect under this Lease immediately prior to the Extension Period, except that (a) Tenant shall have no further right to extend the Term of this Lease, (b) the Base Rent payable during the Extension Period shall be an amount equal to rent for the last year of the Lease, increased by the greater of 75% of CPI, or 4% on an annual basis. If Tenant exercises the Extension Option, such extension shall apply to the entire Premises. Tenant may exercise the Extension Option only by giving Landlord irrevocable and unconditional written notice thereof (the “ Extension Notice ”) not later than twelve (12) months prior to the commencement date of the Extension Period. Such exercise shall, at Landlord’s election, be null and void if any monetary or material non-monetary default (without regard to applicable grace or notice and cure periods) by Tenant under this Lease or any Event of Default shall have occurred and is continuing at the date of such notice. Upon delivery of the Extension Notice, Tenant shall be irrevocably bound to lease the Premises for the Extension Period. If Tenant shall fail to timely exercise the Extension Option in accordance with the provisions of this Section 1.3 , then the Extension Option shall terminate, and shall be null and void and of no further force and effect. If this Lease or Tenant’s right to possession of the Premises shall terminate in any manner whatsoever before Tenant shall exercise the Extension Option, then immediately upon such termination the Extension Option shall simultaneously terminate and become null and void. Time is of the essence with regard to this Section 1.3 .
Exhibit C, Page 7 |
ARTICLE 2
RENT
2.1 Base Rent .
2.1.1 Generally . Tenant shall pay to Landlord the monthly Base Rent in effect from time to time on or before the first day of each full calendar month during the Term. Tenant shall pay to Landlord on the Commencement Date the prorated Base Rent for any partial calendar month at the beginning of the Term. Base Rent for the first twelve (12) months of term of the Lease shall be equal to a monthly rate of Three Hundred Nineteen Thousand Five Hundred Eighty and No/100 Dollars ($319,580.00) plus fifteen percent (15%) of the closing costs incurred by Landlord in Landlord’s acquisition of the Premises divided by twelve (12). The Base Rent due for any partial calendar month at the end of the Term shall also be prorated and paid on the first day of such calendar month. Tenant shall pay to Landlord all items of Rent (as defined below), without deduction or offset and without notice or demand (except as specifically provided in this Lease in respect of Additional Rent (as defined below)), and Tenant shall deliver such payments to the payment address set forth in the Basic Lease Information, or to such other person, at such other place, or in such other manner as Landlord may designate by giving to Tenant Notice (as defined below) thereof. “ Additional Rent ” means all amounts payable by Tenant to Landlord in accordance with this Lease, other than Base Rent or Supplemental Rent. “ Rent ” means all amounts payable by Tenant to Landlord in accordance with this Lease, including, but not limited to Base Rent, Additional Rent, and Supplemental Rent.
2.2 Expenses and Taxes; Triple-Net The term “Rent” includes Base Rent, Supplemental Base Rent, and Additional Rent. Tenant shall pay all Operating Expenses directly relating to the Premises during the Occupancy Period. "Occupancy Period" means the period from the time Tenant first enters the Premises, throughout the Lease Term and thereafter as long as Tenant remains in the Premises.
2.2.1 Expenses. Tenant will pay directly all Operating Expenses allocable to the Occupancy Period in a timely manner and prior to delinquency. In the event that Tenant fails to pay any Operating Expense within fifteen days after written notice by Landlord to Tenant, and without being under any obligation to do so and without hereby waiving any default by Tenant, Landlord may pay any delinquent Operating Expenses. Any Operating Expense paid by Landlord and any expenses reasonably incurred by Landlord in connection with the payment of the delinquent Operating Expense may be billed immediately to Tenant, or at Landlord’s option and upon written notice to Tenant, may be deducted from the Security Deposit. "Operating Expenses" means all costs and expenses incurred with respect to the ownership, maintenance and operation of the Premises including, but not limited to: all insurance, maintenance, repair and replacement of the foundation, roof, walls, heating, ventilation, air conditioning, plumbing, electrical, mechanical, utility and safety systems, paving and parking areas, roads and driveways; maintenance of exterior areas such as gardening and landscaping, snow removal and signage; maintenance and repair of roof membrane, flashings, gutters, downspouts, roof drains, skylights and waterproofing; painting; lighting; cleaning; refuse removal; security; utilities for, or the maintenance of, outside areas; Premises personnel costs; personal property taxes; rentals or lease payments paid by Landlord for rented or leased personal property used in the operation or maintenance of the Premises; fees for required licenses and permits; and [a property management fee in the amount of 1.5% of the Base Rent.
Exhibit C, Page 8 |
2.2.2 “ Taxes ” means all real estate taxes, fees, assessments and other charges of any kind or nature, whether general, special, ordinary, or extraordinary, (without regard to any different fiscal year used by such governmental authority) that are levied in respect of the Premises, or in respect of any improvement, fixture, equipment, or other property of Landlord, real or personal, located at the Premises, and used in connection with the operation of the Premises., and all fees, expenses, and costs incurred by Landlord in investigating, protesting, contesting, or in any way seeking to reduce or avoid increases in any assessments, levies, or the tax rate pertaining to the Taxes. Taxes shall not include corporate franchise taxes, estate taxes, inheritance taxes, net income taxes.
2.3 Late Charge . Together with each payment of Rent and Supplemental Rent that Tenant pays to Landlord after such payment is due, Tenant shall pay to Landlord the Late Charge (as defined below) and interest calculated on the amount of such payment over the period commencing on the day immediately following the day on which such payment was due and ending on the day on which Tenant pays to Landlord such payment at the rate of the lesser of 12% per annum or the maximum lawful rate of interest; provided that no Late Charge shall apply unless Tenant fails to pay such delinquent payment within two (2) days after written notice of such delinquent payment from Landlord to Tenant. “ Late Charge ” means, in respect of any such payment, five percent (5%) of such payment.
Exhibit C, Page 9 |
2.4 Security Deposit . Concurrently with Tenant's execution of this Lease, Tenant shall deposit with Landlord a security deposit (the " Security Deposit ") in the amount of $2,112,474.00. At the beginning of month seven of the rental period, and up until month sixty of the rental period, the Security Deposit shall be reduced to $1,056,237.00 for the balance of the term of the Lease, upon Tenant achieving a revenue target of Annualized EBITDA of $10,000,000.00 for a continuous six-month period, as demonstrated by audited financial statements provided to Landlord.
The Security Deposit shall be made as security for the faithful performance by Tenant of all of its obligations under this Lease. If Tenant defaults with respect to any provisions of this Lease, including, but not limited to, the provisions relating to the payment of Rent, the removal of property and the repair of resultant damage, Landlord may, with notice to Tenant, but shall not be required to apply all or any part of the Security Deposit for the payment of any Rent or any other sum in default and Tenant shall, upon demand therefor, restore the Security Deposit to its original amount. Any unapplied portion of the Security Deposit shall be returned to Tenant, or, at Landlord's option, to the last assignee of Tenant's interest hereunder, within thirty (30) days following the expiration of the Term. Tenant shall be entitled to interest earned on the Security Deposit. Upon Tenant being entitled to reduce the Security Deposit as provided hereinabove, all interest accrued to date on the Security Deposit shall be paid to Tenant. Thereafter, interest shall accrue on the Security Deposit for the benefit of Tenant and shall be paid to Tenant when Tenant is entitled to the return of the Security Deposit as provided in this Lease. Tenant hereby irrevocably waives and relinquishes any and all rights, benefits, or protections, if any, Tenant now has, or in the future may have under any provision of law which (i) establishes the time frame by which a landlord must refund a security deposit under a lease, or (ii) provides that a landlord may claim from a security deposit only those sums reasonably necessary to remedy defaults in the payment of rent, to repair damage caused by a tenant, or to clean the subject premises. Tenant acknowledges and agrees that (A) any statutory time frames for the return of a security deposit are superseded by the express period identified in this Section 2.4 , above, and (B) rather than be so limited, Landlord may claim from the Security Deposit (i) any and all sums expressly identified in this Section 2.4 , above, and (ii) any additional sums reasonably necessary to compensate Landlord for any and all losses or damages caused by Tenant's default of this Lease, including, but not limited to, all damages or rent due upon termination of this Lease.
2.5 Annual Adjustments. Base rent shall be adjusted annually at the rate of four percent (4%), or seventy-five percent (75%) of CPI, whichever is greater.
ARTICLE 3
USE, COMPLIANCE WITH LAWS, HAZARDOUS MATERIALS
3.1 Use . Tenant shall use the Premises solely for the Permitted Use and shall comply with all applicable restrictions and laws. Tenant may use any portion of the roof of the Premises. Tenant shall not commit, or allow Tenant Parties (as defined below) to commit, any waste of the Premises. “ Tenant Parties ” means Tenant’s agents, contractors, employees, customers, licensees, invitees, assignees, and subtenants.
3.2 Compliance with Laws. The parties acknowledge that myriad regulations and local and state laws shall govern the operation of Tenant’s use. Tenant alone will be responsible for compliance with all mandates to maintain compliance with the License.
3.2.1 Mandates : Tenant’s foregoing obligation shall encompass all laws and regulations from any governmental authority with jurisdiction related solely to the issuance and maintenance of the License that become effective before and during the Lease term, as same may be extended (collectively, the “Mandates”), regardless of the cost of such compliance, including, but not limited to, state regulations, local zoning ordinances and local laws allowing the Tenant to use the Premises for the Permitted Use. Tenant’s inability to comply with new Mandates shall be grounds for termination of this Lease by Landlord; provided, however, that Tenant shall continue to be liable for all rent and other charges reserved in this Lease through the date of such termination and, without exception, through and including the date upon which Tenant has complied in full with the surrender and restoration obligations, which shall include any Mandates pertaining to dismantling and restoration of property following the cessation of a use like the Permitted Use.
Exhibit C, Page 10 |
3.2.1 To ensure Tenant’s compliance with Mandates, upon reasonable notice to Tenant and subject to and in accordance with all applicable Law, Landlord shall cause independent third party inspections of the facility and Tenant’s operation to confirm compliance with Mandates, at Landlord’s expense.
3.2.2 To ensure Tenant’s compliance with Mandates, subject to execution by Landlord of a mutually acceptable confidentiality agreement, Landlord shall have the right to review at the Premises (subject to and in accordance with all applicable Law) Tenant’s receipts of sales and all other records Tenant shall from time to time maintain at this Lease’s inception and thereafter.
3.3 Hazardous Materials . Tenant shall not, and shall not permit Tenant Parties to, at any time, handle, use, manufacture, store, or dispose of Hazardous Materials (as defined below) in or about any portion of the Premises. Notwithstanding the foregoing, Tenant may handle, use, store, and dispose of products containing small quantities of Hazardous Materials to the extent customary, required and necessary for the Permitted Use; provided that Tenant shall always handle, use, store, and dispose of such products in a safe manner and in compliance with Restrictions and shall never allow such products to contaminate any portion of the Premises or the Project. “ Hazardous Materials ” means flammables, explosives, corrosive materials, radioactive materials, materials capable of emitting toxic fumes, hazardous wastes, toxic wastes or materials, and other similar substances, petroleum products and derivatives, and any substance subject to regulation by or under any Laws relating to the protection of the environment or the keeping, use, transportation, or disposition of environmentally hazardous materials, substances, or wastes, and all amendments to any of them.
ARTICLE 4
ALTERATIONS
4.1 Alterations .
4.1.1 Consent . Tenant shall not make or allow to be made any Alterations that require the issuance of building or other permits in accordance with applicable local law without the prior written consent of Landlord, such consent not to be unreasonably withheld, conditioned, or delayed. Landlord’s consent shall not be required with respect to Alterations that do not require any permits, approvals or authorizations from any governmental agency. Notwithstanding anything contained in this Lease to the contrary, Tenant shall, without the consent of Landlord, but upon notice to Landlord, be allowed to make such Alterations as Tenant is required to complete in order to maintain the License in accordance with the Permitted Use even if building or other permits are required to be issued for completion of such Alterations. Tenant hereby agrees to provide copies of all plans of such Alterations. “ Alterations ” means any alterations, additions, or improvements to the Premises, including the attachment of any fixtures or equipment in, on, or to any part of the Premises. If Tenant is obligated to request Landlord’s consent to any Alterations under the terms and conditions of this Lease, then, if requested by Landlord, Tenant shall give to Landlord complete plans and specifications for such Alterations. All Alterations shall be constructed, maintained, and used by Tenant, at its risk and expense, in accordance with all laws. Landlord’s consent to or approval of any Alterations (or the plans therefor) shall not constitute a representation or warranty by Landlord, nor Landlord’s acceptance, that the same comply with sound architectural and/or engineering practices, or with all applicable laws, and Tenant shall be solely responsible for ensuring all such compliance. If, as a result of Tenant’s use of the Premises or the making of any Alterations to the Premises (including the Initial Tenant Work, as defined below), any other alterations, improvements, betterments or other physical additions shall be required to be made to any part of the Premises or the Project to comply with the requirements of any applicable Law, including the requirements of the Americans With Disabilities Act (ADA), the Occupational Safety & Health Administration (OSHA), or any of the Restrictions, Tenant shall be solely responsible for the costs (including the costs of any required Title 24 upgrades) incurred to effect such compliance with respect to the Premises, and Landlord shall be solely responsible for the costs (including the costs of any required Title 24 upgrades) incurred to effect such compliance.
Exhibit C, Page 11 |
4.1.2 Requirements . With respect to any Alterations, Tenant hereby agrees as follows: (a) Tenant shall contract for the performance of such Alterations with a contractor approved by Landlord, which approval shall not be unreasonably withheld or delayed, (b) Tenant shall cause all Alterations to be constructed free of all liens, in accordance with all Restrictions, (c) Tenant shall pay the costs of the Alterations and so that Landlord, the Premises and the Project will be protected against any loss from any mechanic’s, materialmen’s, or other liens, and (d) prior to the commencement of the construction of any Alterations, Tenant shall give to Landlord evidence of the insurance required by Section 7.2.4 .
4.1.3 Completion . Upon the completion of any Alterations, (a) Tenant shall timely cause to be recorded a Notice of Completion in respect of such Alterations in the office of the applicable Recorder’s Office, and Tenant shall give to Landlord a conformed copy of such Notice of Completion and (b) Tenant shall give to Landlord a reproducible copy of the “as-built” drawings of such Alterations.
4.1.4 Ownership of Alterations . Any Alterations that are paid for by Landlord (“ Landlord Alterations ”) shall belong to Landlord, subject to Landlord’s right to require removal thereof in accordance with Section 5.2 . Any Alterations that are paid for by Tenant (“ Tenant Alterations ”) shall belong to Tenant until the Termination Date, at which time the Tenant Alterations shall belong to Landlord, subject to Landlord’s right to require removal thereof in accordance with Section 5.2 .
ARTICLE 5
REPAIR AND MAINTENANCE; SERVICES
5.1 Tenant Repair and Maintenance Obligations . Landlord and Tenant acknowledge and agree that this is a "true" NNN lease and that Landlord shall have NO obligations relating to the repair or maintenance of the Premises, or any part thereof, or the outside areas; Tenant shall be solely responsible for same. Tenant shall repair and maintain the Premises and keep same in good condition and in compliance with Law. Tenant shall contract for the performance of repairs and maintenance of the Premises with contractors approved by Landlord. If Tenant fails to so repair and maintain the Premises, after applicable notice and cure period, then Landlord may do so on Tenant’s behalf, and Tenant shall reimburse Landlord for the cost thereof, plus an administrative fee of 5% of such costs.
Exhibit C, Page 12 |
5.2 Condition of Premises on Surrender . Except as otherwise provided in this Section 5.2 , upon the Termination Date, all Alterations, whether Landlord Alterations or Tenant Alterations, shall belong to Landlord without compensation, and title shall pass to Landlord under this Lease. On the Termination Date, Tenant shall give Landlord possession of the Premises, together with all such Alterations, in the same condition as when received or first installed, broom clean and free of all debris, excepting only ordinary wear and tear and damage that Tenant is not required to repair or restore under this Lease. On or prior to the Termination Date, Tenant shall also remove all of Tenant’s furniture, portable trade fixtures, furnishings, electronic data processing equipment, and other equipment (with the exception of security systems servicing the Premises, which shall remain the property of Landlord), and movable partitions of less than full height from floor to ceiling and other personal property (collectively, the “ Personalty ”) and trade fixtures. All of Tenant’s Personalty and portable trade fixtures not so removed by Tenant, may be removed from the Premises by Landlord and stored, at Tenant’s sole risk and expense and in any event, Landlord shall not be responsible for the value, preservation, or safekeeping thereof. Tenant shall pay to Landlord, upon demand, all reasonable expenses so incurred by Landlord, including the cost of repairing any damage caused by removal and storing such Personalty and/or trade fixtures (collectively, “Tenant’s Property”). Any such Tenant’s Property not claimed by Tenant within sixty (60) days after Tenant’s surrender of the Premises shall, at Landlord’s option, be deemed either abandoned or conveyed by Tenant to Landlord under this Lease without further payment or credit by Landlord to Tenant.
5.2 Services . Landlord shall not be obligated to furnish to the Premises any services or utilities (including, without limitation, janitorial services), and Tenant shall contract directly with the providers of all services and utilities Tenant desires to receive at the Premises.
ARTICLE 6
ASSIGNMENT AND SUBLETTING
6.1 General Prohibition on Transfers .
6.1.1 Transfers Generally . Tenant shall not, directly or indirectly, make a Transfer (as defined below), except in accordance with this Article 6 , and any purported Transfer that does not comply with the provisions of this Article 6 shall be void.
6.1.2 Defined Terms .
(a) “ Transfer ” means any assignment, pledge, mortgage, hypothecation, encumbrance, lien attaching to, or other transfer of this Lease, or any sublet or other transfer of any portion of the Premises, or any Interest Transfer (as defined below), in any case whether voluntarily, by operation of Law, or otherwise, or permitting the Premises to be used or occupied by anyone other than Tenant.
(b) “ Transferee ” means the party to which a Transfer is made.
(c) “ Interest Transfer ” means if Tenant is a corporation, trust, partnership, limited liability company or other entity, (i) the transfer of a Controlling Interest in the voting stock, beneficial interest, partnership interests, membership interests or other ownership interests therein (whether at one time or in the aggregate) or (ii) the sale, mortgage, hypothecation, or pledge of more than 25% of Tenant’s net assets. A “ Controlling Interest ” means the effective control over the management of such entity.
Exhibit C, Page 13 |
6.1.3 Consent Requests . If Tenant desires to assign this Lease, sublease all or any part of the Premises, or effect an Interest Transfer, then Tenant shall give to Landlord Notice thereof at least 30 days, but not more than 60 days, prior to the proposed effective date of the Transfer, which Notice shall include (a) the name and address of the proposed Transferee, (b) the relevant terms of the Transfer, (c) copies of financial reports and other relevant financial information for the proposed Transferee, (d) information regarding the nature of the business the proposed Transferee intends to operate in the Premises and how long the proposed Transferee has operated such business, (e) a draft of the document to be used to effect the Transfer (the “ Transfer Document ”), and (f) payment to Landlord of $2,500 as a transfer review fee. Landlord may give, condition, delay or withhold its consent to a Transfer in Landlord’s reasonable discretion.
6.1.4 Permitted Transfer . Notwithstanding anything contained herein to the contrary, Tenant may assign its interest in this Lease or sublease all or any part of the Premises (each a “Permitted Transfer”) to a Permitted Transferee (defined below) without Landlord's prior written consent; provided, that (i) Tenant gives Landlord a written notice of any Permitted Transfer not later than thirty (30) days prior to the effective date of such Permitted Transfer, (ii) Tenant is not in Default under this Lease, (iii) with respect to a Permitted Transfer involving an assignment of this Lease, the Permitted Transferee assumes this Lease by a written assumption agreement delivered to Landlord prior to the effective date of such Permitted Transfer, (iv) the Permitted Transferee shall use the Premises only for the Permitted Use, (v) the use of the Premises by the Permitted Transferee shall not violate any other agreements or leases affecting the Property, (vi) the occurrence of a Permitted Transfer shall not waive Landlord's rights as to any subsequent Transfer, and (vii) Tenant shall be released from any liability under this Lease (whether past, present or future) by reason of such Permitted Transfer). As used herein, (A) “Affiliate” means any person or entity who or which controls, is controlled by, or is under common control with Tenant, (ii) a corporation or other entity which shall be a wholly owned subsidiary of the Tenant, (iii) the parent corporation or other entity of Tenant, or (iv) a subsidiary of such parent corporation or other entity, or to a corporation or other entity having a majority of its ownership in common with the ownership of Tenant; (B) “Successor” means any business entity (i) in which or with which Tenant is merged or consolidated in accordance with applicable statutory provisions governing merger and consolidation of business entities, so long as Tenant's obligations under this Lease are assumed by the Successor or (ii) the successor or surviving corporation or other entity in the event of a merger or consolidation of the Tenant with another corporation, or (iii) a franchisee of Tenant’s (C) “Purchaser” means any person or entity who or which acquires all or substantially all of the assets of Tenant,), and (D) “Permitted Transferee” means an Affiliate, Successor, Purchaser or an entity that is an approved operator by the applicable New York governmental agency with respect to Tenant’s business operations at the Premises
6.2 Conditions to Effectiveness . As conditions precedent to any Transfer becoming effective and binding on Landlord:
6.2.1 Prior to the proposed effective date of the Transfer, Tenant shall give to Landlord a copy of the fully executed Transfer Document, which shall (i) be in form and substance reasonably acceptable to Landlord, and (ii) for an assignment of this Lease, contain Transferee’s express assumption of Tenant’s obligations under this Lease and waivers by Tenant, for the benefit of Landlord, of all applicable suretyship defenses;
6.2.2 as of the proposed effective date of the Transfer, there shall exist no Event of Default and Landlord shall not have given to Tenant any Notice of a default that Tenant has not cured; and
6.2.3 between the date on which Landlord gave to Tenant Landlord’s consent to the proposed Transfer and the proposed effective date of the Transfer, there shall have been no material adverse change in circumstances that would have allowed Landlord to reasonably withhold Landlord’s consent to the proposed Transfer had such change occurred prior to Landlord giving such consent.
Exhibit C, Page 14 |
6.3 Transfer Premium . If Landlord consents to a Transfer relating solely to a sublease of the Premises, then at Landlord’s option Tenant shall pay to Landlord 50% of any Transfer Premium (as defined below). “ Transfer Premium ” means the amount by which all rent paid by the transferee to Tenant or to any subtenant or any other person or entity (other than Tenant) (such person or entity being referred to as a “ Subsequent Transferor ”) for the Premises pursuant to such agreement exceeds the monthly Base Rent payable by Tenant hereunder with respect to the portion of the Premises being transferred for the term of such agreement. Payment of the Transfer Premium payable to Landlord hereunder shall be made on the first day of each month during the term of such agreement, the Transferee shall pay directly to Landlord 50% of the amount by which the rent, additional rent and other consideration due from the Transferee to Tenant or a Subsequent Transferee under such agreement for such month exceeds the sum of (A) the Base Rent payable by Tenant under this Lease with respect to the portion of the Premises to be Transferred for such month.
6.4 Miscellaneous .
6.4.1 Notwithstanding any Transfer, permitted or otherwise, Tenant shall at all times remain directly, primarily, and fully responsible and liable for the payment of Rent and for compliance with all of the other obligations to be performed by Tenant under the terms, provisions and covenants of this Lease. If any Transferee defaults under this Lease, then Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such Transferee.
6.4.2 Landlord may consent to subsequent Transfers, or amendments or modifications to this Lease with Transferees, without notifying Tenant and without obtaining Tenant’s consent, and no such consent by Landlord shall relieve Tenant of liability under this Lease.
6.4.3 Upon the occurrence of an Event of Default, if all or any portion of the Premises is then subject to one or more subleases, then Landlord, in addition to any other remedies provided in this Lease or by Law, may collect directly from the subtenants under such subleases all rents due and becoming due to Tenant under such subleases and apply such rent against any sums due to Landlord from Tenant under this Lease, and no such collection shall be construed to constitute a novation or release of Tenant from the further performance of Tenant’s obligations under this Lease.
ARTICLE 7
INDEMNIFICATION; INSURANCE
7.1 Indemnification . To the extent permitted by Laws, Tenant shall protect, indemnify, and hold Landlord harmless from and against any and all Claims incurred by reason of: (a) any damage to any property (including the property of Landlord), or any injury (including death) to any person, occurring in, on, or about any portion of the Premises, to the extent that such injury or damage shall be caused by, or arise from, any actual or alleged act, neglect, fault, or omission by or of Tenant or any Tenant Parties; (b) any Alterations, work, or other thing done by Tenant or any Tenant Parties in or about any portion of the Premises, or from transactions of Tenant concerning any portion of the Premises; (c) Landlord’s withholding of consent to any Transfer; (d) Tenant’s failure to materially comply with any restrictions; (e) any breach or default by Tenant, after applicable notice and cure period, of any representation, covenant or other term of this Lease; or (f) the failure of Tenant or any other occupant of the Premises to surrender to Landlord possession of the Premises on the Termination Date in accordance with this Lease; provided that Tenant shall not be obligated to so indemnify Landlord to the extent any such matter arises from, or is caused by, the willful misconduct or gross negligence of Landlord. “ Claims ” mean claims, demands, losses, penalties, fines, liabilities, actions (including informal proceedings), settlements, judgments, damages, reasonable costs, and reasonable expenses (including reasonable attorneys’ fees and consultants’ fees, court costs, and other litigation expenses) of whatever kind or nature, known or unknown, contingent or otherwise, incurred or suffered by, or asserted against, the party in question.
Exhibit C, Page 15 |
In addition to the above, Tenant agrees to indemnify and hold harmless Landlord from and against damages or losses Landlord incurs as a result of an Early Exit Event, as set forth in Section 9.3.
7.2 Tenant Insurance .
7.2.1 Required Policies . Tenant shall obtain and keep in force throughout the Term the following coverages in the following amounts: (a) commercial general liability insurance on an “occurrence” basis on the current ISO CG 00 01 occurrence form or its equivalent with a deductible reasonably acceptable to Landlord, and with a combined single limit for bodily injury, death, property damage for products and completed operations, third-party bodily injury and/or property damage, contractual liability, personal injury and advertising injury, in an amount reasonably satisfactory to Landlord, but in no event less than $1,000,000.00 and a general aggregate no less than $2,000,000.00; such limit can be achieved by a primary policy or a combination of primary and umbrella/excess policies; (b) comprehensive automobile insurance on ISO form CA 00 01 or its equivalent covering owned vehicles with a combined single limit of not less than $1,000,000.00; (c) worker’s compensation insurance with limits as required by Laws, and employer’s liability insurance coverage with limits of $500,000.00 each accident, $500,000.00 disease – each employee, and $500,000.00 – policy limit; (d) “Special Form” property insurance covering damage to or loss of Tenant’s Personalty, and all Tenant’s Alterations in an amount equal to the full replacement value thereof (without deduction for depreciation); (e) business income insurance with extra expense insurance (ISO form CP 00 30 or its equivalent) in an amount not less than 12 months of income on an Actual Loss Sustained basis; and (f) any such other insurance as Landlord’s lender may require or Landlord may reasonably require.
7.2.2 Requirements for Policies . The policies required under Section 7.2.1 shall: (a) with respect to the commercial general liability policy, name Landlord, Landlord’s property manager; and/or any other persons or entities reasonably designated by Landlord, as additional insureds using additional insurance endorsements CG 20 10 10 01 and 20 37 07 04 or their equivalents, and (ii) with respect to the property insurance policy, name Landlord and Landlord’s lender as loss payees; (b) be issued by reputable, financially sound insurance companies admitted to do business in the State with an A.M. Best rating of A-:VIII or better at all times during which one or more policies issued by such companies are being used to satisfy any of the requirements of Section 7.2.1 ; (c) provide that such policies shall not be canceled unless 30 days’ notice shall have been given to Landlord (except that 10 days’ notice of cancellation for non-payment of premiums may be given); (d) include coverage for liability assumed under an insured contract (including the tort liability of another assumed in a business contract) with defense provided in addition to policy limits, including the indemnity obligations set forth in Section 7.1 ; (e) provide that no act or omissions of Tenant shall affect or limit the obligations of the insurer with respect to other insureds, including Landlord; (f) provide that the proceeds of such insurance applicable to casualties occurring during the Term shall be used to repair or replace Tenant’s Personalty and Tenant Alterations, and to pay the Rent; and (g) with respect to the commercial general liability policy, provide that (i) coverage includes a standard ISO separation of insureds provision or substantially similar provision, (ii) Landlord, although an additional insured, shall nevertheless be entitled to recovery under such policy for any damage to Landlord or the Premises by reason of acts or omissions of Tenant, and (iv) the coverage carried by Landlord shall be noncontributory with respect to policies carried by Tenant. The cost of the Required Insurance and any deductibles, self-insured retentions or co-insurance penalties payable in connection with claims under the Required Insurance, as well as the cost of any other insurance carried by Tenant, will be borne solely by Tenant, without reimbursement by Landlord. By requiring the Required Insurance, Landlord does not represent that the required coverage and limits will be adequate to protect Tenant, and the required coverage and limits will not limit Tenant’s indemnity obligations under this Lease.
Exhibit C, Page 16 |
7.2.3 Evidence of Insurance . Prior to the Commencement Date, Tenant shall give to Landlord either a copy of each insurance policy required to be obtained and maintained by Tenant in accordance with Section 7.2.1 , or certificate thereof issued by the insurance company on ACORD Form 25 as to liability insurance, or on ACORD Form 28 as to property insurance showing such policies in force, and a copy of the additional insured endorsements, and thereafter Tenant shall give to Landlord renewal policies or certificates meeting the requirements of this Section 7.2 at least 30 days prior to the expiration date of each policy. Tenant shall, within a reasonable period of time after Landlord’s request therefor, give to Landlord a certified copy of any and all insurance policies required by this Lease.
7.2.4 Insurance for Alterations . During the performance of any Alterations by Tenant, (a) the insurance required under this Section 7.2 shall extend to all of Tenant’s contractors (and subcontractors of any tier) and shall include injuries to persons and damage to property arising in connection with such Alterations and (b) Tenant shall also maintain such other insurance as Landlord may require, including all-risk builder’s insurance. Tenant shall give to Landlord copies of the policies of, or certificates evidencing, such insurance prior to commencing construction of such Alterations.
7.3 Waivers .
7.3.1 Tenant hereby waives all rights against Landlord for recovery of damages to the extent that those damages are covered under Tenant’s insurance required to be maintained under Sections 7.2.1(a), (b), (c) and (f) above, or which would ordinarily have been covered by such insurance if Tenant had maintained such insurance. Tenant shall obtain any special endorsements required by Tenant’s insurers to effect compliance with this Section 7.3.1 .
7.3.2 Each of Landlord and Tenant hereby waive all rights against the other for recovery of damages to the extent that such damages are covered by any property insurance related to the Premises or the Premises, or which would ordinarily have been covered by such insurance if the waiving party had maintained the property insurance required to be maintained by it under this Lease. If any property insurance policy implicated by this waiver does not allow the insured to waive rights of recovery against others prior to a loss, the insured shall cause such policy to be endorsed to provide this waiver.
7.3.3 Landlord shall not be liable to Tenant, and Tenant hereby waives all Claims against Landlord for any damage to or loss of property in or about any portion of the Premises by or from any cause whatsoever, except to the extent caused by or arising from the gross negligence or willful misconduct of Landlord.
ARTICLE 8
THIRD PARTIES
8.1 Subordination . This Lease shall be automatically subject and subordinate at all times to the lien of any first priority mortgages or deeds of trust on, against, or affecting any portion of the Premises, or Landlord’s interest or estate in any portion of the Premises, whether this Lease was executed before or after said instrument, and to all renewals, modifications, consolidations, replacements, and extensions thereof (each, a “ Mortgage ”); provided that Tenant receives a “Non-Disturbance Agreement” from any current and future encumbrance holder (each, a “ Mortgagee ”) in customary form assuring Tenant that as long as Tenant is not in Default under this Lease, Tenant’s rights under this Lease shall not be impaired or modified by such Mortgagee. If a Mortgagee elects to have this Lease be superior to such Mortgage, then, by Notice given to Tenant, this Lease shall be deemed superior. Tenant shall execute and deliver to Landlord, within 10 days after Landlord’s request therefor, such further commercially reasonable instruments evidencing such subordination or superiority as may be required by Landlord.
Exhibit C, Page 17 |
8.2 Attornment . In the event of the foreclosure of, or exercise of the power of sale under, any Mortgage, or in the event of a deed given in lieu of foreclosure, then (a) upon the request of the purchaser in such foreclosure or sale, or the grantee under such deed in lieu (any such party, the “ New Owner ”), Tenant shall attorn, without any deductions or setoffs whatsoever, to the New Owner and recognize the New Owner as the Landlord under this Lease; (b) upon the request of the New Owner, Tenant shall enter into a new lease, containing all of the terms and provisions of this Lease, with the New Owner for the remaining Term, or at the election of the New Owner, this Lease shall automatically become a new lease between Tenant and the New Owner upon the terms and provisions of this Lease for the remaining Term, and Tenant shall confirm such attornment and new lease in writing within 10 days after the New Owner’s request therefor; (c) the New Owner shall not be liable for any act or omission of Landlord under this Lease occurring prior to the New Owner stepping into the shoes of Landlord, except for the return of the Security Deposit (and all interest accrued thereon) to Tenant as provided under the terms and conditions of this Lease; and (d) the New Owner shall not be bound by any modification of this Lease that was not consented to by the New Owner or any previous payment of more than one month of Base Rent that was not consented to by the New Owner. Tenant waives the provisions of any laws that may give or purport to give to Tenant any right to terminate or otherwise adversely affect this Lease or the obligations of Tenant under this Lease in the event of any foreclosure, sale or deed in lieu of foreclosure.
8.3 Mortgagee’s Right to Cure . Notwithstanding anything to the contrary in this Lease, before exercising any right (a) of offset, counterclaim, reduction, deduction, or abatement against Tenant's payment of Rent under this Lease or (b) to terminate the Lease or to claim a partial or total eviction, in each case arising from Landlord's default under this Lease, (i) Tenant shall provide to each Mortgagee whose name and address has been furnished in writing to Tenant with notice of the default by Landlord giving rise to same, and (ii) after such Mortgagee receives such notice, such Mortgagee shall have the same period of time available to Landlord under the Lease in which to cure the default. Such Mortgagee shall have no obligation to cure (and shall have no liability or obligation for not curing) any default by Landlord. In addition, as to any default by Landlord the cure of which requires possession and control of the Premises, provided that such Mortgagee undertakes by written notice to Tenant to exercise reasonable efforts to cure or cause to be cured by a receiver such default within the period permitted by this Section 8.3 , such Mortgagee's cure period shall continue for such additional time as such Mortgagee may reasonably require to either: (A) obtain possession and control of the Premises with due diligence and thereafter cure the default with reasonable diligence and continuity; or (B) obtain the appointment of a receiver and give such receiver a reasonable period of time in which to cure the default.
8.4 Sale of the Premises . If Landlord sells or conveys the Premises, such sale or conveyance shall release Landlord from any liability from and after such sale or conveyance upon any of the covenants or conditions, expressed or implied, contained in this Lease in favor of Tenant, and in such event, Tenant agrees to look solely to the successor-in-interest of Landlord in and to this Lease. Except as set forth in this Section 8.4 , this Lease shall not be affected by any such sale or conveyance and Tenant agrees to attorn to the purchaser or assignee. Landlord shall transfer or deliver the Security Deposit (and all interest accrued thereon) to Landlord’s successor-in-interest and thereupon Landlord shall be discharged from any further liability with regard thereto.
8.5 Estoppel Certificates . Within 10 days after Landlord’s request, Tenant shall execute and deliver to Landlord and any of Landlord’s then existing or prospective lenders, investors, or purchasers of any portion of the Premises, a certificate substantially in the form attached as Exhibit C , or in such other form and containing such other information as Landlord or any such lenders, investors, or purchasers, may reasonably require. Any certificate delivered in accordance with this Section 8.5 may be relied upon by any such lender, investor, or purchaser. Within 10 days after Tenant’s request, Landlord shall execute and deliver to Tenant and any of Tenant’s then existing or prospective lenders, investors, or purchasers, a statement in writing certifying that Tenant is in possession of the Premises under the terms of this Lease, that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, as modified, and setting forth such modifications), stating the dates to which rent has been paid, and either stating that no defaults exist hereunder, or specifying each such default of which Landlord may have knowledge, and such other matters as may be reasonably requested by Tenant.
Exhibit C, Page 18 |
8.6 Liens . Tenant shall, within sixty (60) days of filing, discharge (either by payment or by filing of the necessary bond, insure over, or otherwise) any mechanic’s, materialman’s or other lien or encumbrance against any portion of the Premises that arises out of any payment due for, or purported to be due for, any labor, services, materials, supplies or equipment alleged to have been furnished to or for Tenant. If Tenant shall fail to so discharge such lien or encumbrance (either by payment or by filing of the necessary bond, insure over or otherwise) then, in addition to any other right or remedy of Landlord, Landlord may discharge the same (either by payment or by filing of the necessary bond or otherwise), and any payment, costs and expenses incurred by Landlord in connection therewith, including reasonable attorneys’ fees, shall be repaid together with interest thereon at the rate set forth in Section 2.3 from the date of payment.
ARTICLE 9
EVENTS OF DEFAULT & REMEDIES
9.1 Events of Default .
9.1.1 Events of Default . “ Event of Default ” means any of the following: (a) Tenant fails to pay when due any Rent, and such failure continues for 5 days after Landlord gives to Tenant Notice thereof; (b) except as otherwise provided in this Lease, Tenant fails to comply with any term, provision, or covenant of this Lease and such failure continues for 30 days after Landlord gives to Tenant Notice thereof (but if such failure is curable but cannot reasonably be cured during such 30-day period, and if Tenant has commenced such cure promptly and in any case within such 30-day period and thereafter has diligently pursued such cure to completion, then such 30-day period shall be extended to 90 days); (c) Tenant fails to obtain and keep in force at all times any insurance required under this Lease, and such failure continues for 5 days after Landlord gives to Tenant Notice thereof; (d) Tenant fails to deliver to Landlord timely any instrument or assurance required under this Lease; (e) material breach of any of the representations or warranties of Tenant set forth in this Lease; or (f) Tenant’s failure to restore the Security Deposit as set forth in Section 2.4 above.
9.1.2 Intentionally Deleted
9.2 Remedies .
9.2.1 Upon Event of Default . Upon the occurrence of any Event of Default, Landlord shall have the option to pursue any one or more of the following remedies without any Notice or demand whatsoever, concurrently or consecutively and not alternatively (in addition to any other remedies available to Landlord at law or in equity), all of which remedies shall be distinct, separate and cumulative:
Exhibit C, Page 19 |
(a) Termination . Landlord may terminate this Lease, in which event Tenant shall vacate the Premises immediately and deliver possession of the Premises to Landlord, and if Tenant fails to do so, then Landlord may, after due process of law, enter upon and take possession of the Premises, and expel or remove Tenant and any other person who may be occupying the Premises or any portion thereof, without being liable for prosecution or any claim or damages therefor, and Landlord may recover from Tenant all of the following: (i) the worth at the time of award of the unpaid Rent that has been earned at the time of termination; plus (ii) the worth at the time of award of the amount by which the unpaid Rent that would have been earned after the termination until the time of the award exceeds the amount of lost Rent that Tenant proves could have been reasonably avoided; plus (iii) the worth at the time of award by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of such lost Rent Tenant provides could be reasonably avoided; plus (iv) such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by Laws; plus (v) any other amount necessary to compensate Landlord for all of the detriment proximately caused by Tenant’s failure to perform Tenant’s obligations under this Lease, or that in the ordinary course would be likely to result therefrom. “ Worth at the time of award ” of the amounts set forth in Sections 9.2.1(a)(i) and (ii) shall be computed by allowing interest at a rate per annum equal to the lesser of (1) the annual “Bank Prime Loan” rate cited in the Federal Reserve Statistical Release Publication H.15(519), published weekly plus 400 basis points, or (2) the highest rate permitted by Law. “Worth at the time of award” of the amount set forth in Section 9.2.1(a)(iii) shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco, California at the time of award plus 100 basis points.
(b) Subleases of Tenant . Whether or not Landlord elects to terminate this Lease, Landlord may terminate any and all subleases or other consensual arrangements for possession or occupancy of the Premises entered into by Tenant or any subtenant of Tenant, or may succeed to Tenant’s or Tenant’s subtenant’s interest in such subleases or other arrangements. If Landlord elects to succeed to Tenant’s or Tenant’s subtenant’s interest in any such subleases or other arrangements, then as of the date of Notice by Landlord of such election (i) Tenant shall have no further right to, or interest in, the rent or other consideration receivable thereunder, and (ii) any sublessee or other occupant of the Premises shall attorn to and recognize Landlord as its landlord.
9.2.2 Form of Payment Following Event of Default . Following the occurrence of an Event of Default, Landlord shall have the right to require that any or all subsequent amounts paid by Tenant to Landlord under this Lease, whether relating to the Event of Default in question or otherwise, be paid in the form of money orders, cashier’s checks, or certified checks drawn on institutions acceptable to Landlord, or by other means approved by Landlord, notwithstanding any prior acceptance by Landlord of payments from Tenant in any different form.
9.2.3 Landlord’s Cure Rights . If Tenant defaults under this Lease, then Landlord may, without being under any obligation to do so, and without thereby waiving such default, remedy such default for the account of Tenant. Tenant shall reimburse Landlord for all costs, expenses, and disbursements that Landlord incurs in so remedying such default, plus interest from the date of expenditure by Landlord at the rate set forth in Section 2.3 .
9.2.4 Mitigation of Damages . Except as required by Law, Landlord shall have no obligation to mitigate its damages. If Landlord is required by Law to mitigate its damages under this Lease, then (a) Landlord shall be required only to use reasonable efforts to so mitigate, which shall not exceed such efforts as Landlord generally uses to lease the Premises; (b) Landlord shall not be deemed to have failed to so mitigate if Landlord leases less than all of the Premises; and (c) Landlord’s failure to so mitigate shall only reduce the Rent to which Landlord is entitled. Tenant acknowledges that Landlord’s rejection of a prospective replacement tenant based on an offer of rentals below Landlord’s published rates for new leases of the Premises at the time in question, or containing terms less favorable than those contained herein, shall not give rise to a claim by Tenant that Landlord failed to so mitigate.
Exhibit C, Page 20 |
9.2.5 Waiver of Right of Redemption . Tenant (for itself and all others claiming through Tenant) irrevocably waives and releases any rights under any Laws now or hereafter existing to redeem or reinstate this Lease or Tenant’s right of occupancy of the Premises after termination of this Lease under any Laws.
9.3 Early Exit . Anything to the contrary in this Lease notwithstanding, Landlord shall have the right in Landlord’s sole election, upon thirty (30) days prior written notice to Tenant, or sooner on the effective date of any applicable court order, to terminate this Lease in the event of any of the following causes (each, an “Early Exit Cause” and collectively, the “Early Exit Causes”:
a. The seizure by any governmental authority seeking forfeiture of the building(s) housing the Premises, unless such seizure is being diligently challenged by Tenant.
b. The entry of a final, unappealable judgment (after exhaustion of all applicable appeals) having the effect (whether by restraining order, injunction, declaration or otherwise) of establishing that Tenant’s use of the Premises constitutes a private or public nuisance.
9.4 Landlord Default . If Landlord shall fail to perform any material obligation under this Lease required to be performed by Landlord, Landlord shall not be deemed to be in default hereunder nor subject to claims for damages of any kind, unless such failure shall have continued for a period of thirty (30) days after written notice thereof by Tenant or, if it would reasonably take more than 30 days to complete such cure, such additional time as it would reasonably take to cure up to ninety (90) days after written notice by Tenant. If Landlord shall fail to cure within the time permitted for cure herein, Landlord shall be subject to all remedies as may be available to Tenant at law or in equity (subject to the other provisions of this Lease), including, without limitation, the right of Tenant to terminate this Lease without Tenant waiving its right to damages for Landlord’s default.
ARTICLE 10
CASUALTY & CONDEMNATION
10.1 Casualty .
10.1.1 Generally . If the Base Building is damaged or destroyed by casualty, then Landlord shall promptly and diligently repair the Base Building subject to the condition that insurance proceeds are available for the repair. Notwithstanding the foregoing, in the event the Base Building is damaged or destroyed by casualty during the final two (2) years of this Lease, Landlord shall have no obligation to promptly and diligently repair the Base Building unless Tenant has exercised an Extension Option to extend the term of this Lease as provided for under the terms and conditions of this Lease, whereupon Landlord shall promptly and diligently repair the Base Building.
10.1.2 Abatement of Rent . If the Premises are damaged or destroyed by casualty, then the Base Rent shall be temporarily abated proportionately to the degree the Building is rendered untenantable for the operation of Tenant’s business as a result of the damage or destruction, but only to the extent of any proceeds received therefor by Landlord from rental abatement insurance. Such abatement shall commence on the date of the damage or destruction and shall end on the date on which Landlord substantially completes the repair or restoration of the Premises. Except for such Base Rent abatement, Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the Premises, damage to Tenant’s Personalty or to the Tenant Alterations, or any inconvenience occasioned by any damage, repair, or restoration.
Exhibit C, Page 21 |
10.1.3 Insurance Proceeds . If Landlord terminates this Lease, then Landlord shall be entitled to any and all of the insurance proceeds payable for the damage to Landlord’s property. Tenant shall be entitled to any and all of the insurance proceeds payable for the damage to Tenant’s Property and/or Tenant Alterations.
10.1.4 Waiver . Tenant (for itself and all others claiming through Tenant) irrevocably waives and releases its rights to make repairs at Landlord’s expense. With respect to any damage or destruction that Landlord repairs under this Section 10.1 , Tenant also waives all of its rights to terminate this Lease pursuant to rights presently or hereafter accorded by Law to tenants. The provisions of this Lease, including this Section 10.1 , constitute an express agreement between Landlord and Tenant with respect to any damage to, or destruction of, any portion of the Premises. Any Law in respect of any rights or obligations concerning any such damage or destruction in the absence of an express agreement between the parties, and any other Law relating to damage or destruction of leased premises, whether in effect on the date of this Lease or thereafter, shall have no application to this Lease or any damage or destruction of any part of the Premises.
10.2 Condemnation . If all or any substantial part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain, or conveyance in lieu thereof, then either party to this Lease shall have the right to give the other a Notice terminating this Lease at any time within 30 days after such taking. If neither party to this Lease shall so elect to terminate this Lease, then the Rent thereafter to be paid shall be adjusted on a fair and equitable basis under the circumstances. Landlord shall be entitled to any and all income, rent, award, and any interest whatsoever upon any such sum, which may be paid or made in connection with any such public or quasi-public taking or conveyance in lieu thereof, and Tenant hereby assigns to Landlord any interest Tenant may have in, or claim to, all or any part of such sums, other than any separate award that may be made with respect to Tenant’s trade fixtures, lost business, and moving expenses. Tenant shall make no claim for the value of any unexpired portion of the Term.
ARTICLE 11
MISCELLANEOUS
11.1 Notices . Any notice, consent, demand, or other communication or document required or permitted to be given under this Lease or pursuant to any Laws (“ Notice(s) ”), shall be (a) in writing (except as otherwise provided in this Lease), (b) addressed to the intended recipient at its address set forth in the Basic Lease Information (provided that each of Landlord and Tenant may change its addresses for the giving of notices by giving notice thereof to the other party), (c) sent by fully prepaid registered or certified United States Mail return receipt requested, or by reputable independent contract delivery service furnishing a written record of attempted or actual delivery, and (d) deemed to have been delivered when tendered for delivery to the addressee, whether or not actually accepted or received by the addressee. Any Notice may be given by an attorney on behalf of Landlord or by Landlord’s property management company.
11.2 OFAC/FCPA . Neither Tenant nor any of its Affiliates, nor to its knowledge any of their respective brokers or other agents acting in any capacity in connection with the transactions contemplated by this Lease is or will be (a) conducting any business or engaging in any transaction or dealing with any person appearing on the U.S. Treasury Department’s OFAC list of prohibited countries, territories, “specifically designated nationals” (“ SDNs ”) or “blocked person” (each, a “ Prohibited Person(s) ”) (which lists can be accessed at the following web address: http://www.ustreas.gov/offices/enforcement/ofac/), including the making or receiving of any contribution of funds, goods or services to or for the benefit of any such Prohibited Person; (b) engaging in certain dealings with countries and organizations designated under Section 311 of the USA PATRIOT Act as warranting special measures due to money laundering concerns; (c) dealing in, or otherwise engaging in any transaction relating to, any property or interests in property blocked pursuant to Executive Order No. 13224 dated September 24, 2001, relating to “Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism”; (d) a foreign shell bank or any person that a financial institution would be prohibited from transacting with under the USA PATRIOT Act; or (e) engaging in or conspiring to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempting to violate, any of the prohibitions set forth in (i) any U.S. anti-money laundering law, (ii) the Foreign Corrupt Practices Act, (iii) the U.S. mail and wire fraud statutes, (iv) the Travel Act, (v) any similar or successor statutes or (vi) any regulations promulgated under the foregoing statutes. If at any time this representation becomes false, then it shall be considered an event of default under this Lease as to which there shall be no right to Notice or any opportunity to cure, notwithstanding anything contained in this Lease to the contrary, and Landlord shall have the right to immediately exercise all of the remedies set forth in this Lease, including immediate termination of this Lease.
Exhibit C, Page 22 |
11.3 Financial Statements . Tenant agrees to provide Landlord with such information and financial statements of the Tenant requested by Landlord that are required to be included in any filings to be made by Landlord with the SEC, subject to Tenant’s right to object to such disclosure by appropriate filings and/or action before the SEC. Tenant shall supply the requested information within 60 days of Landlord’s request. Such financial statements of Tenant shall include consolidated balance sheets, statements of operations, statements of cash flows and statements of stockholders equity prepared in accordance with U.S. generally accepted accounting principles and shall be reviewed or audited by the Seller’s independent auditors (within the requirements of Regulation S-X under the rules and regulations of the SEC, as interpreted by the staff of the SEC), as reasonably requested by the Landlord and required by the SEC.”
11.4 Brokers . Each of Landlord and Tenant represents and warrants to the other that such party has not dealt with any broker or finder in connection with this Lease.
11.5 Limitation of Landlord’s Liability . Landlord’s liability under this Lease shall be limited to and enforceable only against and to the extent of Landlord’s interest in the Premises. Landlord’s obligations under this Lease shall not be personally binding on Landlord’s present or future investment manager, property manager, or any of the trustees, directors, officers, partners, beneficiaries, principals, members, managers, investors, stockholders, employees, Affiliates, agents, representatives, or successors or assigns of Landlord (collectively, the “ Landlord Parties ”). Landlord shall not be liable to Tenant under this Lease for any lost profits or damage to business. The limitation of liability provided in this Section 11.5 is in addition to, and not in limitation of, any limitation or liability applicable to Landlord provided by Law or by any other contract, agreement, or instrument.
11.6 No Waivers . No provision of this Lease shall be deemed waived by either party unless expressly waived in a writing signed by the waiving party (and then only to the extent so expressly waived). No waiver shall be implied by delay or any other act or omission of either party. No waiver by either party of any provision of this Lease shall be deemed a waiver of such provision with respect to any subsequent matter relating to such provision, and Landlord’s consent or approval respecting any action by Tenant shall not constitute a waiver of the requirement for obtaining Landlord’s consent or approval respecting any subsequent action. No act or thing done by Landlord or its agents during the Term shall be deemed a termination of this Lease, an acceleration of the Termination Date, or an acceptance of the surrender of the Premises, and no agreement to terminate this Lease, accelerate the Termination Date, or accept a surrender of the Premises shall be valid, unless expressly provided in a writing signed by Landlord. Acceptance of the full or any partial payment of Rent shall not be deemed Landlord’s waiver of any breach by Tenant of any provision of this Lease and Landlord’s acceptance of a lesser amount than the Rent due under this Lease shall not be deemed Landlord’s waiver of Landlord’s right to receive the full amount of Rent due, nor shall any endorsement or statement on any check or payment or any letter accompanying such check or payment be deemed an accord and satisfaction, and Landlord may accept such partial payment without prejudice to Landlord’s right to recover the full amount of Rent due. Tenant acknowledges that this Section 11.6 imparts actual notice to Tenant that Landlord’s acceptance of partial payment of Rent does not constitute a waiver of any of Landlord’s rights, including any right Landlord may have to recover possession of the Premises. Forbearance by Landlord in enforcing one or more of the remedies provided in this Lease upon an Event of Default shall not be deemed a waiver of such Event of Default or of Landlord’s right to enforce any such remedies with respect to such Event of Default or any subsequent Event of Default. Landlord’s acceptance of any Rent or of the performance of any other provision of this Lease from any person other than Tenant, including any Transferee, shall not be deemed a waiver of Landlord’s right to approve any Transfer in accordance with Article 6 .
Exhibit C, Page 23 |
11.7 Entry into Premises Upon at least twenty four (24) hour prior written notice to Tenant , Landlord reserves and shall at all times have the right to enter the Premises to inspect the same to ensure compliance with the covenants, warranties and representations of Tenant under this Lease, to perform any obligation to be performed by Landlord under this Lease, to remedy any Tenant default, to show the Premises to prospective purchasers, investors, Mortgagees, and tenants, and to alter, improve, and repair the Premises, in any case without abatement of Rent, and may for such purposes erect, use, and maintain scaffolding, pipes, conduits, and other necessary structures and open any wall, ceiling, or floor in or through the Premises where reasonably required by the character of the work to be performed; provided that Tenant’s entrance to the Premises shall not be blocked and the conduct of Tenant’s business at the Premises shall not be interfered with unreasonably. If Landlord damages any portion of any wall or wall-covering, ceiling, or floor or floor-covering within the Premises, then Landlord shall repair or replace the damaged portion to match the original as nearly as commercially reasonable, but shall not be required to repair or replace more than the portion actually damaged. Except as otherwise expressly provided in this Section 11.7, Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant’s business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned by any action of Landlord authorized by this Section 11.7.
Notwithstanding anything contained herein to the contrary, the Landlord acknowledges that its rights of reentry into the Premises as set forth in this Lease do not confer on it the authority to manufacture and/or dispense on the Premises medical marijuana in accordance with Article 33 of the Public Health Law and Landlord further agrees to provide the New York State Department of Health, Mayor Erastus Corning 2nd Tower, The Governor Nelson A. Rockefeller Empire State Plaza, Albany, N.Y. 12237, with notification by certified mail return receipt requested of its intent to reenter the Premises or to initiate dispossess proceedings or that the Lease is due to expire, at least thirty (30) days prior to the date on which the Landlord intends to exercise a right of reentry or to initiate such proceedings or at least sixty (60) days before expiration of this Lease.
11.8 Other Provisions .
11.8.1 Covenant of Quiet Enjoyment . Landlord covenants that Tenant, while paying Rent and performing Tenant’s other covenants and agreements under this Lease, shall peaceably and quietly have, hold, and enjoy the Premises for the Term without hindrance from Landlord, but not otherwise, subject to all matters of record and to the terms and provisions of this Lease.
11.8.2 Survival . All obligations of Tenant under this Lease not fully performed as of the Termination Date shall survive the Termination Date.
11.8.3 Entire Agreement . This Lease, together with the Exhibits, contains all of the agreements of Landlord and Tenant in respect of this Lease and supersedes any previous negotiations. There have been no representations made by Landlord or any of Landlord’s representatives, or understandings made between Landlord and Tenant, other than those set forth in this Lease and the Exhibits. This Lease may not be modified except by a written instrument duly executed by the party to be bound. Landlord and Tenant each represent to the other, that is has the individuals executing this Lease have been properly authorized by proper action of the Landlord and Tenant, as the case may be.
Exhibit C, Page 24 |
11.8.4 Execution in Counterparts . This Lease may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.
11.8.5 Recording . Tenant shall not record this Lease or a short form memorandum of this Lease.
11.8.6 No Light, Air, or View Easement . Any diminution or shutting off of light, air or view by any structure that may be erected on lands adjacent to or in the vicinity of the Premises or any portion thereof shall not affect this Lease, entitle Tenant to any reduction in Rent, or impose any liability on Landlord.
11.8.7 Non-Discrimination . Tenant shall not (and Tenant shall not permit any person claiming through or under Tenant to) discriminate against or segregate any person or group of persons on account of race, color, creed, sex, religion, marital status, ancestry, or national origin, whether in the use, occupancy, subleasing, transferring, or enjoyment of the Premises, or otherwise.
11.8.8 Attorneys’ Fees . In any action or proceeding that Landlord or Tenant initiates against the other party declaratory or otherwise, arising out of this Lease, the unsuccessful party in such action or proceeding shall reimburse the prevailing party for its costs, including reasonable attorneys’ fees.
11.8.9 Waiver of Consequential Damages . Neither Landlord nor Tenant shall be liable to the other for any form of special, indirect, consequential, or punitive damages.
11.9 Interpretation .
11.9.1 Captions . The captions in this Lease are for convenience of reference and shall not define, increase, limit, or describe the scope or intent of any provision of this Lease.
11.9.2 Landlord and Tenant . The terms “Tenant” and “Landlord”, and any pronoun used in place thereof, shall indicate and include each of the parties’ and respective successors, executors, administrators, and permitted assigns, according to the context, provided that, for the purposes of any provisions indemnifying or waiving claims against, Landlord, the term “Landlord” shall also include Landlord’s present and future investment manager, and property management company, and all of their trustees, directors, officers, partners, beneficiaries, principals, members, managers, investors, stockholders, employees, Affiliates, agents, representatives, contractors (and subcontractors of any tier), successors and assigns.
11.9.3 Non-Exclusivity . Whenever the words “including”, “include”, or “includes” are used in this Lease, they shall be interpreted in a non-exclusive manner as though the words “without limitation” immediately followed the same. Any reference to “any part” or “any portion of” the Premises or any other property shall be construed to refer to all or any part of the same.
11.9.4 Covenants Independent . This Lease shall be construed as though the covenants herein between Landlord and Tenant are independent.
11.9.5 Joint and Several Liability . In any case where either Landlord or Tenant consists of more than one person, the obligations of such party under this Lease shall be joint and several.
Exhibit C, Page 25 |
11.9.6 Time of the Essence . Time is of the essence of this Lease and all of its provisions.
11.9.7 Governing Law . This Lease shall in all respects be governed by the laws of the State of New York.
11.9.8 Successors and Assigns . Subject to the provisions of Article 6 , the provisions of this Lease shall be binding upon and inure to the benefit of the heirs, successors, executors, administrators, and assigns of Landlord and Tenant.
11.10 Tenant’s Signage .
11.10.1 In General . Tenant shall not place on any portion of the Premises any sign, placard, lettering, banner, displays, graphic, decor or other advertising or communicative material that is visible from the exterior of the Building without Landlord’s prior written approval, which approval shall not be unreasonably be withheld or delayed. Notwithstanding the foregoing, Tenant shall have the right to install such signage at or upon the Premises as permitted by the License and applicable Law. Tenant, at its sole expense, shall maintain Tenant’s Signage in good condition and repair during the Term. Should Tenant’s Signage require maintenance or repairs as determined in Landlord’s reasonable judgment, Landlord shall have the right to provide notice thereof to Tenant and Tenant shall cause such repairs and/or maintenance to be performed within thirty (30) days after receipt of such notice from Landlord at Tenant’s sole cost and expense. Should Tenant fail to perform such maintenance and repairs within the period described in the immediately preceding sentence, then, in addition to all of Landlord’s other rights and remedies, Landlord may, but need not, perform the required maintenance and repairs, and Tenant shall pay Landlord the cost thereof, plus a fee for Landlord’s oversight and coordination of such work equal to five percent (5%) of its cost, within thirty (30) days after receipt of Landlord’s request for payment, together with reasonable, supporting backup documentation.
11.11 Right of First Offer. Landlord hereby covenants and agrees that Tenant shall have a “Right of First Offer” to purchase the Premises (including the Building and all land making up the Premises). Such Right of First Offer is granted on and subject to the following terms and conditions:
(i) If, when and as Landlord desires to sell the Premises (or a portion thereof) to a bona fide third-party, Landlord shall promptly notify Tenant, in writing (a “ROFO Notice”). Tenant shall then have the right to purchase the Premises on the terms and conditions hereinafter set forth;
(ii) Upon Tenant’s receipt of the ROFO Notice, Tenant shall have thirty (30) days (“ROFO Response Period”) in which to advise Landlord, in writing (the “ROFO Response”), whether or not Tenant desires to exercise its Right of First Offer. The ROFO Response shall describe the economic and other relevant terms and conditions upon which Tenant is prepared to purchase the Premises from the Landlord (the “ROFO Terms”);
(iii) If Tenant fails to timely deliver a ROFO Response, then Tenant, except as otherwise set forth herein, shall automatically be deemed to have waived its Right of First Offer with respect to its opportunity to purchase the Premises. In that event, Landlord shall be free to sell the Premises to one or more third parties (a “ROFO Sale”);
Exhibit C, Page 26 |
(iv) If Tenant timely delivers a ROFO Response and Landlord is in agreement with the ROFO Terms as set forth in the ROFO Response, then, within thirty (30) days of Tenant’s delivery of the ROFO Response to Landlord, Landlord and Tenant shall execute and enter into a purchase and sale agreement containing the ROFO Terms and such other terms as mutually agreed (“Purchase and Sale Agreement”), pursuant to which Tenant shall purchase the Premises on all of the terms and conditions set forth in the Purchase and Sale Agreement. If Landlord and Tenant enter into a Purchase and Sale Agreement and Tenant terminates the agreement pursuant to the terms thereof or fails to close the purchase of the Premises through no fault of Landlord, then Tenant’s Right of First Offer shall automatically terminate and be of no further force or effect; and
(v) In the event Landlord delivers a ROFO Notice, but Tenant fails to timely deliver a ROFO Response or Landlord is not in agreement with the terms and conditions of the ROFO Response or the ROFO Terms, Landlord has the right to pursue the sale of the Premises to a third party purchaser; provided, however, the Landlord agrees that the sale of the Premises to a third party purchaser shall be on such terms and conditions that are economically superior to the terms and conditions as set forth in the ROFO Terms.
(SIGNATURES APPEAR ON NEXT PAGE)
Exhibit C, Page 27 |
IN WITNESS WHEREOF , the parties hereto have duly executed this Agreement on the day and year first above written.
LANDLORD:
IIP Operating Agreement, LP
By: | ||
Name: | Paul E. Smithers | |
Title: | CEO |
TENANT:
PharmaCann LLC
An Illinois Limited Liability Company
By: | ||
Name: | ||
Title: |
Exhibit C, Page 28 |
EXHIBIT A
SITE PLAN DEPICTING THE PREMISES
A- 1 |
EXHIBIT B
COMMENCEMENT DATE MEMORANDUM
THIS COMMENCEMENT DATE MEMORANDUM, dated _____________ (this “ Memorandum ”), is made by IIP Operating Agreement, LP, (“ Landlord ”), and PharmaCann LLC, an Illinois Limited Liability Company (“ Tenant ”).
Recitals :
A. Landlord and Tenant are parties to that certain Lease, dated [__________] (the “ Lease ”) for the Building, the land, and the parking facilities located at 600 Neelytown Road, Hudson Valley Crossing, Montgomery, NY. Each capitalized term used, but not defined, in this Memorandum shall have the meaning given to such term in the Lease.
B. The Commencement Date has occurred.
C. Landlord and Tenant desire to enter into this Memorandum to confirm the facts set forth in this Memorandum.
NOW, THEREFORE, Landlord and Tenant agree as follows:
1. The Commencement Date is ________________.
2. The scheduled Termination Date is ____________________.
3. the Base Rent is $ _____________.
IN WITNESS WHEREOF, the parties hereto have caused this Memorandum to be executed as of the date first above written.
LANDLORD:
IIP Operating Agreement, LP
By: | ||
Name: | ||
Title: |
TENANT:
PharmaCann LLC,
an Illinois Limited Liability Company
By: | ||
Name: | ||
Title: |
B- 1 |
EXHIBIT C
FORM OF TENANT ESTOPPEL CERTIFICATE
The undersigned as Tenant under that certain Lease Agreement (the “ Lease ”) made and entered into as of _________, ____ with [__________], a [__________], as Landlord, for the building, land, and parking facilities located at [__________], certifies as follows:
1. Attached hereto as Exhibit A is a true and correct copy of the Lease and all amendments and modifications thereto. The documents contained in Exhibit A represent the entire agreement between the parties as to the Premises.
2. The undersigned has commenced occupancy of the Premises described in the Lease, currently occupies the Premises, and the Term commenced on ____________________.
3. The Lease is in full force and effect and has not been modified, supplemented or amended in any way except as provided in Exhibit A . Tenant is not entitled to receive any concession or benefit (rental or otherwise) or other similar compensation in connection with leasing the Premises other than as set forth in the Lease.
4. Tenant has not transferred, assigned, or sublet any portion of the Premises nor entered into any license or concession agreements with respect thereto except as follows: ______________________.
5. Base Rent became payable on ____________________.
6. The Term expires on _______________________.
7. All conditions of the Lease to be performed by Landlord necessary to the enforceability of the Lease have been satisfied and neither Landlord nor Tenant is in default thereunder. Without limiting the foregoing, (i) all construction and installation of tenant improvements required to be performed by or paid by Landlord under the Lease have been completed and paid and (ii) there are no unpaid allowances or rental concessions payable or creditable to Tenant which have not been paid or credited in full.
8. No rental has been paid in advance and no security has been deposited with Landlord except as provided in the Lease.
9. As of the date hereof, there are no existing defenses or offsets that the undersigned has, which preclude enforcement of the Lease by Landlord.
10. All monthly installments of Base Rent and Supplemental Rent and all Operating Expenses (as those terms in quotation marks are defined in the Lease) have been paid when due through ______________. The current monthly installment of Base Rent is $________________.
11. Tenant does not have any option to purchase or right of first refusal or first offer to purchase the Premises, or any portion thereof, or any interest therein and the only interest of Tenant in such property is as the Tenant under the Lease.
C- 1 |
12. The amount of the Security Deposit held by Landlord to secure Tenant’s performance under the Lease is __________________ Dollars ($____________). No portion of the Security Deposit has been utilized or applied by Landlord.
13. Tenant is not the subject of any bankruptcy, insolvency, debtor’s relief, reorganization, receivership or other similar proceeding.
The undersigned acknowledges that this Estoppel Certificate may be delivered to Landlord’s prospective mortgagee, trust deed holder or a prospective purchaser or investor, and acknowledges that it recognizes that if same is done, in addition to Landlord, said mortgagee, prospective mortgagee, trust deed holder or prospective purchaser or investor will be relying upon the statements contained herein in making the loan or acquiring the Premises, and in accepting an assignment of the Lease as collateral security, and that receipt by it of this Estoppel Certificate is a condition of making the loan or acquisition of the Premises.
If Tenant is a corporation, limited liability company or partnership, each individual executing this Estoppel Certificate on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in the State of Illinois, if required by law, and that Tenant has full right and authority to execute and deliver this Estoppel Certificate and that each person signing on behalf of Tenant is authorized to do so.
Executed at __________________ on the _____ day of ______________, 20___.
“Tenant” | ||
By: | ||
Name: | ||
Title: | ||
Date Signed: |
C- 2 |
EXHIBIT D
SCHEDULE OF FERTILIZER, HERBICIDE AND PESTICIDE BASED PRODUCTS
D- 1 |
EXHIBIT E
SUPPLEMENTAL RENT SCHEDULE
Month | Year | Payment | ||||
1 | 1 | $ | 105,476.82 | |||
2 | $ | 105,476.82 | ||||
3 | $ | 105,476.82 | ||||
4 | $ | 105,476.82 | ||||
5 | $ | 105,476.82 | ||||
6 | $ | 105,476.82 | ||||
7 | $ | 105,476.82 | ||||
8 | $ | 105,476.82 | ||||
9 | $ | 105,476.82 | ||||
10 | $ | 105,476.82 | ||||
11 | $ | 105,476.82 | ||||
12 | $ | 105,476.82 | ||||
1 | 2 | $ | 105,476.82 | |||
2 | $ | 105,476.82 | ||||
3 | $ | 105,476.82 | ||||
4 | $ | 105,476.82 | ||||
5 | $ | 105,476.82 | ||||
6 | $ | 105,476.82 | ||||
7 | $ | 105,476.82 | ||||
8 | $ | 105,476.82 | ||||
9 | $ | 105,476.82 | ||||
10 | $ | 105,476.82 | ||||
11 | $ | 105,476.82 | ||||
12 | $ | 105,476.82 | ||||
1 | 3 | $ | 105,476.82 | |||
2 | $ | 105,476.82 | ||||
3 | $ | 105,476.82 | ||||
4 | $ | 105,476.82 | ||||
5 | $ | 105,476.82 | ||||
6 | $ | 105,476.82 | ||||
7 | $ | 105,476.82 | ||||
8 | $ | 105,476.82 | ||||
9 | $ | 105,476.82 | ||||
10 | $ | 105,476.82 | ||||
11 | $ | 105,476.82 | ||||
12 | $ | 105,476.82 | ||||
1 | 4 | $ | 105,476.82 | |||
2 | $ | 105,476.82 | ||||
3 | $ | 105,476.82 | ||||
4 | $ | 105,476.82 | ||||
5 | $ | 105,476.82 | ||||
6 | $ | 105,476.82 | ||||
7 | $ | 105,476.82 | ||||
8 | $ | 105,476.82 | ||||
9 | $ | 105,476.82 | ||||
10 | $ | 105,476.82 | ||||
11 | $ | 105,476.82 | ||||
12 | $ | 105,476.82 | ||||
1 | 5 | $ | 105,476.82 | |||
2 | $ | 105,476.82 | ||||
3 | $ | 105,476.82 | ||||
4 | $ | 105,476.82 | ||||
5 | $ | 105,476.82 | ||||
6 | $ | 105,476.82 | ||||
7 | $ | 105,476.82 | ||||
8 | $ | 105,476.82 | ||||
9 | $ | 105,476.82 | ||||
10 | $ | 105,476.82 | ||||
11 | $ | 105,476.82 | ||||
12 | $ | 105,476.82 |
E- 1 |
EXHIBIT D
INTENTIONALLY DELETED
Exhibit D, Page 1 1 |
EXHIBIT E
GRANT DEED
RECORDING REQUESTED BY | ||
WHEN RECORDED MAIL TO | ||
And mail tax statements to : | ||
Space Above this Line for Recorder’s Use
APN: __________
The undersigned grantor declares the Documentary Transfer Tax is $__________ and City Transfer Tax is $__________ and is computed on the full value of the interest or property conveyed.
GRANT DEED
THIS GRANT DEED is made and entered into this _____ day of _________________, 2016, by ___________________ LLC, a Illinois limited liability company (“ Grantor ”), in favor of ___________________, a ________________________ (“ Grantee ”).
WITNESSETH :
For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, GRANTOR hereby GRANTS to Grantee that certain real property in the County of ____________________ (the “ Property ”) more particularly described as follows:
LEGAL DESCRIPTION IS ATTACHED HERETO AS EXHIBIT A AND INCORPORATED HEREIN BY THIS REFERENCE.
The foregoing grant is expressly subject to all matters of record as of the date hereof and those certain unrecorded matters identified and described in Exhibit B attached hereto and incorporated herein by this reference.
Mail Tax Statements To: Same As Above
(Signature Page Follows)
Exhibit E, Page 1 |
EXECUTED as of the day and year set forth above.
GRANTOR: | ||
________________________ LLC, | ||
An Illinois limited liability company | ||
By: | ||
Name: | ||
Its: |
A notary public or other officer completing this certificate verifies only the identity of the individual who signed the document to which this certificate is attached, and not the truthfulness, accuracy, or validity of that document. |
STATE OF | ) | ||
) | |||
COUNTY OF | ) |
On _______________________, 2015, before me, ______________________________, Notary Public, personally appeared _______________________________, who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.
I certify under PENALTY OF PERJURY under the laws of the State of Illinois that the foregoing paragraph is true and correct.
WITNESS my hand and official seal.
Signature of Notary Public |
(Notary Seal)
Exhibit E, Page 2 |
EXHIBIT A TO GRANT DEED
DESCRIPTION OF PROPERTY
- 1 - |
EXHIBIT B TO GRANT DEED
OFF-RECORD MATTERS
1. | All matters which a correct survey of the Property would disclose. |
2. | All matters which could be ascertained by a physical inspection of the Property. |
3. | Interest of tenants in possession as tenants under written leases in effect as of the date hereof. |
4. | A lien for non-delinquent taxes for real property and personal property, and any non-delinquent general or special assessments against the Property. |
5. | Zoning ordinances and regulations and any other laws, ordinances or governmental regulations restricting, regulating or relating to the use, occupancy or enjoyment of the Property. |
- 1 - |
EXHIBIT F
BILL OF SALE AND GENERAL ASSIGNMENT
THIS BILL OF SALE AND GENERAL ASSIGNMENT (“ Assignment ”) is executed as of the ________ day of _______________, 2016, by PharmaCann LLC, an Illinois limited liability company (“ Seller ”) in favor of IIP Operating partnership, LP (“ Buyer ”).
RECITALS
A. Reference is made to certain real property and the improvements thereon commonly known as 600 Neelytown Road, Hudson Valley Crossing, Montgomery, NY which real property is more thoroughly described in attached Schedule I (the “ Property ”). Concurrently herewith, Seller is selling to Buyer and Buyer is purchasing from Seller all of Seller’s interest in the Property pursuant to that certain Purchase Agreement dated as of _________ ___, 2016, between PharmaCann LLC, a Delaware Limited Liability Company, 1140 Lake Street, Suite 304, Oak Park, Ill. (Seller ”), and Innovative Greenhouse Properties, 17190 Bernardo Center Drive, San Diego, Ca. (“ Buyer ”), providing for the sale of the Property (the “ Purchase Agreement ”). Initially capitalized terms used herein but not otherwise defined herein shall have the meanings given them in the Purchase Agreement; and
B. In connection with the sale of the Property to Buyer, Seller desires to assign and transfer to Buyer all of Seller’s interest in the Service Contracts, Personal Property, Approvals and Warranties.
IN CONSIDERATION OF THE FOREGOING, and for other good and valuable consideration, Seller agrees as follows:
1. Seller hereby grants, conveys, assigns and transfers to Buyer all of Seller’s rights, title and interest in the leases referenced on Schedule II hereto and the service, utility, management, maintenance and other contracts or agreements listed on Schedule III hereto.
2. Seller hereby grants, transfers and conveys to Buyer all of Seller’s interest in:
(a) all personal property described on Schedule IV hereto; and
(b) all transferable or assignable certificate(s) of occupancy, building or equipment permits, consents, authorizations, variances, waivers, licenses, permits, certificates and approvals from any governmental or quasi-governmental authority with respect to the Land or the Improvements owned by such Seller, and all transferable or assignable warranties, representations, guaranties, and miscellaneous rights relating to the ownership, development, use and operation of the Land and Improvements.
5. Buyer acknowledges and agrees that the Service Contracts, Personal Property, Approvals and Warranties assigned, transferred and conveyed hereby are being assigned, transferred, and conveyed “AS IS, WHERE IS” subject to, and in accordance with, the terms of Section 8 of the Purchase Agreement.
Exhibit F, Page 1 |
6. Any disputes under this Assignment shall be arbitrated in accordance with the provisions of Section 15 of the Purchase Agreement. In the event of any arbitration or litigation between the parties, whether based on contract, tort or other cause of action or involving bankruptcy or similar proceedings, in any way related to this Agreement, the non-prevailing party shall pay to the prevailing party all reasonable attorneys’ fees and costs and expenses of any type, without restriction by statute, court rule or otherwise, incurred by the prevailing party in connection with any action or proceeding (including arbitration proceedings, any appeals and the enforcement of any judgment or award), whether or not the dispute is litigated or prosecuted to final judgment. The “prevailing party” shall be determined based upon an assessment of which party’s major arguments or positions taken in the action or proceeding could fairly be said to have prevailed (whether by compromise, settlement, abandonment by the other party of its claim or defense, final decision, after any appeals, or otherwise) over the other party’s major arguments or positions on major disputed issues.
7. The terms of this Assignment shall bind and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns.
8. The parties agree to execute such other documents and perform such other acts as may be necessary or desirable to carry out the purposes of this Assignment. This Assignment may be signed in any number of counterparts with the same effect as if the signatures to each counterpart were upon a single instrument. All counterparts shall be deemed an original of this Assignment.
IN WITNESS WHEREOF, the parties have executed this Assignment as of the date and year first above written.
SELLER: | PHARMACANN LLC | |
By: | ||
Name: Teddy Scott | ||
Title: Manager | ||
BUYER: | IIP Operating partnership, lp | |
By: | ||
Name: Paul E. Smithers | ||
Title: CEO |
Exhibit F, Page 2 |
SCHEDULE I TO BILL OF SALE AND GENERAL ASSIGNMENT
DESCRIPTION OF THE PROPERTY
Exhibit F, Page 3 |
SCHEDULE III TO BILL OF SALE AND GENERAL ASSIGNMENT
LIST OF SERVICE CONTRACTS
Exhibit F, Page 4 |
SCHEDULE IV TO BILL OF SALE AND GENERAL ASSIGNMENT
ITEMIZATION OF PERSONAL PROPERTY
Exhibit F, Page 5 |
EXHIBIT G
FIRPTA AFFIDAVIT
Section 1445 of the Internal Revenue Code or 1986, as amended (the “ Code ”) provides that a buyer of a U.S. real property interest must withhold tax if the seller is a foreign person. To inform Innovative Industrial Properties, Inc. (the “ Buyer ”), that withholding tax is not required upon the disposition of a U.S. real property interest by PharmaCann LLC, a Delaware limited liability company (the “ Seller ”), the undersigned hereby certifies the following on behalf of Seller:
1. Seller is not a foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Code and Income Tax Regulations)
2. Seller’s U.S. employer identification number is_________________________
3. | Seller’s office address is: | |
4. Seller is not a disregarded entity as defined in Section 1.1445-2(b)(2)(iii) of the Internal Revenue Code Regulations.
Seller understand that this certification may be disclosed to the Internal Revenue Service by the Buyer and that any false statement Seller has made here could be punished by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of Seller.
Dated: _________________, ____
PHARMACANN LLC | ||
By: | ||
Name: Teddy Scott | ||
Title: Manager |
Exhibit G, Page 1 |
EXHIBIT H
INTENTIONALLY DELETED
Exhibit H, Page 1 |
EXHIBIT I
FORM OF OWNER’S AFFIDAVIT
Escrow No. _____________
_____________, _____________,
The undersigned hereby certifies:
1. That they are the owner of the certain real property in the State of New York, described in your Commitment for Title Insurance or Preliminary Title Report No .
2. That the land is improved by a:
x Office Building
¨ Commercial Building
¨ Industrial Building
¨ Other:
3. Title Insurance Company (referred to as “ ”) has been requested to issue a form of policy of title insurance showing as an exception to title in Schedule B therein all existing leases affecting the real property referred to above and described in the Commitment/Preliminary Title Report issued in connection with this transaction. In addition to any other requirements it may have, First American has requested that the undersigned provide it with a certified list of all of the lessees under existing leases. Therefore, in response to such request made by First American, the undersigned hereby declares that, to its knowledge, the rent roll attached hereto as Exhibit “A”, represents all of the lessees under all subsisting leases affecting the subject property. The undersigned also declares that to its knowledge, no leases contain provisions for either options to purchase or the rights of first refusal to purchase, or both.
4. That there have been no repairs, work of improvements or materials furnished to the premises by or on behalf of the undersigned or, to the undersigned’s actual knowledge, by or on behalf of any of the tenants listed on Exhibit “A”, within 90 days, except as shown on Exhibit “B,” which exhibits shows the date such repairs, works of improvements or materials furnished were started and the date such repairs, works of improvements or materials furnished were completed or will be completed.
5. That there are no unpaid bills for labor or material because of any improvements made by or on behalf of the undersigned to the above premises, except as shown on Exhibit “B.”
6. That the undersigned has not received any written notice of violation of any covenants, conditions or restrictions, if any, affecting the Land.
7. That the undersigned has not received any supplemental tax bill which is unpaid.
8. That this Affidavit is given for the purpose of inducing First American and its Agents, Offices and Subsidiaries to issue its Policy(ies) of Title Insurance which may provide coverage as to the items mentioned above and that the statements made herein are true and correct to my/our own knowledge.
Exhibit I, Page 1 |
9. The undersigned acknowledge that they have read the foregoing and fully understand the legal aspects of any misrepresentation and/or untrue statements made herein and indemnify and hold harmless First American against liability occasioned by reason of reliance upon the statements made herein.
10. The undersigned has not and will not, for the period commencing on the business day prior to close of escrow, at 7:30 a.m. through the recording of the Deed transferring title to the property to the grantee thereunder (such period is called the “Gap Period”), encumber, cause any defect to appear in the title to the property or make any conveyance of all or any part of the property except for the documents executed in favor of, or at the request of the grantee. The undersigned agrees to hold harmless and indemnify First American against all reasonable costs, expenses and attorneys’ fees suffered or incurred by First American as a result of the failure of the undersigned, upon receipt of written notice from First American, to promptly remove, bond or otherwise dispose of any such encumbrance, defect or conveyance that may arise or be filed against the property as a result of any act or omission of the undersigned during the Gap Period.
Date: _______________ ___, 2015
PHARMACANN LLC | ||
By: | ||
Name: Teddy Scott | ||
Title: Manager |
Exhibit I, Page 2 |
Exhibit 10.13
FIRST AMENDMENT TO PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO PURCHASE AGREEMENT (this “ Amendment ”) is entered into as of this 16th day of September, 2016, by and between PharmaCann LLC, an Illinois limited liability company (“ Seller ”), and IIP Operating Partnership, LP, a Delaware limited partnership (“ Buyer ”).
RECITALS
A. WHEREAS, Seller and Buyer are parties to that certain Purchase Agreement dated as of August 22, 2016 (as the same may have been amended, supplemented or modified from time to time, the “ Existing PSA ”), where Seller has agreed to sell to Buyer, and Buyer has agreed to purchase from Seller, Seller’s right, title and interest in that certain real property with the street address 600 Neelytown Road, Hudson Valley Crossing, Montgomery, New York; and
B. WHEREAS, in accordance with Section 16.4 of the Existing PSA, Seller and Buyer desire to modify and amend the Existing PSA only in respects and on the conditions hereinafter stated.
AGREEMENT
NOW, THEREFORE, Seller and Buyer, in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, agree as follows:
1. Definitions . For purposes of this Amendment, capitalized terms shall have the meanings ascribed to them in the Existing PSA unless otherwise defined herein. The Existing PSA, as amended by this Amendment, is referred to collectively herein as the “ Agreement .” From and after the date hereof, the term “Agreement,” as used in the Existing PSA, shall mean the Existing PSA, as amended by this Amendment.
2. Exhibit A of the Existing PSA is hereby replaced in its entirety with Exhibit A attached to this Amendment.
3. The first sentence of Section 3.1 of the Existing PSA is hereby amended and restated in its entirety to read as follows:
“Within three (3) business days after the Contract Date, Buyer shall deposit in an escrow (“ Escrow ”) established for the transaction contemplated by this Agreement with Chicago Title Insurance Company (the “ Title Company ”) the sum of three hundred seventy-five thousand dollars ($375,000) (the “ Deposit ”).”
4. Section 3.2 of the Existing PSA is hereby amended and restated in its entirety to read as follows:
“ IPO Contingency . The Deposit shall be refundable in the event that Buyer does not successfully complete Buyer’s initial public offering (“ IPO ”) in an amount not less than $75,000,000 on or before November 23, 2016, and as otherwise provided herein. Buyer agrees to keep Seller advised as to the status of the IPO and/or other capital raises.”
5. The first sentence of Section 7 of the Existing PSA is hereby amended and restated in its entirety to read as follows:
“Subject to Section 6, Buyer shall have from the Contract Date until 11:59 p.m. Eastern Time on November 23, 2016 (the “ Due Diligence Period ”) to inspect and investigate the Property, including roof, plumbing, soils, electrical, sprinkler, water, sewer, mechanical, engineering, heating, ventilation and air conditioning and life safety systems, structural integrity of the Improvements, measurement of the square footage of the Land and Improvements, legal status and requirements pertaining to the Property (including applicable building codes, zoning, environmental, public health and fire safety laws), hazardous substance inspections including preparation of an environmental assessment, suitability of the Property for Buyer’s purposes and all other matters of significance to Buyer.”
6. Effect of Amendment . Except as modified by this Amendment, the Existing PSA and all the covenants, agreements, terms, provisions and conditions thereof shall remain in full force and effect and are hereby ratified and affirmed. In the event of any conflict between the terms contained in this Amendment and the Existing PSA, the terms herein contained shall supersede and control the obligations and liabilities of the parties.
7. Miscellaneous . This Amendment becomes effective only upon execution and delivery hereof by Seller and Buyer. The captions of the paragraphs and subparagraphs in this Amendment are inserted and included solely for convenience and shall not be considered or given any effect in construing the provisions hereof.
8. Authority . Each of Seller and Buyer guarantees, warrants and represents that the individual or individuals signing this Amendment have the power, authority and legal capacity to sign this Amendment on behalf of and to bind all entities, corporations, partnerships, limited liability companies or other organizations on whose behalf such individual or individuals have signed.
9. Counterparts; Facsimile and PDF Signatures . This Amendment may be executed in one or more counterparts, each of which, when taken together, shall constitute one and the same document. A facsimile or portable document format (PDF) signature on this Amendment shall be equivalent to, and have the same force and effect as, an original signature.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
2 |
IN WITNESS WHEREOF, Seller and Buyer have executed this Amendment as of the date and year first above written.
SELLER : | ||
PHARMACANN LLC | ||
By: | /s/ Teddy Scott | |
Name: | Teddy Scott | |
Title: | Manager | |
BUYER : | ||
IIP OPERATING PARTNERSHIP, LP | ||
By: | /s/ Paul E. Smithers | |
Name: | Paul E. Smithers | |
Title: | CEO |
Exhibit A
Parcel I
All that certain lot, parcel of land and premises, hereinafter described, situate, lying and being in the Town of Hamptonburgh, Orange County, State of New York, designated as a portion of Lot #3 on a plat entitled “Subdivision Plan for Hudson Crossings II”, filed with the Orange County Clerk's Office on April 27, 2015 as Map No. 60-2015, said property being more particularly bounded and described as follows.
BEGINNING at a point where the dividing line between Lot #1 and Lot #2 as shown on Orange County Clerk’s Office filed Map #114-12 intersects the southerly line of Lot 7.1, Block 1, Section 36 (Lands of Green Acres Development Group per Liber 3905, Page 026), Town of Montgomery, and running thence from said point along said dividing line the following three courses:
1. South 18°50'45” West, a distance of 904.90 feet to a point; thence
2. South 41°59'13” West, a distance of 209.52 feet to a point; thence
3. South 20°58'05” West, a distance of 1023.27 feet to a point; thence proceeding along the dividing line between said Lot 2 and Lot 21.22, Block 1, Section 1 (Lands of Green Acres Development Group per Liber 3905, Page 026), the following thirteen courses:
4. North 81° 54' 32” West, a distance of 273.13 feet to a point; thence
5. North 82° 12' 43” West, a distance of 209.03 feet to a point; thence
6. North 78° 00' 48” West, a distance of 149.59 feet to a point; thence
7. North 73° 54' 53” West, a distance of 414.09 feet to a point; thence
8. North 75° 30' 05” West, a distance of 151.22 feet to a point; thence
9. North 88° 06' 10” West, a distance of 150.32 feet to a point; thence
10. South 79° 14' 56” West, a distance of 236.83 feet to a point; thence
11. South 84° 53' 37” West, a distance of 261.73 feet to a point on a curve; thence
12. Along a non-tangent curve to the left having a radius of 12,489.00 feet, a central angle of 00° 56' 30”, an arc length of 205.28 feet, also bearing a chord of North 26° 24' 19” East, a chord distance of 205.28 feet to a point of non-tangency; thence
13. North 25° 47' 36” East, a distance of 704.70 feet to a non-tangent point; thence
14. Along a non-tangent curve to the right having a radius of 1,322.00 feet, a central angle of 03° 48' 52”, an arc length of 88.01 feet, also bearing a chord of North 27° 47' 05” East, a chord distance of 87.99 feet to a point of non-tangency; thence
15. North 29° 44' 35” East, a distance of 590.89 feet to a point of curvature; thence
16. Along a curve to the left having a radius of 6,760.00 feet, a central angle of 02° 32' 52”, an arc length of 300.60 feet, also bearing a chord of North 28° 28' 09” East, a chord distance of 300.58 feet to a point; thence
17. Along the dividing line between said Lot 2 and Lot 1.22 (n/f reputed owner Theodore I. & Sharon Owens per Liber 2089 Page 1143), Block 1, Section 1, South 52° 09' 10” East, a distance of 399.79 feet to an iron pipe found; thence proceeding along a new line being the dividing line between Proposed Lot 2 and Proposed Lot 3, the following nine courses:
18. South 38° 27' 17” West, a distance of 537.44 feet to a point; thence
19. South 43° 28' 40” East, a distance of 644.09 feet to a point; thence
20. North 76° 04' 53” East, a distance of 643.64 feet to a point; thence
21. South 49° 20' 53” East, a distance of 85.81 feet to a point; thence
22. North 40° 27' 05” East, a distance of 275.89 feet to a point of curvature; thence
23. Along a curve to the left having a radius of 475.00 feet, a central angle of 22° 02' 48”, an arc length of 182.77 feet, also bearing a chord of North 29° 25' 41” East, a chord distance of 181.65 feet to a point of tangency; thence
24. North 18°24'17” East, a distance of 654.71 feet to a point of curvature; thence
25. Along a curve to the left having a radius of 375.00 feet, a central angle of 30° 22' 25”, an arc length of 198.79 feet, also bearing a chord of North 03° 13' 04” East, a chord distance of 196.48 feet to a point of tangency; thence
26. North 11° 58' 08” West, a distance of 28.86 feet to a point; thence
27. Along the aforementioned dividing line between Lot 2 as shown on said Map #114-12, Town of Hamptonburgh, and Lot 7.1, Block 1, Section 36, Town of Montgomery, South 62°34'19” East, a distance of 158.30 feet to the. point of BEGINNING.
Encompassing an area of 1,811,603 square feet or 41.589 acres, more or less.
Together with the following two parcels:
Parcel II
All that certain lot, parcel of land and premises, hereinafter particularly described, situate, lying and being in the Town of Hamptonburgh, Orange County, State of New York, being a portion of Lot 1 on a map entitled “Phase 1 Final Plan For Pyramid Subdivision, Town of Hamptonburgh and Town of Montgomery”, prepared by Pietrzak & Pfau, Engineering & Surveying, PLLC., last revised June 10, 2004, and recorded in the Orange County Clerk's office on July 13, 2004 as Map #465-04, Sheet 1.
Said property being shown on said map on the northerly side of Eager Road and noted as “Area = 28.7±AC Portion of Lot 1”.
Parcel II being further described as Parcel II in a deed recorded in the Orange County Clerk's office on April 30, 2008 in Book 12567, Page 1566, File No. 20080045244.
Parcel III
All that certain lot, parcel of land and premises, hereinafter particularly described, situate, lying and being in the Town of Hamptonburgh, Orange County, State of New York, being a portion of Lot 1 on a map entitled “Phase 1 Final Plan For Pyramid Subdivision, Town of Hamptonburgh and Town of Montgomery”, prepared by Pietrzak & Pfau, Engineering & Surveying, PLLC., last revised June 10, 2004, and recorded in the Orange County Clerk's office on July 13, 2004 as Map #465-04, Sheet 1.
Said property being shown on said map on the southerly side of Eager Road and noted as “Area = 11.2±AC Portion of Lot 1”.
Parcel III being further described as Parcel III in a deed recorded in the Orange County Clerk's office on April 30, 2008 in Book 12567, Page 1566, File No. 20080045244.
(BEING a portion of the premises conveyed to Hudson Valley Crossing, LLC by Green Acres Development Group by deed dated April 14, 2008 and recorded in the Orange County Clerk's Office on April 30, 2008 in Liber 12657 at page 1566.)
Exhibit 23.3
Consent of Independent Registered Public Accounting Firm
Innovative Industrial Properties, Inc.
San Diego, California
We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated October 17, 2016, relating to the consolidated balance sheet as of September 30, 2016 of Innovative Industrial Properties, Inc. which is contained in that Prospectus.
We also consent to the reference to us under the caption “Experts” in the Prospectus.
/s/BDO USA, LLP
Costa Mesa, California
October 17, 2016
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
Exhibit 99.1
Consent of Director Nominee
Innovative Industrial Properties, Inc. (the “ Company ”) is filing a Registration Statement on Form S-11 with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “ Securities Act ”), in connection with the Company’s initial public offering. In connection therewith, I hereby consent, pursuant to Rule 438 of the Securities Act, to being named as a future member of the Board of Directors of the Company in the Registration Statement, as may be amended from time to time. I also consent to the filing of this consent as an exhibit to such Registration Statement and any amendments thereto.
/s/ Gary M. Malino | ||
Name: | Gary M. Malino | |
Date: | 10/3/16 |
Exhibit 99.2
Consent of Director Nominee
Innovative Industrial Properties, Inc. (the “ Company ”) is filing a Registration Statement on Form S-11 with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “ Securities Act ”), in connection with the Company’s initial public offering. In connection therewith, I hereby consent, pursuant to Rule 438 of the Securities Act, to being named as a future member of the Board of Directors of the Company in the Registration Statement, as may be amended from time to time. I also consent to the filing of this consent as an exhibit to such Registration Statement and any amendments thereto.
/s/ David Stecher | ||
Name: | David Stecher | |
Date: | 10/3/16 |
Exhibit 99.3
Consent of Director Nominee
Innovative Industrial Properties, Inc. (the “ Company ”) is filing a Registration Statement on Form S-11 with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “ Securities Act ”), in connection with the Company’s initial public offering. In connection therewith, I hereby consent, pursuant to Rule 438 of the Securities Act, to being named as a future member of the Board of Directors of the Company in the Registration Statement, as may be amended from time to time. I also consent to the filing of this consent as an exhibit to such Registration Statement and any amendments thereto.
/s/ Scott Shoemaker | ||
Name: | Scott Shoemaker | |
Date: | 10/3/16 |
Exhibit 99.4
Consent of Director Nominee
Innovative Industrial Properties, Inc. (the “ Company ”) is filing a Registration Statement on Form S-11 with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “ Securities Act ”), in connection with the Company’s initial public offering. In connection therewith, I hereby consent, pursuant to Rule 438 of the Securities Act, to being named as a future member of the Board of Directors of the Company in the Registration Statement, as may be amended from time to time. I also consent to the filing of this consent as an exhibit to such Registration Statement and any amendments thereto.
/s/ Paul E. Smithers | ||
Name: | Paul E. Smithers | |
Date: | October 14, 2016 |