As filed with the Securities and Exchange Commission on November 17, 2016
(Exact Name of Registrant as Specified in its Governing Instruments)
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrants Principal Executive Offices)
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
With copies to:
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Martin Traber, Esq.
Carolyn Long, Esq. Curt Creely, Esq. FOLEY & LARDNER LLP 100 North Tampa Street, Suite 2700 Tampa, Florida 33602 Tel: (813) 229-2300 Fax: (813) 221-4210 |
Kerry E. Johnson, Esq.
DLA PIPER LLP (US) 1251 Avenue of the Americas 27 th Floor New York, New York 10020 Tel: (212) 335-4500 Fax: (212) 335-4501 |
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. o
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. o
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. o
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. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o
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):
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Large accelerated filer o | Accelerated filer o |
Non-accelerated filer
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(Do not check if a smaller reporting company) |
Smaller reporting company o |
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 NOVEMBER 17, 2016
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 been approved to list our shares of Class A common stock on the New York Stock Exchange, or the NYSE, subject to official notice of issuance, 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 or, if later, the first year in which we have material real estate assets and operations. 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 the section entitled 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 our Class A common stock only if you can afford a complete loss of your investment. See the section entitled 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, 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. |
| Medical-use cannabis 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 or local laws relating to cultivation and production of medical-use cannabis may be modified or eliminated in the future. |
| We are dependent on our key personnel for our success. The departure of any of our executive officers or key personnel could have a material adverse effect 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 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. |
| Investors participating in this offering will incur immediate and substantial dilution. |
| 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 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.
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Per Share | Total | |||||||
Public offering price | $ | $ | ||||||
Underwriting discount (1) | $ | $ | ||||||
Proceeds, before expenses, to us | $ | $ |
(1) | Includes a structuring fee equal to 0.50% of the gross proceeds of this offering. 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.
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Ladenburg Thalmann
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Compass Point |
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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.
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. 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, 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.
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 structural repairs, maintenance, taxes and insurance. 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.
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 do not currently own any properties. 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 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 five properties, comprising 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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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 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 doctors 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, Parkinsons disease, Alzheimers, lupus, residual limb pain, spinal cord injuries, inflammatory bowel disease and terminal illness. As of November 15, 2016, 29 states, plus the District of Columbia, have passed laws allowing their citizens to use medical cannabis.
We believe that the following conditions create an attractive opportunity to invest in industrial 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 in 2015, 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, continue to 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. |
| A shift in public opinion and increasing momentum toward the legalization of cannabis, especially as it relates to medical-use cannabis : We believe that the growth of the regulated cannabis industry has been fueled by changing public attitudes in the United States. A 2015 poll by Harris found 81% of Americans support the legalization of cannabis for medical use. Driven in part by this shift in public opinion, three additional states, including Florida, Arkansas and North Dakota, voted to legalize medical-use cannabis in November 2016. Expansion of the market opportunity to these states could be significant. |
| The federal governments current policy toward certain 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 with no medical use, and therefore it is illegal to grow, possess and consume cannabis under federal law. Although the Controlled Substances Act of 1910, or CSA, basic prohibitions remain in force, the U.S. Department of Justice, under the Obama administration, has issued memoranda characterizing enforcement of federal cannabis prohibitions under the CSA as an inefficient use of federal investigative and prosecutorial resources when state regulatory and enforcement efforts are effective with respect to enumerated federal enforcement priorities under the CSA. In such instances, the U.S. Department of |
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Justice instructs federal prosecutors that enforcement of state law by state and local law enforcement should remain the primary means of addressing cannabis-related activity, including cultivation and distribution of cannabis. 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. This provision, however, is effective only until December 9, 2016 and must be renewed by Congress in subsequent years. In order to extend the prohibition, it must be specifically included in the fiscal year 2017 Commerce, Justice, and Science (CJS) Appropriations bill the germane bill. Currently, only the Senate version of the CJS Appropriations bill includes the prohibition and the House version does not. 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 be renewed or that the U.S. Department of Justices 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. |
| Limited access to capital by industry participants in light of risk perceived by financial institutions of violating federal laws and regulatory guidelines for offering banking services to cannabis-related businesses : To date, the status of medical-use 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. While 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, 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 that lack access to traditional financing sources. |
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.
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 Government Regulation.
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, an internally-managed 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. According to public filings with the Securities and Exchange Commission, or the SEC, during their tenure at BioMed Realty, Messrs. Gold and Kreitzer oversaw the growth of the companys 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. |
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| Focus on Recurring and Dependable Revenue . Our business strategy will focus on acquiring real estate assets from, and entering into long-term, triple-net leasing arrangements with, licensed medical-use cannabis 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 industrys 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 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. |
We anticipate that our initial target markets will be New York, Illinois, Washington, Oregon, Nevada, California, Arizona, Massachusetts and Maryland. We currently have a definitive agreement to purchase one medical-use cannabis cultivation facility in New York and non-binding letters of intent to purchase one medical-use cannabis cultivation facility in Illinois and four medical-use cannabis cultivation facilities in California.
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The following is a list of states that have legalized cannabis for medical use in some form as of November 15, 2016:
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Year (1) | Jurisdiction (1) |
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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 | ||||||
2016 | Florida | 20.3 | ||||||
2016 | Arkansas | 3.0 | ||||||
2016 | North Dakota | 0.8 | ||||||
Total | 30 | 203.3 |
(1) | Source: ArcView |
(2) | Source: U.S. Census Bureau |
It is expected that new states that entered the marketplace in 2016, may 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. ArcViews projected increase in legal cannabis sales by 2020 is, in part, attributable to this delay between legalization and revenue generation. In addition, 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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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 one or more licenses to operate multiple facilities. Based on our review of potential acquisitions in connection with this offering, indoor cultivation facilities generally appear to have similar shells as standard light industrial buildings. However, based on our initial diligence, the medical-use cultivation process typically requires a finely tuned environment to achieve consistent high quality and specificity in cannabinoid levels and to maximize yields, which translates into certain capital improvements in the buildings infrastructure. These improvements can include enhanced HVAC systems for climate and humidity control, high capacity plumbing systems, specialized lighting systems, and sophisticated building management, cultivation monitoring and security systems. 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.
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. While the acquisition of our Initial Property is subject to ongoing diligence and the satisfaction of closing conditions, at this time, we have determined that the acquisition of our Initial Property is probable. There can be no assurance, however, 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 37 acres of usable 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, 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 our initial public offering within a specified timeframe. The $375,000 deposit was paid on our behalf by IGP Advisers (as defined below) and is to be repaid with the proceeds of this offering. 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 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 tenants license from the state of New York. PharmaCann LLC is a start-up business that commenced retail operations in late 2015. PharmaCann LLC secured one of only five licenses granted to date in New York for the cultivation and
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dispensing of medical-use cannabis. As of the date of this prospectus, PharmaCann LLC operates two cultivation and processing facilities and four registered medical-use cannabis dispensaries in Illinois, and one cultivation and processing facility and four registered medical-use cannabis dispensaries in New York. The lease for our Initial Property is a triple-net lease, with the tenant responsible for paying all structural repairs, maintenance expenses, insurance and taxes related to the property. The base rent is approximately $319,580 per month, which shall be increased annually at a 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. During 2016, the Company expects that PharmaCann LLC will continue to incur losses as its expenses increase in connection with the expansion of PharmaCann LLCs operations. 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.
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.
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 intend to target tenants that have been among the top candidates in the state licensing process and have been granted one or more licenses to operate multiple facilities. We expect, however, that most of our tenants will be start-up businesses that have little or no revenue and, at least initially, will make rent payments to us from the sale proceeds of a sale-leaseback transaction with us or cash on hand. 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.
An investment in shares of our Class A common stock involves a high degree of risk. 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
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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, 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, and may suffer from delays in locating suitable investment properties. |
| Medical-use cannabis 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 or local laws relating to cultivation and production of medical-use cannabis may be modified or eliminated in the future. |
| We are dependent on our key personnel for our success. The departure of any of our executive officers or key personnel could have a material adverse effect on our business. |
| Our growth depends on external sources of capital, which may not be available on favorable terms or at all. In addition, banks and other financial institutions may be reluctant to enter into lending transactions with us, particularly secured lending, because we intend to acquire properties used in the cultivation and production of medical-use cannabis. If this source of funding is unavailable to us, our growth may be limited and our levered return on the properties we purchase may be lower. |
| 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. |
| Compliance with environmental laws could materially increase our operating expenses. |
| 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. |
| 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. |
| Because our real estate investments will consist of primarily industrial properties suitable for cultivation and production of medical-use cannabis, our properties may be difficult to sell or re-lease upon tenant defaults or early lease terminations, and our rental revenues will be significantly influenced by demand for these facilities. |
| 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. |
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| 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 and may have significant adverse consequences on the market price of our Class A common stock. We have not requested and do not intend 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. |
| A material weakness has been identified in our internal control over financial reporting. If we fail to implement and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results could be impaired, investors could lose confidence in our reported financial information, the trading price of our shares of common stock could decline and our access to the capital markets or other financing sources could become limited. |
| We and our tenants may have difficulty accessing the service of banks. |
| If we are deemed to be subject to Section 280E of the Internal Revenue Code of 1986, as amended, or 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. |
| 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. |
| We may be unable to pay or maintain cash dividends and may borrow money, sell assets or use offering proceeds to make distributions to our stockholders, if we are unable to make distributions from cash flows from operations. |
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.
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 Partnerships business and affairs. In the future, we may issue limited partnership interests in our Operating Partnership 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 other 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.
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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 founders, including 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 may 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 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.
In order for us to qualify as a REIT under the Code, the relevant sections of our charter provide that, after completion of this offering and subject to certain exceptions, 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 or number of shares, whichever is more restrictive) of the aggregate of our outstanding shares of stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of our outstanding common stock or any class or series of our outstanding preferred stock. 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 9.8% ownership limits and establish a different limit, or excepted holder limit, for a particular person if the persons 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 persons interest is held during the last half of a taxable year) or otherwise cause us to fail to qualify 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 stockholders 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).
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
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(without regard to whether the stockholders 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.
We intend to elect and qualify to be taxed as a REIT commencing with our tax year ending December 31, 2016 or, if later, the first year in which we have material real estate assets and operations. 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 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.
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), 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 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.
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.
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We qualify as an emerging growth company, as defined in the Jumpstart Our Business Startups Act, or 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 of 2002, or 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 are permitted to use an extended transition period for complying with new or revised accounting standards. |
We have elected to use an extended transition period for complying with new or revised accounting standards, and this election is irrevocable. We have not made a decision whether to take advantage of other exemptions. If we do take advantage of additional exemptions, some investors may find our Class A common stock less attractive, which may result in a less active trading market for our Class A common stock and a more volatile stock price.
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.
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 SEC.
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Class A common stock offered
by us |
8,750,000 shares. (1) |
Class A common stock to be outstanding after the offering |
10,062,500 shares. (1) (2) |
Use of proceeds |
We estimate that we will receive net proceeds from this offering of approximately $161.2 million (or approximately $185.6 million 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 intend to use the net proceeds of this offering as follows: (i) approximately $30 million to acquire our Initial Property, (ii) approximately $50,000 to reimburse IGP Advisers for certain organizational costs, and (iii) approximately $500,000 to pay a consulting fee to IGP Advisers, which amount will increase by $3,300 for each day that the closing of this offering occurs after November 15, 2016. We intend to invest the remaining net proceeds in specialized industrial real estate assets that support the regulated medical-use cannabis industry that are consistent with our investment strategy. 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 quarterly distributions of all or substantially all of our taxable income 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, 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 GAAP), 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. |
NYSE symbol |
IIPR. |
Ownership and transfer
restrictions |
In order for us to qualify as a REIT under the Code, our charter provides that no person or entity may own or be deemed to own more than 9.8% (in value or number of shares, whichever is more restrictive) of the aggregate of our outstanding shares of stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of our outstanding common stock or any class or series of our outstanding preferred 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, (ii) up to 196,875 shares of Class A common stock that may be issued to our founders, including certain executive officers and directors, who are holders of Class B |
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common stock in connection with the exercise of the underwriters over-allotment option and (iii) 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. |
(2) | Includes 1,312,500 shares of our Class A common stock that will be issued to our founders, including 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 Certain Relationships and Related Transactions and Description of Securities. Excludes 1,000,000 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.
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.
We currently do not own any properties. We have entered into a definitive purchase agreement to acquire our Initial Property within 30 days after the expiration of the due diligence period and have entered into two non-binding letters of intent with respect to five properties, 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.
Our ability to achieve our investment objectives and to make distributions to our stockholders depends upon our senior management teams 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
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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 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.
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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.
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 one or more licenses 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 our ability to generate cash flow and make distributions to our stockholders.
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:
| 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. |
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Based on the anticipated net proceeds to be received from this offering, the expected investment size and our senior management teams 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 any adverse change in the political or regulatory climate in those states or specific counties where our properties are located, which could adversely affect our properties and our ability to lease properties.
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 damages 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. 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; |
| 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. |
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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 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.
In addition to the risk of tenants being unable to make regular rent payments, certain of our tenants who may depend on debt 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 tenants 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 tenants 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.
Because our portfolio of properties will consist of industrial properties used in the regulated medical-use cannabis industry, we will be subject to risks inherent in investments in a single industry. A decrease in the
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demand for medical-use cannabis cultivation facilities would have a greater adverse effect on our rental revenues than if we owned a more diversified real estate portfolio. Demand for medical-use cannabis cultivation facilities has been and could be adversely affected by changes in current favorable state or local laws relating to cultivation and production of medical-use cannabis or any change in the federal governments current enforcement posture with respect to state-licensed cultivation of medical-use cannabis, among others. To the extent that any of these conditions occur, they are likely to affect demand and market rents for medical-use cannabis cultivation facilities, which could cause a decrease in our rental revenue. Any such decrease could impair our ability to make distributions to you. We do not expect to invest in other real estate or businesses to hedge against the risk that industry trends might decrease the profitability of our medical-use cannabis cultivation facilities.
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 properties we own. 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.
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.
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 |
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| 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.
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.
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.
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.
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.
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We are not aware of any other publicly-traded REIT that focuses on the acquisition, ownership and management of medical-use cannabis facilities. Therefore, as we commence the operation of our business, we may encounter risks of which we are not aware at this time, which could have a material adverse impact on our business.
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 markets 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, banks and other financial institutions may be reluctant to enter into lending transactions with us, particularly secured lending, because we intend to acquire properties used in the cultivation and production of medical-use cannabis. If this source of funding is unavailable to us, our growth may be limited and 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.
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:
| 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; |
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| 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.
We are targeting for acquisition, properties that are owned by state-licensed cultivators and producers of medical-use cannabis. Relevant state or local 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 or local 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.
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.
Cannabis is a Schedule I controlled substance under the CSA. Even in those jurisdictions in which the manufacture and use of medical cannabis has been legalized at the state level, the possession, use and cultivation 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
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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.
The U.S. Department of Justice, under the Obama administration, issued memoranda, including the so-called Cole Memo on August 29, 2013, characterizing enforcement of federal cannabis prohibitions under the CSA to prosecute those complying with state regulatory systems allowing the use, manufacture and distribution of medical cannabis as an inefficient use of federal investigative and prosecutorial resources when state regulatory and enforcement efforts are effective with respect to enumerated federal enforcement priorities under the CSA. In the Cole Memo, the U.S. Department of Justice provided guidance to all federal prosecutors indicating that federal enforcement of the CSA against cannabis-related conduct 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 cultivation 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, 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 order to extend the prohibition, it must be specifically included in the fiscal year 2017 Commerce, Justice, and Science (CJS) Appropriations bill the germane bill. Currently, only the Senate version of the fiscal 2017 CJS Appropriations bill includes the prohibition and the House version does not. 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 Circuits 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.
Federal prosecutors have significant discretion and 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 prosecutors 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 governments 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 governments enforcement position, we could be subject to criminal prosecution, which could lead to imprisonment and/or the imposition of penalties, fines, or forfeiture.
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
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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.
Financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, unlicensed money transmitter statute and the Bank Secrecy Act. Recent guidance issued by the Financial Crimes Enforcement Network, or FinCen, a division of the U.S. Department of the Treasury, clarifies how financial institutions can provide services to cannabis-related businesses consistent with their obligations under the Bank Secrecy Act. Furthermore, supplemental guidance from the U.S. Department of Justice directs federal prosecutors to consider the federal enforcement priorities enumerated in the Cole Memo when determining whether to charge institutions or individuals with any of the financial crimes described above based upon cannabis-related activity. Nevertheless, banks remain hesitant to offer banking services to cannabis-related businesses. Consequently, those businesses involved in the regulated medical-use cannabis industry continue to encounter difficulty establishing banking relationships. Our inability to maintain our current bank accounts would make it difficult for us to operate our business, increase our operating costs, and pose additional operational, logistical and security challenges and could result in our inability to implement our business plan.
The 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.
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.
Depending on the laws of each 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.
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.
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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.
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 tenants 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.
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 business. 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 teams 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 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 teams ability to execute acquisitions and dispositions of medical-use cannabis facilities, subject to the oversight and approval of our board of directors. Our senior management team has not previously invested in medical-use cannabis facilities. Our senior management team will be
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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.
Under the MGCL, 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 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. 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. A Maryland corporations board of directors may provide that its approval is subject to compliance with any terms and conditions determined by the board of directors prior to the time that 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:
| 80% of the votes entitled to be cast by holders of outstanding 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 unless, among other conditions, the corporations 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 Maryland corporations 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 corporations board of directors prior to the time that the interested stockholder becomes an interested stockholder.
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, if aggregated with all other 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), 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. 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.
The unsolicited takeover provisions of Title 3, Subtitle 8 of the MGCL, or Subtitle 8, permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or
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bylaws, to implement certain takeover defenses, some of which (for example, a classified board) we do not yet have. 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.
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 sections entitled Certain Provisions of Maryland Law and Our Charter and Bylaws Business Combinations, Control Share Acquisitions and Subtitle 8.
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; and |
| 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 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.
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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 Partnerships 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 Partnerships and its subsidiaries liabilities and obligations have been paid in full.
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 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.
We have entered into indemnification agreements with each of our executive directors and officers, that provide for idemnification to the maximum extent permitted by Maryland law. Maryland law permits us to include in our charter a provision eliminating the liability of our directors and officers and our 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. |
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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. |
See the section entitled Certain Provisions of Maryland Law and Our Charter and Bylaws Indemnification and Limitation of Directors and Officers Liability.
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.
In order for us to qualify as a REIT under 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 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 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). In order for us to qualify as a REIT under the Code, the relevant sections of our charter provide that, after completion of this offering and subject to certain exceptions, 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 or number of shares, whichever is more restrictive) of the aggregate of our outstanding shares of stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of our outstanding common stock or any class or series of our outstanding preferred 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.
In preparing and reviewing our consolidated financial statements as of September 30, 2016 and for the period from June 15, 2016 (date of incorporation) through September 30, 2016, and in connection with our restatement of our previously issued audited balance sheet as of September 30, 2016, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial
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statements will not be prevented or detected on a timely basis. The material weakness identified related to our failure to obtain an independent valuation in connection with our accounting for our restricted stock grants of Class B common stock to founders, and lack of recognition of the related stock compensation during the period. As a result, a restatement was required for our consolidated financial statements as of September 30, 2016 and for the period then ended.
In addition, neither we nor our independent registered public accounting firm has performed an evaluation of our internal control over financial reporting during any period in accordance with the provisions of the Sarbanes-Oxley Act. In light of the material weakness that was identified as a result of the limited procedures performed, we believe that it is possible that, had we and our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses or significant control deficiencies may have been identified.
If we fail to remediate the material weakness or to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results, or report them within the timeframes required by law or stock exchange regulations. Failure to comply with Section 404 of the Sarbanes-Oxley Act could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. We cannot assure you that we will be able to remediate the material weakness in a timely manner, or at all, or that in the future, additional material weaknesses will not exist or otherwise be discovered. If we fail to implement and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our consolidated financial statements or suspension or delisting of our common stock from the NYSE, investors could lose confidence in our reported financial information, the trading price of our shares of common stock could decline and our access to the capital markets or other financing sources could become limited.
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.
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; |
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| we are not required to give to our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements; and |
| we are permitted to use an extended transition period for complying with new or revised accounting standards. |
We have elected to use an extended transition period for complying with new or revised accounting standards, and this election is irrevocable. We have not made a decision whether to take advantage of other exemptions. If we do take advantage of additional exemptions, some investors may find our Class A common stock less attractive, which may result in a less active trading market for our Class A common stock and a more volatile stock price.
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.
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.
Shares of our Class A common stock are newly-issued securities for which there is no established trading market. We have been approved to list our Class A common stock on the NYSE, subject to official notice of issuance. However, there can be no assurance 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; |
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| 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; |
| failure to qualify, or maintain our qualification, as a REIT; |
| refusal of securities clearing firms to accept deposits of our securities; |
| 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.
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, our founders, 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 our founders, including 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 may 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.
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 GAAP), 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 intend to make quarterly distributions of all or substantially all of our taxable income so as to
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satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income tax. 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. In addition, we may borrow money, sell assets or use offering proceeds to make distributions to our stockholders, if we are unable to make distributions from cash flows from operations. See the section entitled Distribution Policy.
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.
The market value of the equity securities of a REIT is based primarily upon the markets 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 markets expectations with regard to future earnings and cash distributions likely would 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 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 our founders, including certain executive officers and directors, into 1,312,500 shares of Class A common stock upon completion of this
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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.
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.
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.
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 or, if later, the first year in which we have material real estate assets and operations. 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
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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.
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.
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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 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.
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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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.
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 Services 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.
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.
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
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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.
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 (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.
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 counsels 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.
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.
There are special considerations that apply to employee benefit plans subject to ERISA (such as profit sharing, Section 401(k) or pension plans) and other retirement plans or accounts subject to Section 4975 of the
39
Code (such as an IRA) that are investing in our shares of Class A common stock. Fiduciaries and IRA owners investing the assets of such a plan or account in our Class A common stock should satisfy themselves that:
| the investment is consistent with their fiduciary and other obligations under applicable law, including ERISA and the Code; |
| the investment is made in accordance with the documents and instruments governing the plan, trust or IRA, including the plans or accounts investment policy; |
| the investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and the Code; |
| the investment will not impair the liquidity needs of the plan or IRA; |
| the investment will not produce an unacceptable amount of unrelated business taxable income for the plan or IRA; |
| our stockholders will be able to comply with the requirements under ERISA and the Code to value the assets of the plan or IRA annually; and |
| the investment will not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code. |
Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA, the Code or other applicable statutory or common law may result in the imposition of civil and criminal penalties and could subject the fiduciary to claims for damages or for equitable remedies, including liability for investment losses. In addition, if an investment in our shares constitutes a non-exempt prohibited transaction under ERISA or the Code, the fiduciary or IRA owner who authorized or directed the investment may be subject to the imposition of excise taxes with respect to the amount invested. In addition, the investment transaction must be undone. In the case of a non-exempt prohibited transaction involving an IRA owner, the IRA may be disqualified as a tax-exempt account and all of the assets of the IRA may be deemed distributed and subjected to tax. ERISA plan fiduciaries and IRA owners should consult with their legal, tax, financial and other advisors before making an investment in our Class A common stock. The sale of shares of our Class A common stock to a plan is in no respect a representation by us or any other person associated with the offering of our common stock that such an investment meets all relevant legal requirements with respect to investments by plans generally or any particular plan, or that such an investment is appropriate for plans generally or any particular plan.
For a further discussion of the issues and risks associated with an investment in our Class A common stock by employee benefit plans, IRAs and other benefit plan investors, see the section entitled ERISA Considerations.
40
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; |
| the estimated growth in the medical-use cannabis market; |
| the demand for medical-use cannabis facilities; |
| the expected medical-use or adult-use cannabis legalization in certain states; |
| our ability to access capital; |
| financing rates for our target assets; |
| our expected leverage; |
| 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 any interest rate or other 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 suitable investment opportunities in the medical-use cannabis industry; |
| availability of qualified personnel; |
| our understanding of our competition; and |
| market trends in our industry, interest rates, real estate values, the securities markets or the general economy. |
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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, Managements 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 $161.2 million (or approximately $185.6 million if the underwriters over-allotment option is exercised in full), after deducting underwriting discounts and commissions, and estimated expenses of the offering (including, but not limited to, $720,000 in estimated offering costs reimbursable to IGP Advisers), assuming a public offering price of $20.00 per share. IGP Advisers is funding certain of our expenses in connection with our organization, this offering, the acquisition of our Initial Property and other costs. We will reimburse IGP Advisers for those expenses incurred by it with the net proceeds of this offering. See the section entitled Certain Relationships and Related Transactions Reimbursement of IGP Advisers.
We will contribute the net proceeds of this offering to our Operating Partnership. Our Operating Partnership intends to use the net proceeds of this offering as follows:
| approximately $30 million, or 18.6% of the net proceeds of $161.2 million, to acquire our Initial Property, including acquisition costs of $50,000 (of which $20,000 will be paid by us as a reimbursement to IGP Advisers) and the reimbursement to IGP Advisers for an earnest money deposit of $375,000; |
| approximately $50,000 to reimburse IGP Advisers for certain organizational costs; and |
| approximately $500,000 to pay a consulting fee to IGP Advisers, which amount will increase by $3,300 for each day that the closing of this offering occurs after November 15, 2016. |
We intend to invest the remaining net proceeds in specialized industrial real estate assets that support the regulated medical-use cannabis industry that are consistent with our investment strategy. Our general goal is to invest the remaining net proceeds within six to 12 months following completion of this offering, which will depend on the amount of time necessary to evaluate a target propertys 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.
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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 or, if later, the first year in which we have material real estate assets and operations. 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 GAAP), 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, we expect that a portion of our distributions declared may be paid from 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 organization, offering and other expenses payable by us, and the issuance of 1,312,500 shares of Class A common stock to our founders, including 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, Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and notes thereto included elsewhere in this prospectus.
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September 30, 2016 | ||||||||
Actual | As Adjusted (1) (2) | |||||||
Stockholders equity:
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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 10,062,500 shares issued and outstanding, as adjusted | $ | | $ | 10,063 | ||||
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 | 200,000 | 161,390,445 | ||||||
Accumulated deficit | (200,000 | ) | (750,000 | ) | ||||
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, (ii) up to 196,875 shares of Class A common stock that may be issued to our founders, including certain executive officers and directors, who are holders of Class B common stock in connection with the exercise of the underwriters over-allotment option and (iii) an aggregate of 27,500 shares of Class A common stock that are expected to be issued to two executive officers under the Incentive Plan upon approval at the first meeting of the compensation committee of our board of directors upon completion of this offering. |
(2) | The as adjusted amounts include 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 our founders, including 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 entitled Certain Relationships and Related Transactions and Description of Securities. The as adjusted amounts do not include 1,000,000 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 the section entitled Risk Factors Risks Related to Our Class A Common Stock Investors in this offering will incur immediate and substantial dilution.
The following table illustrates this dilution:
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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 the 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 Andrew Fenton, a co-founder, 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 founders 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. |
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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 for purposes of this dilution calculation 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 additional 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:
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Shares Purchased | Total Consideration (1) | Price | ||||||||||||||||||||||
Number | Percent | Amount | Percent | Per Share | ||||||||||||||||||||
Existing stockholders | 1,312,500 | 13.0 | % | $ | 508 | 0.0 | % | $ | 0.0004 | |||||||||||||||
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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The following table sets forth selected historical and pro forma financial information that has been derived from our historical audited consolidated financial statements as of September 30, 2016 and for the period from June 15, 2016 (date of incorporation) through September 30, 2016. Except for the historical information as of September 30, 2016 and for the period from June 15, 2016 (date of incorporation) through 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 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 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 acquisition of our Initial Property and the entry into the related lease agreement, 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 Managements 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.
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For the Year Ended
December 31, 2015 |
For the Nine Months Ended
September 30, 2016 |
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Historical | Pro Forma | Historical | Pro Forma | |||||||||||||
Statement of operations data:
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Revenues:
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Rental income | $ | | $ | 5,628,169 | $ | | $ | 4,221,127 | ||||||||
Total revenues | | 5,628,169 | | 4,221,127 | ||||||||||||
Expenses:
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Depreciation and amortization | | 641,429 | | 481,072 | ||||||||||||
General and administrative (1) | | | 200,000 | 200,000 | ||||||||||||
Total expenses | | 641,429 | 200,000 | 681,072 | ||||||||||||
Net income (loss) | $ | | $ | 4,986,740 | $ | (200,000 | ) | $ | 3,540,055 | |||||||
Net income (loss) per share | $ | | $ | 2.51 | $ | (0.39 | ) | $ | 1.78 | |||||||
Weighted average shares outstanding (2) | 1,987,769 | 508,065 | 1,987,769 |
(1) | Other than certain stock-based compensation expenses, 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 $6 million and $7 million. This estimate is based on managements previous experience in managing public REITs and is not reflected in the pro forma consolidated statements of operations. |
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(2) | Represents shares of Class A common stock whose proceeds are being reflected in pro forma adjustments in the statement of operations, 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. |
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As of September 30, 2016 | ||||||||
Historical | Pro Forma | |||||||
Balance sheet data:
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Assets:
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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:
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Security deposit | $ | | $ | 2,112,474 | ||||
Due to IGP Advisers, a related party | 375,000 | | ||||||
Total liabilities | 375,000 | 2,112,474 | ||||||
Stockholders Equity:
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Class A common stock | | 10,063 | ||||||
Class B common stock | 508 | | ||||||
Additional paid-in-capital | 200,000 | 161,390,445 | ||||||
Accumulated deficit | (200,000 | ) | (750,000 | ) | ||||
Total stockholders equity | 508 | 160,650,508 | ||||||
Total liabilities and stockholders equity | $ | 375,508 | $ | 162,762,982 |
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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 structural repairs, maintenance, taxes and insurance. We intend to elect and to operate our business so as to qualify to be taxed as a REIT fo U.S. Federal income tax purposes.
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 do not currently own any properties. 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. 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.
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 or, if later, the first year in which we have material real estate assets and operations. 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.
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.
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 tenants financial condition and ability to make rent payments to us on time. |
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 or local laws in the cannabis industry may
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impair our ability to renew or re-lease properties and the ability of our tenants to fulfill their lease obligations and could materially and adversely affect our ability to maintain or increase rental rates for our properties.
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.
We face competition from a diverse mix of market participants, including but not limited to, other 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.
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.
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 or, if later, the first year in which we have material real estate assets and operations. 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. In order for us to qualify as a REIT under the Code, the relevant sections of our charter provide that, after completion of this offering and subject to certain exceptions, 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 or number of shares, whichever is more restrictive) of the aggregate of our outstanding shares of stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of our outstanding common stock or any class or series of our outstanding preferred stock.
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.
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.
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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, or 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.
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 tenants 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.
Stock-based compensation for equity awards is based on the grant date fair value of the equity instrument and is recognized over the requisite service period.
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 operations. 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.
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 or, if later, the first year in which we have material real estate assets and operations. Under the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable
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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.
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 of 1933, as amended, or 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.
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 Future Operating Results.
We recognized stock compensation expense of $200,000 for the period from June 15, 2016 (date of incorporation) through September 30, 2016, related to the issuance of Class B common stock to our founders. We estimated the fair value of these shares at the June 15, 2016 grant date and at subsequent modification dates using a Monte Carlo simulation model. The fair value calculation is primarily based on managements estimates of the probability of its initial public offering and the estimated proceeds of such offering. We expect to recognize the remaining stock compensation expense related to the issuance of our Class B common stock (or the shares of Class A common stock issued upon conversion thereof) of approximately $3.5 million over the remaining service period of approximately 3.5 years through July 2020.
In addition, upon completion of this offering, we expect to award an aggregate of 27,500 restricted shares of Class A common stock to two of our executive officers under the Incentive Plan. We expect to recognize stock compensation expense equal to the fair value of these restricted shares (estimated to be $550,000 based on the price per share of our Class A common stock in this offering) over a service period of six months.
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
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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.
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.
We have no unconsolidated investments or any other off-balance sheet arrangements.
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.
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.
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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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 structural repairs, maintenance, taxes and insurance. 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.
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 do not currently own any properties. 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 the sellers asking prices for the properties, preliminary discussions with 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 five properties, comprising 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.
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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We believe that a convergence of changing public attitudes and increased legalization momentum in various states 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.
In the United States, the development and growth of the regulated medical-use cannabis 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 doctors 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, Parkinsons disease, Alzheimers, lupus, residual limb pain, spinal cord injuries, inflammatory bowel disease and terminal illness. As of November 15, 2016, 29 states, plus the District of Columbia, have passed laws allowing their citizens to use medical cannabis.
We believe that the following conditions, which are described in more detail below, create an attractive opportunity to invest in industrial 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 governments current policy toward certain cannabis-related activities that are legal under state law; and |
| limited access to capital by industry participants in light of risk perceived by financial institutions of violating federal laws and regulatory guidelines for offering banking services to cannabis-related businesses. |
According to ArcView, nationwide sales of legal cannabis grew to $5.4 billion in 2015, 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, continue to 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. 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 in a safe and appealing manner. In addition to smoking and vaporizing of dried leaves, cannabis can be incorporated into a variety of edibles, including cookies, crackers, nut mixes, lollipops, chews, teas, juices, smoothies and sodas, and incorporated into spray products or transdermal patches as well as topicals that have no psychoactive effects, such as salves, ointments, lotions and sprays.
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
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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.
We believe that the growth of the regulated cannabis industry has been fueled by changing public attitudes in the United States. A 2015 poll by Harris found 81% of Americans support the legalization of cannabis for medical use. Driven in part by this shift in public opinion, three additional states, Florida, Arkansas and North Dakota, voted to legalize medical-use cannabis in November 2016. Anticipated expansion of the market opportunity to these states could be significant.
As of November 15, 2016, 29 states, plus the District of Columbia, have passed laws allowing their citizens to use medical cannabis. The first state to permit the use of cannabis for medicinal purposes was California in 1996, upon adoption of 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 adopted medical-use laws in 1998 and 1999, and the remaining medical-use states adopted their laws on various dates through 2016.
In 2016, a number of state legislative or ballot measures passed that are expected to increase the size of the regulated cannabis industry. Some of the more significant measures are summarized below.
| California: California legalized adult-use cannabis in November 2016. The ballot initiative created a regulated framework for legalizing, selling and taxing cannabis sales similar to alcohol. As California is 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 increased cannabis sales. |
| 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 legalized medical-use cannabis in November 2016. Florida is the second-largest potential market in terms of population for medical-use cannabis behind California. |
| Maine: Maine legalized adult-use cannabis in November 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 legalized adult-use cannabis in November 2016. |
| Michigan: In September 2016, Michigans state legislature approved cannabis regulations for medical use that cover the entire state, which was signed into law by Michigans governor. |
| Nevada: Nevada legalized adult-use cannabis in November 2016. 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 states economy. |
Source: Batter Up: The Next States to Legalize, Marijuana Business Magazine, January 2016; Marijuana Policy Project.
Following the approval of medical or adult-use cannabis, state 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. Also, according to Marijuana Business Daily, 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 adult-use cannabis is legalized in states where regulated medical-use cannabis systems are already in place. For example, according
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to Marijuana Business Daily, the average amount of time that elapsed between voters approving adult-use cannabis production and sales to the opening of the first stores in Colorado, Washington and Oregon was 15 months.
Even where 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, limit the medical conditions that are eligible for cannabis treatment or require registration of doctors and/or patients, each 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.
Cannabis is classified as a Schedule I controlled substance by the DEA and the U.S. Department of Justice with no medical use, and therefore it is illegal to grow, possess and consume cannabis under federal law. 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 U.S. Supreme Court ruled that the CSA trumps state law. That means that the federal government has the option of enforcing U.S. drug laws, creating a climate of legal uncertainty regarding the production and sale of medical-use cannabis. Although the CSAs basic prohibition remains in force, the U.S. Department of Justice, under the Obama administration, has issued memoranda characterizing enforcement of federal cannabis prohibitions under the CSA as an inefficient use of federal investigative and prosecutorial resources when state regulatory and enforcement efforts are effective with respect to enumerated federal enforcement priorities under the CSA. In such instances, the U.S. Department of Justice instructs federal prosecutors that enforcement of state law by state and local law enforcement should remain the primary means of addressing cannabis-related activity, including cultivation and distribution of cannabis. 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. This provision, however, is effective only until December 9, 2016 and must be renewed by Congress in subsequent years. In order to extend the prohibition, it must be specifically included in the fiscal year 2017 Commerce, Justice, and Science (CJS) Appropriations bill the germane bill. Currently, only the Senate version of the CJS Appropriations bill includes the prohibition and the House version does not. 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 114 th Congress is summarized below. If passed, this legislation would address certain conflicts existing between state and federal law. In addition, although there is no assurance that any of these proposals will be approved, that the funds prohibition will be renewed or that the U.S. Department of Justices 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.
| 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 |
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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 bill 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 properties that have 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. The bill 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. The bill 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. |
To date, the status of medical-use 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. These limitations, when combined with the high costs of maintaining licensed and stringently regulated medical-use cannabis facilities (including meeting extensive zoning requirements), substantially increase the cost of production. While 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, 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 that lack access to traditional financing sources.
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.
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.
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, Messrs. Gold and Kreitzer founded BioMed Realty, an internally-managed 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 |
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by commercial property investors and lenders and poised for significant growth. According to public filings with the SEC, during their tenure at BioMed Realty, Messrs. Gold and Kreitzer oversaw the growth of the companys 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 a transaction valued at approximately $8 billion (including indebtedness that was paid or assumed at the closing). |
| Focus on Recurring and Dependable Revenue. Our business strategy will focus on acquiring real estate assets from and entering into long-term, triple-net leasing arrangements with licensed medical-use cannabis 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 industrys 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 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. |
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| 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. |
We anticipate that our initial target markets will be New York, Illinois, Washington, Oregon, Nevada, California, Arizona, Massachusetts and Maryland. We currently have a definitive agreement to purchase one medical-use cannabis cultivation facility in New York and non-binding letters of intent to purchase one medical-use cannabis cultivation facility in Illinois and four medical-use cannabis cultivation facilities in California.
The following is a list of the states that have legalized cannabis for medical use in some form as of November 15, 2016:
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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 | ||||||
2016 | Florida | 20.3 | ||||||
2016 | Arkansas | 3.0 | ||||||
2016 | North Dakota | 0.3 | ||||||
Total | 30 | 203.3 |
(1) | Source: ArcView |
(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.
According to ArcView, the following is a description of the regulated medical-use cannabis market opportunity in the states we currently intend to target:
| Arizona: Arizona legalized medical-use cannabis in 2010 and its first legal dispensary opened 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. Voters in Arizona rejected a ballot initiative to legalize adult-use cannabis in 2016. |
| 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. Californias 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, voters approved a ballot initiative in November 2016, which is modeled on the successful initiatives in Washington and Colorado. This initiative created a regulated framework for legalizing, selling and taxing adult and medical-use cannabis sales similar to alcohol. With the passage of this initiative, 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. |
| 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. |
| 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 states regulatory framework matures. By 2017, Massachusetts is projected to have the sixth largest medical-use cannabis market in the country. Massachusetts legalized adult-use cannabis in November 2016. |
| 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 legalized adult-use cannabis in November 2016. 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 states total legal cannabis market. With the legalization of adult-use cannabis in Nevada, it could become the largest cannabis market in the U.S. due to Nevadas 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. Oregons 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 adult-use cannabis, 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 $2.6 billion in annual sales in the adult-use cannabis market by 2020. |
It is expected that new states that entered the marketplace in 2016, may 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. ArcViews projected increase in legal cannabis sales by 2020 is, in part, attributable to this delay between legalization and revenue generation. In addition, 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.
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 one or more licenses to operate multiple facilities. Based on our review of potential acquisitions in connection with this offering, indoor cultivation facilities generally appear to have similar shells as standard light industrial buildings. However, based on our initial diligence, the medical-use cultivation process typically requires a finely tuned environment to achieve consistent high quality and specificity in cannabinoid levels and to maximize yields, which translates into certain capital improvements in the buildings infrastructure. These improvements can include enhanced HVAC systems for climate and humidity control, high capacity plumbing systems, specialized lighting systems, and sophisticated building management, cultivation monitoring and security systems. 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.
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 five properties, comprising approximately $80 million of these potential acquisitions. 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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Our letters of intent 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 completion of 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 subject to non-binding letters of intent are not currently probable.
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. While the acquisition of our Initial Property remains subject to ongoing diligence and the satisfaction of closing conditions, at this time, we have determined that the acquisition of our Initial Property is probable. There can be no assurance, however, 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 37 acres of usable 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, 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 our initial public offering within a specified timeframe. The $375,000 deposit was paid on our behalf by IGP Advisers and is to be repaid with the proceeds of this offering. 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 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 tenants license from the state of New York. PharmaCann LLC is a start-up business that commenced retail operations in late 2015. PharmaCann LLC secured one of only five licenses granted to date in New York for the cultivation and dispensing of medical-use cannabis. As of the date of this prospectus, PharmaCann LLC operates two cultivation and processing facilities and four registered medical-use cannabis dispensaries in Illinois, and one cultivation and processing facility and four registered medical-use cannabis dispensaries in New York. The lease for our Initial Property is a triple-net lease, with the tenant responsible for paying all structural repairs, maintenance expenses, insurance and taxes related to the property. The base rent is approximately $319,580 per month, which shall be increased annually at a rate based on the higher of (i) 4% or (ii) 75% of the CPI.
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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. During 2016, the Company expects that PharmaCann LLC will continue to incur losses as its expenses increase in connection with the expansion of PharmaCann LLCs operations. 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.
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.
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
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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.
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 intend to target tenants that have been among the top candidates in the state licensing process and have been granted one or more licenses to operate multiple facilities. We expect, however, that most of our tenants will be start-up businesses that have little or no revenue and, at least initially, will make rent payments to us from the sale proceeds of a sale-leaseback transaction with us or cash on hand. 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.
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. |
| Our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of its tangible assets at the time of any new borrowing. |
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. Subject to oversight by our
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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 Managements 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, 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 investment 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 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.
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.
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 Partnerships 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 in our Operating Partnership 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 other 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.
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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 founders, including 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 may 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.
The current market for properties that meet our investment objectives may be limited. In additon, 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 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 CannaBusiness 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
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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.
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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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.
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.
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.
Cannabis is a Schedule I controlled substance under the CSA. Even in those jurisdictions in which the manufacture and 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 U.S. Department of Justice, under the Obama administration, has issued memoranda, including the so-called Cole Memo on August 29, 2013, characterizing enforcement of federal cannabis prohibitions under the CSA to prosecute those complying with state regulatory systems allowing the use, manufacture and distribution of medical cannabis as an inefficient use of federal investigative and prosecutorial resources when state regulatory and enforcement efforts are effective with respect to enumerated federal enforcement priorities under the CSA. In the Cole Memo, the U.S. Department of Justice provided guidance to all federal prosecutors indicating that federal enforcement of the CSA against cannabis-related conduct 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
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illegal activity; (5) violence or use of firearms in cannabis cultivation 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 order to extend the prohibition, it must be specifically included in the fiscal year 2017 Commerce, Justice, and Science (CJS) Appropriations bill the germane bill. Currently, only the Senate version of the CJS Appropriations bill includes the prohibition and the House version does not. 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 Circuits 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 prosecutors 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 governments 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.
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. Financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, unlicensed money transmitter statutes and the Bank Secrecy Act. For example, under the Bank Secrecy Act, 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. Therefore, financial institutions that conduct transactions with money generated by cannabis-related conduct could face criminal liability under the Bank Secrecy Act for, among other things, failing to identify or report financial transactions that involve the proceeds of cannabis-related violations of the CSA.
FinCen issued guidance in February 2014 which clarifies how financial institutions can provide services to cannabis-related businesses consistent with their obligations under the Bank Secrecy Act. Concurrently, with the FinCen guidance, the U.S. Department of Justice issued supplemental guidance directing federal prosecutors to consider the federal enforcement priorities enumerated in the Cole Memo with respect to federal money laundering, unlicensed money transmitter and Bank Secrecy Act offenses based on cannabis-related violations of the CSA. The FinCen guidance sets forth extensive requirements for financial institutions to meet if they want to offer bank accounts to cannabis-related 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.
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As a result, many banks are hesitant to offer any banking services to cannabis-related businesses, including opening bank accounts. While we currently have a bank account, our inability to maintain that account or the lack of access to bank accounts or other banking services in the future, would make it difficult for us to operate our business, increase our operating costs, and pose additional operational, logistical and security challenges. Similarly, if our proposed tenants are unable to access banking services, they will not be able to enter into triple-net leasing arrangements with us, as our leases will require rent payments to be made by check or wire transfer.
Upon completion of this offering, we, through our Operating Partnership, will initially have five employees.
We are not a party to any legal proceedings.
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 are permitted to use an extended transition period for complying with new or revised accounting standards. |
We have elected to use an extended transition period for complying with new or revised accounting standards, and this election is irrevocable. We have not made a decision whether to take advantage of other exemptions. If we do take advantage of additional exemptions, some investors may find our Class A common stock less attractive, which may result in a less active trading market for our Class A Common Stock and a more volatile stock price.
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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The following table sets forth certain information about our executive officers, directors and director nominees.
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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 | ||
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 (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 Realtys 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 (NYSE: ARE), a NYSE-listed urban office REIT, from its predecessors 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 of 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. (NYSE: CTT), 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. (NYSE: AAT), 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. Golds 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.
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 (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
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for CoreSite Realty Corporation (NYSE: COR), 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 (NYSE: DCT) from 2006 to 2007, and held senior positions with GMAC Commercial Mortgage and ProLogis, Inc. (NYSE: PLD) 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 (NYSE: O), a NYSE-listed REIT, from January 2013 to June 2014. He joined Realty Income Corporation 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 Corporation 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 Corporation. From June 2014 until joining us, Mr. Fahey was retired. Mr. Fahey is accredited as a certified management accountant.
Brian J. Wolfe serves as our vice president, general counsel and secretary. Until March 2016, Mr. Wolfe served as vice president, corporate legal and assistant secretary of BioMed Realty (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 (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 companys formation in 2004 until August 2012. Mr. Kreitzer currently serves as BioMed Realtys 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 (NYSE: ARE), a NYSE-listed urban office REIT, from its predecessors 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. Kreitzers 30 years of experience in the real estate industry, expertise in NYSE-listed REITs, and legal expertise are valuable to our board of directors.
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. (NASDAQ: PSMT), 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 (NYSE: O), 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. Malinos 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.
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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, LLC holds multiple patents relating to how mobile devices share and distribute contact information. He is part owner and developer of Aztek Paddles, a carbon fiber company. In this role, he assisted in designing paddles, writing patents and testing paddles. We believe that Mr. Shoemakers 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. Stechers expertise in employee compensation and benefits as well as his accounting background and experience are valuable to our board of directors.
As noted above, Mr. Gold served as the chairman, chief executive officer and president of BioMed Realty from its inception and initial public offering in 2004 until its sale in January 2016. Investors who held BioMed Realty common stock from its initial public offering in 2004 until its sale in 2016 received a 163.6% total return on their investment, assuming the reinvestment of dividends into common stock. From and including BioMed Realtys initial public offering in August 2004 through its sale in January 2016, BioMed Realty raised an aggregate of approximately $3.5 billion in gross proceeds from equity offerings through the issuance of approximately 182.5 million shares of common stock. BioMed Realty benefited from a generally healthy economy and favorable operating environment for life science real estate from 2004 to 2007. However, in the severe economic downturn from 2008 through 2010, BioMed Realtys stock price experienced a significant correction. After 2010, the overall economy recovered gradually, and BioMed Realtys stock price recovered gradually over time as well.
Set forth below is the annual return on investment of investors in BioMed Realty during Mr. Gold's tenure at the company. Except as otherwise indicated, annual return on investment of BioMed Realty for the years presented are calculated based on the increase or decrease in the closing price of BioMed Realtys common stock on the NYSE on December 31 of the applicable year compared to December 31 of the prior year and takes into account the reinvestment of dividends paid in the applicable year into shares of common stock. The table below also provides a comparison of the stock performance of BioMed Realty against the MSCI US REIT Index and the S&P 500 during the same periods.
According to MSCI Inc., the MSCI US REIT Index represents approximately 85% of the publicly-traded U.S. REIT market with each REIT in the index having a market capitalization of at least $100 million, and is comprised of equity REIT securities that belong to the MSCI US Investable Market 2500 Index. The MSCI US REIT Index includes only REIT securities that are of reasonable size in terms of full and free float-adjusted market capitalization to ensure that the performance of the equity REIT universe can be captured and replicated in actual institutional and retail portfolios of different sizes. The REITs that are included in the MSCI US REIT Index reflect a broad spectrum of real estate sectors, including REITs that operate in the office, retail, hotel, multifamily, industrial, healthcare and storage sectors in one or more regions of the United States or across the entire United States. We believe that the MSCI US REIT Index is an industry benchmark used by investors for purposes of comparing stock performance and stockholder returns. However, comparison of BioMed Realtys stock performance to the performance of the MSCI US REIT Index may be limited due to the differences between BioMed Realty and the other companies represented in the
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MSCI US REIT Index, including with respect to size, asset type, geographic concentration and investment strategy. The information regarding total return to stockholders achieved by BioMed Realty is not a guarantee or prediction of the returns that we may achieve in the future, and we can offer no assurance that we will be able to replicate these returns.
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Total Return (1) | 2004 (2) | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 (3) |
Total
Return (4) |
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BioMed Realty | 40.9 | % | 15.3 | % | 22.1 | % | (15.2 | %) | (46.2 | %) | 46.6 | % | 22.3 | % | 1.1 | % | 11.8 | % | (1.9 | %) | 26.5 | % | 15.3 | % | 0.5 | % | 163.6 | % | ||||||||||||||||||||||||||||
MSCI US REIT | 22.8 | % | 12.1 | % | 35.9 | % | (16.8 | %) | (38.0 | %) | 28.6 | % | 28.5 | % | 8.7 | % | 17.8 | % | 2.5 | % | 30.4 | % | 2.5 | % | (4.6 | %) | 162.7 | % | ||||||||||||||||||||||||||||
S&P 500 | 13.4 | % | 4.9 | % | 15.8 | % | 5.5 | % | (37.0 | %) | 26.5 | % | 15.1 | % | 2.1 | % | 16.0 | % | 32.4 | % | 13.7 | % | 1.4 | % | (7.8 | %) | 117.7 | % |
(1) | BioMed Realty data obtained from SNL Financial data provider. MSCI US REIT Index data obtained from the MSCI Inc. website. S&P 500 data obtained from the Standard & Poors website. |
(2) | For the period beginning on August 6, 2004 (BioMed Realty initial public offering date) through December 31, 2004. |
(3) | For the period beginning on January 1, 2016 through January 27, 2016 (the date of sale of BioMed Realty). Ending stock price is equal to cash consideration of $23.8239 per share paid to BioMed Realty common stockholders at the closing of the sale of BioMed Realty. |
(4) | For the period beginning on August 6, 2004 (BioMed Realtys initial public offering date) through January 27, 2016, the date of sale of BioMed Realty. |
The table below sets forth BioMed Realty's net income, assets, liabilities, stock price and dividends per share from the companys initial public offering in 2004 to January 2016. This information was obtained from BioMed Realtys public filings with the SEC. We have not independently verified the accuracy of such data.
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Financial Metric | 2004 (1) | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 (2) | 2015 (3) | 2016 (3) (4) | |||||||||||||||||||||||||||||||||||||||
Total Revenues | $ | 29 | $ | 139 | $ | 219 | $ | 266 | $ | 302 | $ | 361 | $ | 386 | $ | 440 | $ | 518 | $ | 637 | $ | 675 | N/A | N/A | ||||||||||||||||||||||||||||
Net Income | 5 | 17 | 35 | 56 | 48 | 42 | 22 | 26 | (3 | ) | 38 | 194 | N/A | N/A | ||||||||||||||||||||||||||||||||||||||
Assets | 582 | 1,337 | 2,693 | 3,057 | 3,227 | 3,283 | 3,960 | 4,429 | 4,834 | 5,973 | 6,171 | N/A | N/A | |||||||||||||||||||||||||||||||||||||||
Liabilities | 138 | 586 | 1,459 | 1,653 | 1,598 | 1,459 | 1,647 | 1,816 | 2,350 | 2,986 | 3,101 | N/A | N/A | |||||||||||||||||||||||||||||||||||||||
High Stock Price | $ | 22.95 | $ | 26.06 | $ | 32.41 | $ | 31.20 | $ | 29.50 | $ | 16.59 | $ | 19.50 | $ | 21.03 | $ | 20.30 | $ | 23.13 | $ | 22.62 | $ | 25.11 | $ | 23.82 | ||||||||||||||||||||||||||
Low Stock Price | $ | 15.75 | $ | 19.39 | $ | 23.75 | $ | 20.89 | $ | 5.88 | $ | 6.02 | $ | 13.36 | $ | 14.94 | $ | 17.52 | $ | 17.90 | $ | 17.98 | $ | 17.94 | $ | 23.56 | ||||||||||||||||||||||||||
End of Year Stock Price | $ | 22.21 | $ | 24.40 | $ | 28.60 | $ | 23.17 | $ | 11.72 | $ | 15.78 | $ | 18.65 | $ | 18.08 | $ | 19.33 | $ | 18.12 | $ | 21.54 | $ | 23.69 | $ | 23.81 | ||||||||||||||||||||||||||
Dividends Declared Per Share | $ | 0.42 | $ | 1.08 | $ | 1.16 | $ | 1.24 | $ | 1.34 | $ | 0.70 | $ | 0.63 | $ | 0.80 | $ | 0.88 | $ | 0.96 | $ | 1.01 | $ | 0.78 | | |||||||||||||||||||||||||||
Dividends Paid Per Share (5) | $ | 0.283673 | $ | 1.010305 | $ | 1.075722 | $ | 1.220000 | $ | 1.315000 | $ | 0.890000 | $ | 0.600000 | $ | 0.770000 | $ | 0.845000 | $ | 0.940000 | $ | 1.300000 | $ | 1.040000 | $ | |
Note: dollars in millions, except per share data.
(1) | From August 6, 2004 (initial public offering) through December 31, 2014. |
(2) | Excludes a special dividend of $0.30 per share paid in December 2014 relating to BioMed Realtys disposition of a Maryland property on December 9, 2014 described below. |
(3) | Data not presented is not available, or N/A. |
(4) | From January 1, 2016 through January 27, 2016, the date of sale of BioMed Realty. Data not presented is not available, or N/A. |
(5) | Represents dividends paid which were allocable to the applicable year for tax purposes. In addition, set forth below is the tax treatment of the annual dividends paid per share of common stock of BioMed Realty. This information was obtained from BioMed Realtys press releases. We have not independently verified such data. |
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Tax Treatment | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||||||||||||||||||||||||||
Taxable Ordinary Dividend | $ | 0.283673 | $ | 1.010305 | $ | 1.064520 | $ | 0.982341 | 1.083176 | $ | 0.449560 | $ | 0.387974 | $ | 0.440921 | $ | 0.626330 | $ | 0.940000 | $ | 0.502580 | $ | 0.019032 | $ | | |||||||||||||||||||||||||||
Return of Capital | | | 0.011202 | 0.220871 | 0.231824 | 0.440440 | 0.212026 | 0.329079 | 0.218670 | | | | | |||||||||||||||||||||||||||||||||||||||
Long-Term Capital Gain | | | | 0.016788 | | | | | | | 0.797420 | 0.337584 | | |||||||||||||||||||||||||||||||||||||||
Unrecaptured Section 1250 Gain | | | | 0.009224 | | | | | | | 0.218513 | | | |||||||||||||||||||||||||||||||||||||||
Non-Dividend Distributions | | | | | | | | | | | | 0.683384 | |
According to BioMed Realtys public filings with the SEC, at the time of BioMed Realtys sale in January 2016, BioMed Realty owned 129 properties located in Massachusetts, California, United Kingdom (Cambridge), New York, New Jersey, Maryland, North Carolina, Pennsylvania, Washington and near certain universities and their related medical systems comprising 196 buildings, approximately 18.9 million rentable square feet of space, and land supporting future development of an estimated additional 6.4 million rentable square feet. In addition, according to BioMed Realtys public filings with the SEC, from January 1, 2013 through its sale in January 2016, BioMed Realty sold five properties as follows:
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Property Type | State | Closing Date |
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Gain/(Loss) on
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Life Science Laboratory and Office Facility | Pennsylvania | May 29, 2015 | 547,000 | $ | 35.2 million | ($32.3) million | ||||||||||||||
Life Science Laboratory and Office Facility | Maryland | September 24, 2015 | 42,900 | $ | 7.9 million | $1.9 million | ||||||||||||||
Life Science Manufacturing Facility | Maryland | December 9, 2014 | 289,912 | $ | 322.5 million | $136.6 million | ||||||||||||||
Life Science Laboratory and Office Facility | New Hampshire | July 31, 2013 | 21,500 | $ | 5.9 million |
Not available
(2)
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Life Science Laboratory and Office Facility | Pennsylvania | September 4, 2013 | 27,750 | $ | 2.1 million | Not available | (2) |
(1) | Gain/(loss) on sale represents the excess/(deficiency) of the book value of the property at the time of sale over the net proceeds from sale. None of the properties sold was subject to mortgage financing at the time of sale. |
(2) | Information not available in BioMed Realtys public filings with the SEC. |
Upon completion of this offering, we expect 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 a majority of our directors are independent in accordance with the independence standards of the NYSE. NYSE rules require that we have a majority of independent directors within one year of listing our Class A common stock on 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.
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.
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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. |
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.
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.
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 committees 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. |
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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. |
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 general counsel, and will be promptly disclosed as required by law or stock exchange regulations.
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 boards 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.
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.
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
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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. As one of our founders, Mr. Kreitzer was granted 25,000 shares of our Class B common stock pursuant to a restricted stock purchase agreement. The grant date fair value of these shares issued on June 15, 2016, the date of our incorporation, including the impact of subsequent modifications, in accordance with FASB Accounting Standards Codification Topic 718, was $182,384. See the section entitled Certain Relationships and Related Transactions Restricted Stock Grants to Founders, Executive Officers and Directors.
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 the section entitled Severance and Change in Control Agreements below.
As explained below, upon consummation of the offering, our compensation committee 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. Our total compensation packages will likely include an annual bonus opportunity, equity awards and other compensation such as participation in various employee benefit plans. Set forth below is the initial annual cash compensation that we expect to pay and equity awards that we have granted or expect to grant to our executive officers upon the closing of this offering:
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Name and principal position | Base Salary (1) | Bonus |
Stock
Award |
Option
Awards |
Non-Equity
Inventive Plan Compensation |
Total | ||||||||||||||||||
Alan D. Gold
Executive Chairman |
$ | 600,000 | | $ | 2,502,780 | (3) | | | $ | 3,102,780 | ||||||||||||||
Paul E. Smithers
President and Chief Executive Officer |
$ | 350,000 | | $ | 656,582 | (3) | | | $ | 1,006,582 | ||||||||||||||
Robert M. Sistek
Chief Financial Officer and Executive Vice President, Investments |
$ | 275,000 | | $ | 275,000 | (2) | | | $ | 550,000 | ||||||||||||||
Gregory J. Fahey
Chief Accounting Officer and Treasurer |
$ | 180,000 | | $ | 182,384 | (3) | | | $ | 362,384 | ||||||||||||||
Brian J. Wolfe
Vice President, General Counsel and Secretary |
$ | 200,000 | | $ | 275,000 | (2) | | | $ | 475,000 |
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(1) | 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. Currently, our executive officers, other than Mr. Gold, are being compensated as consultants to IGP Advisers, which arrangements will terminate upon completion of this offering. The base salaries do not include amounts payable to certain of our executive officers as consultants to IGP Advisers upon completion of this offering. See the section entitled Certain Relationships and Related Transactions Reimbursement of IGP Advisers. |
(2) | We expect that at the first meeting of the compensation committee of our board of directors upon completion of this offering, Messrs. Sistek and Wolfe will each receive $275,000 in shares of Class A common stock under the Incentive Plan, which shares are expected to vest in their entirety 180 days after the completion of this offering. The aggregate estimated value of the restricted share awards are $275,000 assuming a share price on the date of grant of $20.00, the per share public offering price in this offering. We expect that compensation expense for these awards will be recognized ratably over the restricted shares vesting period. |
(3) | As founders, Messrs. Gold, Smithers and Fahey were issued 343,065, 90,000 and 25,000 shares of our Class B common stock, respectively. The amounts shown for Messrs. Gold, Smithers and Fahey reflect the grant date fair value of such shares issued at June 15, 2016, the date of our incorporation, including the impact of subsequent modifications, in accordance with FASB Accounting Standards Codification Topic 718. See the section entitled Certain Relationships and Related Transactions Restricted Stock Grants to Founders, Executive Officers and Directors. |
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.
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.
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
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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.
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.
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, which shares are expected to vest in their entirety 180 days after the completion of this offering.
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.
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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.
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 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 executives 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 officers unvested options and stock rights awards that vest solely on the basis of time will vest on a pro-rated basis and the executive officers 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.
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.
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
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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 officers 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 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 executives 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 executives 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 executives commission of fraud or dishonesty that results in economic or financial damage to us; |
| an executives conviction of a felony or crime involving moral turpitude; |
| a willful breach of an executives fiduciary duty to us which results in economic or other damage to us; or |
| a willful and material breach of an executives obligations under the agreement relating to our confidential information, non-solicitation and post-employment consulting services. |
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 executives 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); |
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| 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; or |
| 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). |
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.
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 Plans 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.
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
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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 Plans reserve and may again be used for new awards under the Incentive Plan. However, shares recredited to the Incentive Plans 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. |
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
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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 participants 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.
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
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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 participants 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 participants 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 participants 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 participants 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 participants 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.
The specific terms and conditions of a participants award will be set forth in an award agreement or another document delivered to the participant.
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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 |
| 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 |
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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 persons 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.
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Immediately Prior to
this Offering |
Immediately After
this Offering |
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Beneficial Owner |
Number of
Shares Owned (2) |
Percentage of
Outstanding Common Stock |
Number of
Shares Owned (2) (3) |
Percentage of
Outstanding Common Stock (1) |
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Alan D. Gold | 343,065 | 67.5 | % | 1,036,251 | (3) | 10.3 | % | |||||||||
Paul E. Smithers | 90,000 | 17.7 | % | 232,500 | 2.3 | % | ||||||||||
Robert M. Sistek | | | | (4) | * | |||||||||||
Gregory J. Fahey | 25,000 | 4.9 | % | 64,583 | * | |||||||||||
Brian J. Wolfe | | | | (4) | * | |||||||||||
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 | 483,065 | 95.1 | % | 1,397,917 | 13.9 | % |
* | Less than 1.0%. |
(1) | Based on 10,062,500 shares of Class A common stock to be outstanding upon completion of this offering. |
(2) | 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 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 founders 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 may 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. |
(3) | Includes 150,000 shares of Class A common stock that Mr. Gold may purchase in this offering at the public offering price. |
(4) | A grant of 13,750 shares of Class A common stock to each of Messrs. Sistek and Wolfe is 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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Mr. Gold may purchase up to 150,000 shares of our Class A common stock in this offering at the public offering price. In addition, certain of our other executive 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.
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, Kreitzer and Fenton. 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:
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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 | ||||||||||
Gary A. Kreitzer | 64,583 | $ | 1,291,660 | 74,271 | $ | 1,485,420 | ||||||||||
Andrew Fenton | 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.
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 three-year period commencing on July 31, 2017, such that all shares will be released by July 31, 2020 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, and excluding a sale by us of our securities for fund-raising purposes, all shares shall be released from the repurchase option immediately prior to the change in control.
Our founders 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 entitled Description of Securities for a description of our Class B common stock.
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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 Mr. 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.
We intend to use a portion of the net proceeds of this offering to reimburse IGP Advisers, a company that is owned by Messrs. Gold (76.5%), Smithers (18.5%) and Fahey (5%), for out-of-pocket expenses it incurred in connection with the formation of our company and this offering. 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 consulting agreement. We also expect to use $375,000 of the net proceeds of this offering 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. Following the completion of this offering, our agreements with IGP Advisers will terminate and we do not expect to transact business with, or incur costs related to, IGP Advisers in the future, as all of our employees will be employed directly by us through our Operating Partnership.
The amounts reimbursable to IGP Advisers are as follows:
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Estimated Costs:
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Offering Costs | $ | 720,000 | ||
Organizational Costs | $ | 50,000 | ||
Transaction Costs | $ | 20,000 | ||
Earnest Money Deposit | $ | 375,000 | ||
Estimated Consulting Fee | $ | 500,000 | ||
Total | $ | 1,665,000 |
Until the completion of this offering, each of our executive officers other Mr. Gold is a consultant to IGP Advisers and is being paid by IGP Advisers for such consulting service. Following the completion of this offering, these consulting arrangements will terminate and all of our executive officers will be employed directly by us through our Operating Partnership. Such executive officers will be paid the following amounts from IGP Advisers in connection with their services rendered to IGP Advisers as consultants on our behalf in connection with this offering:
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Name | Consulting Fees (1) | |||
Paul E. Smithers | $ | 227,202 | ||
Robert M. Sistek | $ | 35,233 | ||
Gregory J. Fahey | $ | 116,847 | ||
Brian J. Wolfe | $ | 42,707 |
(1) | For each day that the closing of this offering occurs after November 15, 2016, the executive officers listed above will receive a daily consulting fee of $959 for Mr. Smithers, $753 for Mr. Sistek, $493 for Mr. Fahey and $548 for Mr. Wolfe. |
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 and Wolfe, as described in Our Management Executive Officer and Director Compensation Compensation of Executive Officers Severance and Change in Control Agreements.
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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.
We have entered into indemnification agreements with each of our executive officers and directors, and expect to enter into indemnification agreements with future executive officers and directors. Each indemnification agreement provides, 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 officers or directors status as a present or former officer, director, employee or agent of the company. Each indemnification agreement also requires 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 is not 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 bylaws or applicable law.
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 directors, officers or employees 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.
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.
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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 directors 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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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.
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. Except as set forth in the section entitled Business Investment Guidelines, 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.
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.
Subject to the requirements for qualification as a REIT, we may, but do not intend to, underwrite 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.
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 board of directors 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.
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
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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 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.
Our current board consists of Messrs. Gold 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 other independent directors.
Effective upon closing of this offering, we intend to adopt policies to reduce potential conflicts of interest. See the section entitled Certain Relationships and Related Transactions Related Party Transaction 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.
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.
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
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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.
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.
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 three-year period commencing on July 31, 2017, such that all shares will be released by July 31, 2020, 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 and excluding a sale by us of our securities for fund-raising purposes, all shares shall be released from the repurchase option immediately prior to the change in control.
Our founders 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.
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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.
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.
In order for us to qualify as a REIT under 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 or number of shares, whichever is more restrictive) of the aggregate of our outstanding shares of stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of our outstanding common stock or any class or series of our outstanding preferred 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,
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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 persons 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 persons 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.
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 persons 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 stockholders 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.
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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 stockholders 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.
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
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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 trustees 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.
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.
The transfer agent and registrar for our Class A common stock is expected to be Computershare Trust Company, N.A.
We have been approved to list our shares of Class A common stock on the NYSE, subject to official notice of issuance, under the symbol IIPR.
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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 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.
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.
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.
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.
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 (i) derivative actions on our behalf, (ii) actions asserting claims of breach of any duty owed by any of our directors, officers or employees, (iii) 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 (iv) actions governed by the internal affairs doctrine.
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
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beneficially owns, directly or indirectly, 10% or more of the voting power of the corporations 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 corporations 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 corporations 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 corporations board of directors prior to the time that the interested stockholder becomes an interested stockholder.
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.
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
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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 of the MGCL 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.
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.
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.
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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.
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.
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 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.
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:
| 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; |
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| 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 directors or officers 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 have entered into indemnification agreements with each of our executive officers and directors, and expect to enter into indemnification agreements with future 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.
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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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 been approved to have our Class A common stock listed on the NYSE, suject to official notice of issuance, 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 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 10,062,500 shares of Class A common stock (11,571,875 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, 1,000,000 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.
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 brokers 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.
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.
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Non-affiliate resales are not subject to the manner of sale, volume limitation or notice filing provisions of Rule 144.
The Incentive Plan provides for the grant of incentive awards to our executive officers, directors, employees, and consultants. We expect to issue 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.
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 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; |
| exercise any right to request or require registration of any common stock or other securities; |
| 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 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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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.
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 Partnerships 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.
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.
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.
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.
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
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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.
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 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.
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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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 stockholders 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.
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 or, if later, the first year in which we have material real estate assets and operations. 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 or, if later, the first year in which we have material real estate assets and operations, 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 or, if later, the first year in which we have material real estate assets and operations, and thereafter. You should be aware that Foley & Lardner LLPs 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 & Lardners 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 LLPs 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 |
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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. |
| 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 arms-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 REITs 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 corporations 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.
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.
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
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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 subsidiarys 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 REITs 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 REITs tenants that are not conducted on an arms-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 arms 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.
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 SEC 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 REMICs assets are real estate assets, in which case all of the income derived from the REMIC; and |
| 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. |
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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 partnerships 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 borrowers gain upon the sale of the real property securing the loan or a percentage of the appreciation in the propertys 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.
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
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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 Codes 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. |
| 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. |
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| 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; |
| 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 |
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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 Department. 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 |
| 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. |
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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 Department. |
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.
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. |
Second, of our investments not included in the 75% asset class, the value of our interest in any one issuers 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 issuers 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.
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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 partnerships 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 borrowers 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 issuers 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 issuers debt obligations held by us exceeds $1 million and no more than 12 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 |
| 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 partnerships 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
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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 Department 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.
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
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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 REITs 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.
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.
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
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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.
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.
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.
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 partners 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 partners 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 partners 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 partners 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 partnerships 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 partners 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
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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 Department. 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.
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.
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
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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. holders 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. holders 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.
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. holders adjusted tax basis. A holders adjusted tax basis
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generally will equal the U.S. holders 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 IRSs 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.
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. |
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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. holders 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. holders 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.
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. holders 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. holders 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 individuals net capital gain for the year).
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. holders 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
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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 holders 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 1 st 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 REITs 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.
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
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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. holders 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.
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.
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
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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.
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.
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The following is a summary of some considerations associated with the purchase and holding of our Class A common stock by (i) an employee benefit plan (as defined in Section 3(3) of ERISA that is subject to Title I of ERISA, (ii) a plan (as defined in Section 4975 of the Code), which is subject to Section 4975 of the Code (including IRAs and Keogh plans) or (iii) any entity deemed to hold plan assets of any of the foregoing by virtue of the plans investment in the entity (each such plan, account and entity described above is referred to herein as a Plan), or any employee benefit plan that is subject to any federal, state, local or other law that is substantially similar to the foregoing provisions of ERISA and the Code (Similar Law).. This summary is based on current provisions of ERISA and the Code, each as amended through the date of this prospectus, and the relevant regulations, opinions and other authority issued by the Department of Labor and the Internal Revenue Service. We cannot assure you that there will not be adverse tax or labor decisions or legislative, regulatory or administrative changes that would significantly modify the statements expressed herein. Any such changes may apply to transactions entered into prior to the date of their enactment.
Under ERISA and the Code, a person generally is a fiduciary with respect to a Plan if, among other things, the person has discretionary authority or control over the administration of the Plan or the management or disposition of Plan assets or provides investment advice for a fee or other compensation with respect to the Plan. Each fiduciary of Plan subject to ERISA (such as a profit sharing, Section 401(k) or pension plan) or any other retirement plan or account subject to Section 4975 of the Code, such as an IRA, seeking to invest plan assets in our shares of Class A common stock must consider, taking into account the facts and circumstances of each such Plan, among other matters:
| whether the investment is consistent with the applicable provisions of ERISA and the Code; |
| whether, under the facts and circumstances pertaining to the Plan in question, the fiduciarys responsibility to the Plan has been satisfied; |
| whether the investment will produce an unacceptable amount of unrelated business taxable income (UBTI) to the Plan; and |
| the need to value the assets of the Plan annually. |
Under ERISA, a Plan fiduciarys responsibilities include the following duties:
| to act solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits to them, as well as defraying reasonable expenses of plan administration; |
| to invest plan assets prudently; |
| to diversify the investments of the plan, unless it is clearly prudent not to do so; |
| to ensure sufficient liquidity for the plan; |
| to ensure that plan investments are made in accordance with plan documents; and |
| to consider whether an investment would constitute or give rise to a non-exempt prohibited transaction under ERISA or the Code. |
ERISA also requires that, with certain exceptions, the assets of an employee benefit plan be held in trust and that the trustee, or a duly authorized named fiduciary or investment manager, have exclusive authority and discretion to manage and control the assets of the plan. In considering an investment in our Class A common stock, a Plan fiduciary should consider whether such an investment is appropriate for the Plan, taking into account such fiduciary obligations described above.
Generally, both ERISA and the Code prohibit Plans from engaging in certain transactions involving Plan assets with specified parties, such as sales or exchanges or leasing of property, loans or other extensions of credit, furnishing goods or services, or transfers to, or use of, plan assets, unless an exemption is available. The specified parties are referred to as parties-in-interest under ERISA and as disqualified persons under
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the Code. A party in interest or disqualified person who engages in a non-exempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code. In addition, the fiduciary of a Plan that engages in a non-exempt prohibited transaction may be subject to penalties and liabilities under ERISA and the Code, including an obligation to restore to the Plan any profits they realized as a result of the transaction or breach and make up for any losses incurred by the Plan as a result of the transaction or breach. With respect to an IRA that invests in our shares, the occurrence of a non-exempt prohibited transaction involving the individual who established the IRA, or his or her beneficiary, would cause the IRA to lose its tax-exempt status under Section 408(e)(2) of the Code. Accordingly, the fiduciary of a Plan or any other person making investment decisions for a Plan should consider the application of the prohibited transaction rules (and the available exemptions, if any) of ERISA and the Code prior to making any decision to purchase and hold shares of our Class A common stock. There can be no assurance that the conditions of any of the available prohibited transaction exemptions will satisfied.. In addition, if we are deemed to hold plan assets (as described below), our management could be characterized as fiduciaries with respect to such assets, and each would be deemed to be a party-in-interest under ERISA and a disqualified person under the Code with respect to investing Plans. Whether or not we are deemed to hold plan assets, if we or our affiliates are affiliated with a Plan investor, we might be a disqualified person or party-in-interest with respect to such Plan investor, resulting in a non-exempt prohibited transaction merely upon investment by such Plan in our shares of Class A common stock.
In order to determine whether an investment in our shares by a Plan creates or gives rise to the potential for either non-exempt prohibited transactions or a commingling of assets as referred to above, a Plan fiduciary must consider whether an investment in our shares will cause our assets to be treated as assets of the investing Plan and subject to ERISA. Section 3(42) of ERISA defines the term plan assets to mean plan assets as defined in regulations (the Plan Assets Regulation) promulgated by the Department of Labor. These regulations provide guidelines as to whether, and under what circumstances, the underlying assets of an entity will be deemed to constitute assets of a Plan when the Plan invests in that entity. Under the Plan Assets Regulation, the assets of an entity in which a Plan makes an equity investment will generally be deemed to be assets of the Plan, unless one of the exceptions to this general rule applies.
In the event that our underlying assets were treated as the assets of investing Plans, our management would be treated as fiduciaries with respect to each Plan stockholder and an investment in our shares might constitute an ineffective delegation of fiduciary responsibility to our advisors, and expose the fiduciary of the Plan to co-fiduciary liability under ERISA for any breach by our advisor of the fiduciary duties mandated under ERISA. Further, if our assets are deemed to be plan assets, an investment by an IRA in our shares might be deemed to result in an impermissible commingling of IRA assets with other property.
If our advisor or its affiliates were treated as fiduciaries with respect to Plan stockholders, the prohibited transaction restrictions of ERISA and the Code would apply to any transaction involving our assets. These restrictions could, for example, require that we avoid transactions with persons that are affiliated with or related to us or our affiliates or require that we restructure our activities in order to obtain an administrative exemption from the prohibited transaction restrictions. Alternatively, we might have to provide Plan stockholders with the opportunity to sell their shares to us or we might dissolve.
The Plan Assets Regulation provides that the underlying assets of an entity such as a REIT will be treated as assets of a Plan investing therein unless the entity satisfies one of the exceptions to the general rule.
Exception for Publicly-Offered Securities. If a Plan acquires publicly-offered securities, the assets of the issuer of the securities will not be deemed to be plan assets under the Plan Assets Regulation. A publicly-offered security must be:
| sold as part of a public offering registered under the Securities Act of 1933, as amended, and be part of a class of securities registered under the Securities Exchange Act of 1934, as amended, within a specified time period; |
| part of a class of securities that is owned by 100 or more persons who are independent of the issuer and one another; and |
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| freely transferable. |
Our shares of Class A common stock are being sold as part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act of 1933 and are part of a class that will be registered under the Securities Exchange Act of 1934 within the specified period. In addition, we anticipate having in excess of 100 independent stockholders; however, having 100 independent stockholders is not a condition to our selling shares in this offering.
Whether a security is freely transferable depends upon the particular facts and circumstances. The Plan Assets Regulation provides several examples of restrictions on transferability that, absent unusual circumstances, will not prevent the rights of ownership in question from being considered freely transferable if the minimum investment is $10,000 or less. Where the minimum investment in a public offering of securities is $10,000 or less, the presence of the following restrictions on transfer will not ordinarily affect a determination that such securities are freely transferable:
| any restriction on, or prohibition against, any transfer or assignment that would either result in a termination or reclassification of the entity for federal or state tax purposes or that would violate any state or federal statute, regulation, court order, judicial decree or rule of law; |
| any requirement that not less than a minimum number of shares or units of such security be transferred or assigned by any investor, provided that such requirement does not prevent transfer of all of the then remaining shares or units held by an investor; |
| any prohibition against transfer or assignment of such security or rights in respect thereof to an ineligible or unsuitable investor; and |
| any requirement that reasonable transfer or administrative fees be paid in connection with a transfer or assignment. |
Our structure has been established with the intent to satisfy the freely transferable requirement set forth in the Plan Assets Regulation, however, there is no assurance that our shares will meet such requirement.. Accordingly, while we anticipate that, from and after the date we make our first investment, our shares of Class A common stock would satisfy the publicly-offered securities exception, we cannot provide any assurance that we will, in fact, meet the requirements for such exception.
Exception for Insignificant Participation by Plan Investors. The Plan Assets Regulation provides that the assets of an entity will not be deemed to be the assets of a Plan investing in such entity if equity participation in the entity by employee benefit plans, including Plans, is not significant. The Plan Assets Regulation provides that equity participation in an entity by Plan investors is significant if at any time 25% or more of the value of any class of equity interest is held by Plan investors. In calculating the value of a class of equity interests, the value of any equity interests held by us or any of our affiliates must be excluded. We cannot provide any assurance that Plan investors will hold less than 25% of the value of our shares of Class A common stock at the completion of this offering or thereafter.
Regardless of whether the shares qualify for the publicly-offered securities exception of the Plan Assets Regulation, a prohibited transaction could occur if we, our advisors, any selected broker-dealer or any of their affiliates is a fiduciary (within the meaning of Section 3(21) of ERISA) with respect to any Plan purchasing our shares. Accordingly, unless an administrative or statutory exemption applies, shares should not be purchased by a Plan with respect to which any of the above persons is a fiduciary.
Further, certain employee benefit plans, such as governmental, non-U.S. or church plans) generally are not subject to the requirements of Title I of ERISA of relevant Code provisions, provided, however, such plans may be subject to Similar Laws that affect their ability to acquire or hold shares of our Class A common stock. Such plans should consult their own advisors regarding the applicability of any such Similar Laws.
By acceptance of any shares of our Class A common stock, each purchaser and subsequent transferee of a share will be deemed to have represented and warranted that either (i) no portion of the assets used by such
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purchaser or transferee to acquire or hold the shares constitutes assets of any Plan or a plan subject to Similar Law or (ii) the purchase and holding of the shares by such purchaser or transferee will not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or similar violation under any applicable Similar Laws.
The sale of shares of our Class A common stock to a Plan is in no respect a representation by us or any other person associated with the offering of our common stock that such an investment meets all relevant legal requirements with respect to investments by Plans generally or any particular Plan, or that such an investment is appropriate for Plans generally or any particular Plan.
The preceding discussion is only a summary of certain ERISA and Code implications of an investment in the securities and does not purport to be complete. Prospective investors should consult with their own legal, tax, financial and other advisors prior to investing to review these implications in light of such investors particular circumstances.
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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.
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Underwriter | Number of Shares | |||
Ladenburg Thalmann & Co. Inc. | ||||
Compass Point Research & Trading LLC | ||||
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 officers 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.
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.
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Per
Share |
Without
Option |
With
Option |
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Public offering price | $ | $ | $ | |||||||||
Underwriting discount (1) | $ | $ | $ | |||||||||
Proceeds, before expenses, to us | $ | $ | $ |
(1) | Includes a structuring fee payable to Ladenburg Thalmann & Co. Inc. and International Assets Advisory, LLC equal to 0.50% of the gross proceeds of this offering. |
The estimated expenses of this offering payable by us, exclusive of the underwriting discount, are approximately $1,550,000. We have agreed to reimburse the underwriters for fees and expenses of counsel up to $20,000 related to the review by Financial Industry Regulatory Authority, Inc. 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. Additionally, we or our affiliates will pay up to $20,000 of certain transportation costs in connection with the roadshow. We have also agreed to reimburse $25,000 of out-of-pocket expenses of certain participating dealers.
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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 underwriters initial amount reflected in the above table.
Mr. Gold may purchase up to 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. Any 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.
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; |
| exercise any right to request or require registration of any common stock or other securities; |
| 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 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.
We have been approved to list our shares of Class A common stock on the NYSE, subject to official notice of issuance, under the symbol IIPR. In order to meet the requirements for listing on that exchange, the underwriters have undertaken 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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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.
The underwriters do not expect to sell more than 5% of the shares in the aggregate to accounts over which they exercise discretionary authority.
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.
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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.
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.
We will pay Ladenburg Thalmann & Co. Inc. and International Assets Advisory, LLC a structuring fee equal to 0.50% of the gross proceeds of this offering, or $ (or $ if the underwriters over-allotment option is exercised in full), in connection with this offering. 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.
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.
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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 financial statements as of September 30, 2016 and for the period from June 15, 2016 (date of incorporation) through 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.
The financial statements of PharmaCann LLC as of December 31, 2015 and December 31, 2014 and the and for the year ended December 31, 2015 and the period from March 19, 2014 (inception) to December 31, 2014, included in this prospectus and in the registration statement have been so included in reliance upon the report of Martin, Hood, Friese & Associates, LLC, independent auditor, appearing elsewhere herein and in the registration statement, given on the authority of said firm as experts in accounting and auditing.
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.
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 SECs 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 SECS PUBLIC REFERENCE FACILITIES AND THE WEBSITE OF THE SEC REFERRED TO ABOVE.
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F-1
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 as 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 Companys 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. At this time, the Company has determined that the acquisition of the Initial Property is probable.
The following unaudited pro forma consolidated financial statements are based on our historical audited consolidated financial statements as of September 30, 2016 and for the period from June 15, 2016 (date of incorporation) through 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 Companys 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 and the Companys acquisition of the Initial Property and the entry into the related lease agreement, as if the completion of the offering and the acquisition of the Initial Property had occurred on January 1, 2015, and does not give effect to the payment of a consulting fee and reimbursement of other costs to IGP Advisers from the net proceeds of the initial public offering.
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 financial statements of the Company and related notes thereto, and other financial information pertaining to the Company, including Capitalization and Managements 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
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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 |
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Assets:
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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
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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 stockholders equity
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Liabilities:
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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:
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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 | 200,000 | 161,190,445 | (1) | | 161,390,445 | |||||||||||
Accumulated deficit | (200,000 | ) | (550,000 | ) (1) | | (750,000 | ) | |||||||||
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
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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 |
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Revenues:
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Rental income | $ | | $ | | $ | 5,628,169 | (5) | $ | 5,628,169 | |||||||
Total revenues | | | 5,628,169 | 5,628,169 | ||||||||||||
Expenses:
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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 | ||||||||
Net income per share | $ | | $ | | $ | 2.51 | ||||||||||
Weighted average shares outstanding | 1,987,769 | (7) |
See notes to unaudited pro forma consolidated financial statements.
F-4
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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 |
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Revenues:
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Rental income | $ | | $ | | $ | 4,221,127 | (5) | $ | 4,221,127 | |||||||
Total revenues | | | 4,221,127 | 4,221,127 | ||||||||||||
Expenses:
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Depreciation and amortization | | | 481,072 | (6) | 481,072 | |||||||||||
General and administrative | 200,000 | | (8) | | 200,000 | |||||||||||
Total expenses | 200,000 | | 481,072 | 681,072 | ||||||||||||
Net (loss) income | $ | (200,000 | ) | $ | | $ | 3,740,055 | $ | 3,540,055 | |||||||
Net (loss) income per share | $ | (0.39 | ) | $ | | $ | 1.78 | |||||||||
Weighted average shares outstanding | 508,065 | 1,987,769 | (7) |
See notes to unaudited pro forma consolidated financial statements.
F-5
The adjustments to the unaudited pro forma consolidated balance sheet as of September 30, 2016 are as follows:
(1) Represents (i) the Companys 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 organizational costs of $50,000 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 Companys 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 Companys 2016 Omnibus Incentive Plan. These 27,500 restricted shares are not reflected in outstanding shares. The fair value of the restricted shares will be recognized on a straight-line basis over the service period. Based on the estimated IPO share price of $20, total expense will be $550,000 to be recognized over the service period of six months.
(2) Represents the purchase price for the Initial Property of $30 million plus $50,000 of estimated transaction costs, of which $20,000 is expected to be funded by IGP Advisers. 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 will be 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.
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. For the year ended December 31, 2015, there were no results of operations for the Company. The nine months ended September 30, 2016, reflects the historical operations of the Company from June 15, 2016 (the date of incorporation) through 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,
F-6
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.
(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 operations, 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) Other than certain stock-based compensation expenses, 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 and stock-based compensation, director fees and other general and administrative expenses associated with operating a public company to be between $6 million and $7 million. This estimate is based on managements previous experience in managing public real estate investment trusts and is not reflected in the pro forma consolidated statements of operations.
F-7
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 and the related consolidated statements of operations, changes in stockholders equity, and cash flows for the period from June 15, 2016 (date of incorporation) through September 30, 2016. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements 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 the consolidated financial statements are 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 Companys 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 statements, 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Innovative Industrial Properties, Inc. at September 30, 2016 and the consolidated results of its operations and its cash flows for the period from June 15, 2016 (date of incorporation) through September 30, 2016, in conformity with accounting principles generally accepted in the United States of America.
As described in Note 3 to the consolidated financial statements, the 2016 consolidated financial statements have been restated to correct a misstatement.
/s/ BDO USA, LLP
Costa Mesa, California
November 4, 2016
F-8
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Assets
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Cash | $ | 508 | ||
Property escrow deposit | 375,000 | |||
Total assets | $ | 375,508 | ||
Liabilities and stockholders equity
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Liabilities
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Due to IGP Advisers, LLC a related party | $ | 375,000 | ||
Stockholders equity:
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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 | |||
Additional paid-in-capital | 200,000 | |||
Accumulated deficit | (200,000 | ) | ||
Total stockholders equity | 508 | |||
Total liabilities and stockholders equity | $ | 375,508 |
See independent auditors report and the accompanying notes to the consolidated financial statements.
F-9
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Revenues: | $ | | ||
Expenses:
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General and administrative | 200,000 | |||
Net loss | $ | (200,000 | ) | |
Net loss per share | $ | (0.39 | ) | |
Weighted average shares outstanding | 508,065 |
See independent auditors report and the accompanying notes to the consolidated financial statements.
F-10
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Shares of
common stock |
Common
stock |
Additional
Paid-in-capital |
Accumulated
deficit |
Total
stockholders equity |
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Balance, June 15, 2016 | | $ | | $ | | $ | | $ | | |||||||||||
Issuance of Class B common
stock |
508,065 | 508 | | | 508 | |||||||||||||||
Net loss | | | | (200,000 | ) | (200,000 | ) | |||||||||||||
Stock-based compensation | | | 200,000 | | 200,000 | |||||||||||||||
Balance, September 30, 2016 | 508,065 | $ | 508 | $ | 200,000 | $ | (200,000 | ) | $ | 508 |
See independent auditors report and the accompanying notes to the consolidated financial statements.
F-11
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Cash flows from operating activities
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Net loss | $ | (200,000 | ) | |
Adjustment to reconcile net loss to net cash provided by operating activities
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Stock-based compensation | 200,000 | |||
Net cash provided by operating activities | | |||
Cash flows from financing activities
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Issuance of Class B common stock | 508 | |||
Net cash provided by financing activities | 508 | |||
Net increase in cash | 508 | |||
Cash, beginning of period | | |||
Cash, end of period | $ | 508 |
See independent auditors report and the accompanying notes to the consolidated financial statements.
F-12
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 7).
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.
Basis of Presentation. The consolidated financial statements includes all of the accounts of the Company as of September 30, 2016, and for the period from June 15, 2016 (date of incorporation) through 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 (REIT) for U.S. federal income tax purposes, commencing with our taxable year ending December 31, 2016 or, if later, the first year in which we have material real estate assets and operations. 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 Companys liability unless and until the successful completion of the Companys
F-13
initial public offering has occurred (see Note 6). 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 9). In addition, $595,000 of offering costs have been incurred by the Company as of September 30, 2016 and are contingently payable upon the successful completion of the offering and are expected to be paid out of the offering proceeds.
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 tenants 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.
Stock-based compensation for equity awards is based on the grant date fair value of the equity investment and is recognized over the requisite service period.
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.
F-14
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 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.
The consolidated financial statements have been restated to correct a misstatement related to stock-based compensation expense for the period from June 15, 2016 (date of incorporation) through September 30, 2016. The impact of the restatement on the consolidated financial statements is as follows:
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As of September 30, 2016 |
As Previously
Reported |
Restatement | As Restated | |||||||||
Additional paid-in-capital | $ | | $ | 200,000 | $ | 200,000 | ||||||
Accumulated deficit | $ | | $ | (200,000 | ) | $ | (200,000 | ) |
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For the period from June 15, 2016
(date of incorporation) through September 30, 2016 |
As Previously
Reported |
Restatement | As Restated | |||||||||
General and administrative expense | $ | | $ | 200,000 | $ | 200,000 | ||||||
Net loss | $ | | $ | (200,000 | ) | $ | (200,000 | ) |
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, directors and a co-founder. No Class A Common Stock has been issued.
The Company has 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 an initial public offering) for a period of 90 days if such purchaser ceases his affiliation with the Company 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 the Company 25% of the shares will be released from our repurchase option on June 15, 2017. The remaining shares will be released from the repurchase option in equal monthly installments over the three-year period commencing on July 31, 2017, such that all shares will be released by July 31, 2020 subject to continued service. In the event of a change in control, as defined in the restricted stock purchase agreements, and excluding a sale by us of our securities for fund-raising purposes, all shares will be released from the repurchase option immediately prior to the change in control.
F-15
The Companys founders 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 an initial public offering) (or any interest therein) that remain subject to the repurchase option. Prior to the completion of an initial public offering, the Company has a right of first refusal to purchase any shares of Class B common stock that have been released from the repurchase option that a purchaser proposes to transfer.
In connection with the Companys issuance of its Class B common stock, the Company obtained a third-party valuation to determine the fair value of the shares at the June 15, 2016 grant date and at subsequent modification dates using a Monte Carlo simulation. The fair value calculation is primarily based on managements estimates of the probability of an initial public offering and the estimated proceeds of the offering.
The Company recognized stock compensation expense of $200,000 for the period from June 15, 2016 (date of incorporation) through September 30, 2016 related to issuance of the Class B common stock. The Company expects to recognize the remaining stock compensation expense related to the Class B common stock (or the shares of the Class A common stock issued upon conversion of the shares of Class B common stock) of approximately $3.5 million over a remaining service period of approximately 3.5 years through July 2020.
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.
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, as amended, 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.
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.
F-16
In June 2016, our Board of Directors adopted our 2016 Omnibus Incentive Plan (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 Companys 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 Company has updated its evaluation of subsequent events through November 4, 2016, the date the consolidated financial statements are being issued.
On October 17, 2016, we entered into a consulting agreement with IGP Advisers. Per the consulting agreement, upon the completion of the Companys 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 Companys organization, fundraising and evaluation of potential properties for acquisition (collectively, Costs). Upon the completion of the Companys 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 as of September 30, 2016 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.
F-17
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MARTIN
HOOD FRIESE |
2507 South Neil St.
Champaign, Illinois 61820 Phone 217.351.2000 Fax 217.351.7726 www. mhfa.net |
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& ASSOCIATES, LLC |
To the Board of Members
PharmaCann LLC
Oak Park, Illinois
We have audited the accompanying financial statements of PharmaCann LLC (the Company), which comprise the balance sheets as of December 31, 2015 and December 31, 2014 and the related statements of income, members equity, and cash flows (restated) for the year and period then ended, and the related notes to the financial statements.
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we obtained is sufficient and appropriate to provide a basis for our audit opinion.
F-18
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PharmaCann LLC as of December 31, 2015 and December 31, 2014, and the results of its operations and its cash flows for the year and period then ended in accordance with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, the Companys business operations are in the medical cannabis industry which is currently considered illegal under federal law. The Company is operating under the laws of the states of Illinois and New York. If the federal government decides to prosecute companies operating in the medical cannabis industry, it could be financially harmful to the Company.
Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The supplementary information contained in Schedule 1 is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audits of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole.
/s/ Martin, Hood, Friese & Associates, LLC
Champaign, Illinois
June 13, 2016, except for Note 14 which is as of November 16, 2016
F-19
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2015 | 2014 | ||||||||
ASSETS
|
|||||||||
Current Assets
|
|||||||||
Cash | $ | 1,325,708 | $ | 612,219 | |||||
Cash Held in Escrow | 4,287,282 | | |||||||
Subscriptions Receivable | 249,465 | 19,000,000 | |||||||
Inventory | 2,126,234 | | |||||||
Prepaid Expenses | 548,483 | | |||||||
Total Current Assets | 8,537,172 | 19,612,219 | |||||||
Property and Equipment, Net | 38,615,581 | 505,005 | |||||||
Other Assets
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Restricted Cash | 426,000 | | |||||||
Intangibles | 18,841 | 18,841 | |||||||
Deposits | 119,618 | 10,060 | |||||||
Total Other Assets | 564,459 | 28,901 | |||||||
Total Assets | $ | 47,717,212 | $ | 20,146,125 | |||||
LIABILITIES AND MEMBERS EQUITY
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Current Liabilities
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Accounts Payable | $ | 213,423 | $ | | |||||
Construction Payable | 6,089,636 | 115,898 | |||||||
Accrued Expenses | 560,879 | 2,710 | |||||||
Total Current Liabilities | 6,863,938 | 118,608 | |||||||
Long-Term Liabilities
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Convertible Note Payable | 4,650,606 | | |||||||
Total Liabilities | 11,514,544 | 118,608 | |||||||
Members Equity
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Members Capital | 40,647,976 | 20,304,388 | |||||||
Retained Deficit | (4,445,308 | ) | (276,871 | ) | |||||
Total Members Equity | 36,202,668 | 20,027,517 | |||||||
Total Liabilities and Members Equity | $ | 47,717,212 | $ | 20,146,125 |
See Accompanying Notes
F-20
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2015 | 2014 | |||||||
Net Sales | $ | 249,689 | $ | | ||||
Cost of Sales | 215,883 | | ||||||
Gross Profit (Loss) | 33,806 | | ||||||
Operating Expenses | 4,194,077 | 274,161 | ||||||
Income (Loss) from Operations | (4,160,271 | ) | (274,161 | ) | ||||
Other Income (Expense)
|
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Interest Expense | (13,564 | ) | (2,710 | ) | ||||
Interest Income | 6,528 | | ||||||
Other Expense | (1,130 | ) | | |||||
Total Other Income (Expense) | (8,166 | ) | (2,710 | ) | ||||
Net Income (Loss) | $ | (4,168,437 | ) | $ | (276,871 | ) |
See Accompanying Notes
F-21
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Series A Preferred | Class A |
Total
Members Capital |
Retained
Deficit |
Total
Members Equity |
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Balance at March 19, 2014 | $ | | $ | | $ | | $ | | $ | | ||||||||||
Contributions from Members | 20,303,388 | 1,000 | 20,304,388 | | 20,304,388 | |||||||||||||||
Net Income (Loss) | | | | (276,871 | ) | (276,871 | ) | |||||||||||||
Balance at December 31, 2014 | 20,303,388 | 1,000 | 20,304,388 | (276,871 | ) | 20,027,517 | ||||||||||||||
Contributions from Members | 20,343,588 | | 20,343,588 | | 20,343,588 | |||||||||||||||
Net Income (Loss) | | | | (4,168,437 | ) | (4,168,437 | ) | |||||||||||||
Members Equity, December 31, 2015 | $ | 40,646,976 | $ | 1,000 | $ | 40,647,976 | $ | (4,445,308 | ) | $ | 36,202,668 |
See Accompanying Notes
F-22
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2015 | 2014 | |||||||
Cash Flows from Operating Activities
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Net Income (Loss) | $ | (4,168,437 | ) | $ | (276,871 | ) | ||
Adjustments to Reconcile Net Income (Net Loss) to Net Cash Provided by (Used in) Operating Activities:
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Depreciation | 55,523 | | ||||||
(Increase) Decrease in Assets:
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Escrow | (4,287,282 | ) | | |||||
Restricted Cash | (426,000 | ) | | |||||
Inventory | (2,126,234 | ) | | |||||
Prepaid Expenses | (548,483 | ) | | |||||
Deposits | (109,558 | ) | (10,060 | ) | ||||
Increase (Decrease) in Liabilities:
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Accounts Payable | 213,423 | | ||||||
Accrued Expenses | 558,169 | 2,710 | ||||||
Net Adjustments | (6,670,442 | ) | (7,350 | ) | ||||
Net Cash Provided by (Used in) Operating Activities | (10,838,879 | ) | (284,221 | ) | ||||
Cash Flows from Investing Activities
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Purchases of Intangibles | | (18,841 | ) | |||||
Purchases of Property and Equipment | (32,192,361 | ) | (389,107 | ) | ||||
Net Cash Provided by (Used in) Investing Activities | (32,192,361 | ) | (407,948 | ) | ||||
Cash Flows from Financing Activities
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Principal Advances on Convertible Note Payable | 4,650,606 | | ||||||
Receipts from Subscriptions Receivable | 19,000,000 | | ||||||
Contributions from Members | 20,094,123 | 1,304,388 | ||||||
Net Cash Provided by (Used in) Financing Activities | 43,744,729 | 1,304,388 | ||||||
Net Change in Cash | 713,489 | 612,219 | ||||||
Cash, Beginning of Year | 612,219 | | ||||||
Cash, End of Year | $ | 1,325,708 | $ | 612,219 | ||||
Supplemental Disclosure of Cash Flow Information
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Cash Paid During the Year for Interest | $ | 2,710 | $ | | ||||
Supplemental Disclosure of Non-Cash Financing Information
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Purchases of Property and Equipment via Construction Payable | $ | 6,089,636 | $ | 115,898 | ||||
Subscriptions Receivable | $ | 249,465 | $ | 19,000,000 |
See Accompanying Notes
F-23
PharmaCann LLC (the Company) is an Illinois limited liability company established in 2014 for the purposes of cultivating, distributing and dispensing medical cannabis to be used by qualified patients for medical use. In Illinois, the Company operates two permitted cultivation centers to grow and process medical cannabis products which are distributed to Illinois registered medical cannabis dispensaries. The Company operates four registered medical cannabis dispensaries in Illinois that sell medical cannabis and ancillary products to patients that have been certified by the State of Illinois to use medical cannabis. In New York, the Company is a registered organization and operates one manufacturing facility to grow and process medical cannabis products which are distributed to dispensaries operated by the Company; the Companys New York dispensaries sell medical cannabis and ancillary products to patients that have been certified by New York State Department of Health to use medical cannabis. The company operates in Illinois and New York exclusively.
a. | Inventories are valued at lower of cost or market. Cost is determined using the first-in first-out (FIFO) method. |
b. | Property and equipment are recorded at cost. Minor additions are expensed in the year incurred. Major additions over $500 are capitalized and depreciated over their estimated useful lives using straight-line or accelerated methods. Useful lives are 5 12 years for equipment, 10 years for furniture and fixtures, 15 years for leasehold improvements, and 39 years for buildings. |
c. | The Company recognizes revenue when the transaction is completed upon delivery of the final product to the customers at the point of sale. |
d. | The Company expenses shipping and handling costs as they are incurred. Shipping and handling expenses incurred on products sold are included in cost of sales. |
e. | Advertising costs are charged to operations when incurred. Advertising expenses totaled $25,443 for the year ended December 31, 2015. There was no advertising expense for the period from inception through December 31, 2014. |
f. | As a limited liability company, the Companys taxable income or loss is allocated to members in accordance with their respective percentage ownership. Therefore, no provision or liability for income taxes has been included in the financial statements. |
g. | The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates. |
Compensation expense recognized related to the issuance of stock options is based in the intrinsic method of valuing the underlying options in relation to the estimated value of the Company. Allocation of overhead costs to work in process is based on an estimate of time and resources dedicated to the production of inventory. Due to the uncertainties inherent in the estimation process it is at least reasonably possible that compensation expense and the overhead cost allocation will be revised.
h. | As of December 31, 2015, the federal and Illinois tax filings since inception remain open for review by tax authorities. |
F-24
Cash held in escrow consists of four escrow accounts for $50,000 related to four dispensary locations for a total of $200,000 as of December 31, 2015, as required by the Illinois Division of Financial and Professional Regulation for medical cannabis dispensaries in Illinois. The balance must remain in escrow as long as the Company maintains its license to operate the dispensaries in Illinois.
Cash held in escrow as of December 31, 2015, also included $4,000,000 related to Illinois Department of Agriculture requirements for cultivation centers and $87,282 in escrow related to property taxes that were paid during 2016.
Restricted cash consists of cash deposits serving as collateral for a surety bond ($375,000 at December 31, 2015) and secured credit facilities ($51,000 at December 31, 2015). There were no restricted cash balances at December 31, 2014.
The major classes of inventory are as follows as of December 31:
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2015 | 2014 | |||||||
Materials Inventory | $ | 161,079 | $ | | ||||
Work in Process | 1,886,569 | | ||||||
Finished Goods | 78,586 | | ||||||
Total Inventory | $ | 2,126,234 | $ | |
Property and equipment consist of the following as of December 31:
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2015 | 2014 | |||||||
Land | 7,616,957 | | ||||||
Building | 9,163,687 | | ||||||
Leasehold Improvements | 1,781,921 | | ||||||
Equipment | 697,735 | | ||||||
Furniture and Fixtures | 40,903 | | ||||||
Construction in Progress | 19,449,763 | 505,005 | ||||||
Total Property and Equipment | 38,750,966 | 505,005 | ||||||
Less: Accumulated Depreciation | (135,385 | ) | | |||||
Property and Equipment, Net | $ | 38,615,581 | $ | 505,005 |
Depreciation expense for the year ended December 31, 2015 was $135,385, of which $79,862 related to the production of inventory was capitalized into work in process. There was no depreciation expense for the period from inception through December 31, 2014.
A convertible note payable with a related party accruing interest at 3.0 percent annually with lump payment due in May, 2017. This note is convertible at any time during the life of the note at the holders option into 65,565 Series A preferred member units.
F-25
Aggregate annual maturities on long-term debt as of December 31, 2015 are due in future years as follows:
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Year | ||||
2016 | $ | | ||
2017 | 4,650,606 | |||
Total Future Maturities on Convertible Notes | $ | 4,650,606 |
The Company and its members have entered into an agreement which, among other matters, governs the distributions, liquidation preferences, and transferability of its membership interests.
The Class A Unit holders distribution and liquidation rights are subject to and qualified by the rights, powers and preferences of the holders of Series A Preferred Units as discussed below.
The holders of Series A Preferred Units participate in all distributions of net cash flow on an as-if-converted to Class A Units basis. Each Series A Preferred Unit is convertible (upon the election of the holders of a majority of the Series A Preferred Units) into one Class A Unit at the time of issuance, subject to certain adjustments for unit splits or combinations. The Companys Amended and Restated Certificate of Designation for the Series A Preferred Units sets forth the mechanics for such conversion.
Holders of Series A Preferred Units are not entitled to any form of dividend.
In the event of any liquidation event or deemed liquidation event, the holders of Series A Preferred Units shall be entitled to receive, prior and in preference to any proceeds of the liquidation to the holders of Class A Units the greater of (1) the original issue price of the Series A Preferred Units or (2) the distribution they would be entitled to receive on an as-if-converted to Class A Unit basis.. If liquidation proceeds are insufficient to cover all members, holders of the Series A Preferred Units will be distributed the full proceeds ratably among themselves.
In the event that any Class A Member wishes to transfer any or all of its membership interest in the Company, the Class A Member must first offer to sell the membership interest to the Company and then to the Series A Preferred Members by providing written notice of intent.
The Company has granted options to certain employees for the purchase of common B member units at an average purchase price of $58.20 per unit. These options vest over a period up to two years and expire ten years from the date of issuance. Of the 46,391 total options granted under this plan, 22,047 were vested and no options were exercised as of December 31, 2015. No options were outstanding as of December 31, 2014.
The Company has elected to value these options using the intrinsic method. Under this method, the options are valued at the date of issuance and any excess of the current per unit value of the company over the strike price of the options is recognized as compensation expense over the vesting period. No compensation expense was recognized for these options for the year ended December 31, 2015.
F-26
The Company has various non-cancellable operating leases for land, equipment, and office space, with monthly payments ranging from $658 to $10,535, expiring through December 2054.
Future minimum lease payments under operating leases as of December 31, 2015 are as follows:
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Year | ||||
2016 | $ | 611,543 | ||
2017 | 563,658 | |||
2018 | 316,195 | |||
2019 | 296,441 | |||
2020 | 250,142 | |||
Thereafter | 1,356,046 | |||
Total Future Minimum Lease Payments | $ | 3,394,025 |
Rental expense from the operating leases noted above and other month-to-month leases amounted to $310,405 for the year ended December 31, 2015. There was no lease expense for the period from inception through December 31, 2014.
The Company contracts architectural and construction services to companies related through common ownership. The following is a summary of the related party activities for the year ended December 31, 2015 and the period from inception through December 31, 2014:
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2015 | 2014 | |||||||||||||||
Payments | Accounts Payable | Payments | Accounts Payable | |||||||||||||
Vendor A | $ | 927,388 | $ | 205,789 | $ | | $ | | ||||||||
Vendor B | 1,095,055 | | 221,790 | | ||||||||||||
Vendor C | 13,241,547 | 5,413,315 | 47,446 | 115,898 |
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash. At times, cash in banks is in excess of the FDIC insurance limit The Company has not experienced any loss as a result of those deposits and does not expect any in the future.
The Company has been granted a license to cultivate and distribute cannabis for medical purposes pursuant to the laws of Illinois and New York. Presently, this industry is illegal under federal law. The Company has and intends to continue to adhere strictly to the statutes in the states in which it operates.
The Company has entered into certain construction contracts related to the building of new cultivation centers. The remaining commitment associated with these contracts totaled $11,513,933 as of December 31, 2015.
F-27
Subsequent to original issuance of these financial statements, management has changed their presentation of cash flows. This change resulted in a $4,713,282 reduction in cash from operating activities due to a reclassification of escrow and restricted cash balances previously included in the cash category.
The impact of the restatement on the statement of cash flows for the year ended December 31, 2015 is as follows:
|
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As Previously
Reported |
Restatement | As Reported | ||||||||||
Cash flows from operating activities
|
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Escrow | $ | | $ | (4,287,282 | ) | $ | (4,287,282 | ) | ||||
Restricted Cash | $ | | $ | (426,000 | ) | $ | (426,000 | ) | ||||
Net Adjustments | $ | (1,957,160 | ) | $ | (4,713,282 | ) | $ | (6,670,442 | ) | |||
Net Cash Provided by (Used in) Operating Activities | $ | (6,125,597 | ) | $ | (4,713,282 | ) | $ | (10,838,879 | ) | |||
Net Change in Cash | $ | 5,426,771 | $ | (4,713,282 | ) | $ | 713,489 | |||||
Cash, End of Year | $ | 6,038,990 | $ | (4,713,282 | ) | $ | 1,325,708 |
During January 2016, the Company entered into an agreement with a related party to provide available credit in an amount up to $5,000,000 bearing interest at 13.0 percent, maturing in February 2018. The note was amended in April 2016 to increase the available credit to $7,000,000.
During April 2016, the Company entered into purchase agreements with two significant members. Under the agreements, the Company redeemed 100 percent of the members units for $4,979,975 which was based on the estimated fair value of the Company as agreed upon by the parties to the agreement. The purchase was paid $979,996 in cash and the remaining $3,999,979 of the purchase price was paid through issuance of promissory notes.
The Company has evaluated subsequent events through June 13, 2016, the date which the financial statements were available to be issued.
F-28
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2015 | 2014 | |||||||
Compensation & Benefits | $ | 1,496,220 | $ | | ||||
Professional Fees | 1,025,075 | 56,692 | ||||||
Licenses & Permits | 569,754 | | ||||||
Occupancy | 321,708 | | ||||||
Marketing | 289,602 | 3,873 | ||||||
Travel & Entertainment | 64,844 | 10,250 | ||||||
Depreciation | 55,523 | | ||||||
Insurance | 44,189 | | ||||||
Business Development | 22,638 | | ||||||
Other | 304,524 | 203,346 | ||||||
Total Operating Expenses | $ | 4,194,077 | $ | 274,161 |
F-29
Through and including , 2016 (the 25 th 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.
, 2016
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.
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SEC registration fee | $ | 23,325 | ||
FINRA filing fee | 35,000 | |||
NYSE listing fee | 100,000 | |||
Printing and mailing expenses | 75,000 | |||
Legal fees and expenses | 900,000 | |||
Accounting fees and expenses | 125,000 | |||
Transfer agent fees | 3,500 | |||
Miscellaneous | 288,175 | |||
Total | $ | 1,550,000 |
On June 15, 2016, we issued 508,065 shares of our Class B common stock to our founders, including 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.
On June 15, 2016, we issued 508,065 shares of our Class B common stock to our founders, including 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.
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:
| 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; |
II-1
| 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 directors or officers 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 have entered into indemnification agreements with each of our executive officers and directors, and expect to enter into indemnification agreements with future 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.
None.
II-2
See page F- 1 for an index to the financial statements included in this registration statement.
The list of exhibits filed with this Registration Statement is set forth in the Exhibit Index following the signature page herein.
(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 Securities Act of 1933, as amended, 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 Securities Act of 1933, as amended, 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 of 1933, as amended, 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.
II-3
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 17 th day of November, 2016.
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.
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NAME | CAPACITY | DATE | ||
/s/ Alan D. Gold
Alan D. Gold |
Executive Chairman | November 17, 2016 | ||
/s/ Paul E. Smithers
Paul E. Smithers |
President and Chief Executive Officer
(Principal Executive Officer) |
November 17, 2016 | ||
/s/ Robert M. Sistek
Robert M. Sistek |
Chief Financial Officer and Executive Vice President, Investments (Principal Financial Officer) | November 17, 2016 | ||
/s/ Gregory J. Fahey
Gregory J. Fahey |
Chief Accounting Officer and Treasurer
(Principal Accounting Officer) |
November 17, 2016 | ||
/s/ Gary A. Kreitzer
Gary A. Kreitzer |
Director | November 17, 2016 |
S-1
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 number | Exhibit description | |
1.1 | Form of Underwriting Agreement (filed herewith) | |
3.1** | Amended and Restated Articles of Incorporation of Innovative Industrial Properties, Inc. | |
3.2** | Amended and Restated Bylaws of Innovative Industrial Properties, Inc. | |
4.1** | Agreement of Limited Partnership of IIP Operating Partnership LP. | |
4.2 | Form of Certificate for Common Stock (filed herewith) | |
5.1 | Opinion of Foley & Lardner LLP (including consent of such firm) (filed herewith) | |
8.1 | Tax Opinion of Foley & Lardner LLP (including consent of such firm) (filed herewith) | |
10.1**+ | 2016 Omnibus Incentive Plan | |
10.2**+ | Form of Indemnification Agreement between Innovative Industrial Properties, Inc. and each of its directors and officers | |
10.3**+# | Form of Restricted Stock Purchase Agreement dated June 15, 2016 between Innovative Industrial Properties, Inc. and the purchaser named therein | |
10.4**+ | Form of Severance and Change in Control Agreement with Alan D. Gold | |
10.5**+ | Form of Severance and Change in Control Agreement with Paul E. Smithers | |
10.6**+ | Form of Severance and Change in Control Agreement with Gregory J. Fahey | |
10.7**+ | Form of Severance and Change in Control Agreement with Brian J. Wolfe | |
10.8 | [Intentionally omitted.] | |
10.9**+ | Form of Severance and Change in Control Agreement with Robert M. Sistek | |
10.10** | Funding Agreement between Innovative Industrial Properties, Inc. and IGP Advisers LLC | |
10.11** | Consulting Agreement between Innovative Industrial Properties, Inc. and IGP Advisers LLC | |
10.12** | Purchase Agreement dated as of August 22, 2016 between IIP Operating Partnership, LP and PharmaCann LLC | |
10.13** | Amendment No. 1 dated September 16, 2016 to Purchase Agreement dated as of August 22, 2016 between IIP Operating Partnership, LP and PharmaCann LLC | |
23.1 | Consent of Foley & Lardner LLP (included in Exhibit 5.1) | |
23.2 | Consent of Foley & Lardner LLP (included in Exhibit 8.1) | |
23.3 | Consent of BDO USA, LLP (filed herewith) | |
23.4 | Consent of Martin, Hood, Friese & Associates, LLC (filed herewith) | |
99.1** | Consent of Gary M. Malino as a director nominee | |
99.2** | Consent of David Stecher as a director nominee | |
99.3** | Consent of Scott Shoemaker as a director nominee | |
99.4** | Consent of Paul E. Smithers as a director nominee |
** | Previously filed. |
+ | Indicates management contract or compensatory plan. |
# | The Restricted Stock Purchase Agreements listed below are identical in all material respects to the form of Restricted Stock Purchase Agreement, except for the identities of the parties and number of shares of Class B common stock purchased, and have not been filed as an exhibit to this registration statement pursuant to Instruction 2 to Item 601 of Regulation S-K: |
(i) | Restricted Stock Purchase Agreement dated June 15, 2016 between Innovative Industrial Properties, Inc. and Alan D. Gold for 343,065 shares of Class B Common Stock. |
E-1
(ii) | Restricted Stock Purchase Agreement dated June 15, 2016 between Innovative Industrial Properties, Inc. and Paul E. Smithers for 90,000 shares of Class B Common Stock. |
(iii) | Restricted Stock Purchase Agreement dated June 15, 2016 between Innovative Industrial Properties, Inc. and Gregory J. Fahey for 25,000 shares of Class B Common Stock. |
(iv) | Restricted Stock Purchase Agreement dated June 15, 2016 between Innovative Industrial Properties, Inc. and Andrew Fenton for 25,000 shares of Class B Common Stock. |
(v) | Restricted Stock Purchase Agreement dated June 15, 2016 between Innovative Industrial Properties, Inc. and Gary A. Kreitzer for 25,000 shares of Class B Common Stock. |
E-2
Exhibit 1.1
[ · ] Shares
Innovative Industrial Properties, Inc.
Class A Common Stock
UNDERWRITING AGREEMENT
[ · ], 2016
Ladenburg Thalmann & Co. Inc.
As Representative of the several
Underwriters named in
Schedule I
attached hereto,
570 Lexington Avenue
11 th Floor
New York, NY 10022
Ladies and Gentlemen:
Innovative Industrial Properties, Inc., a Maryland corporation (the “ Company ”), and IIP Operating Partnership, LP, a Delaware limited partnership and the Company’s operating partnership (the “ Operating Partnership ”), confirm their respective agreements with Ladenburg Thalmann & Co. Inc. (“ Ladenburg ”) and each of the other underwriters named in Schedule I attached to this agreement (this “ Agreement ”) (collectively, the “ Underwriters ,” which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Ladenburg is acting as representative (in such capacity, the “ Representative ”), with respect to (i) the sale by the Company and the purchase by the Underwriters, acting severally and not jointly, of the respective numbers of shares of the Company’s Class A common stock, par value $0.001 per share (the “ Common Stock ”), set forth in Schedule I hereto, and (ii) the grant by the Company to the Underwriters, acting severally and not jointly, of the option to purchase up to [ · ] additional shares of Common Stock to cover over-allotments, if any, on the terms set forth in Section 2(b). The aforesaid [ · ] shares of Common Stock (the “ Initial Securities ”) to be purchased by the Underwriters and all or any part of the [ · ] shares of Common Stock subject to the option described in Section 2(b) hereof (the “ Option Securities ”) are herein called, collectively, the “ Securities .”
The Company and the Operating Partnership understand that the Underwriters propose to make a public offering of the Securities as soon as the Representative deems advisable after this Agreement has been executed and delivered.
The Company and the Underwriters agree that a portion of the Initial Securities to be purchased by the Underwriters (the “ Reserved Securities ”) shall be reserved for sale by the Underwriters to certain persons designated by the Company (the “Invitees”), as part of the distribution of the Securities by the Underwriters, subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the Financial Industry Regulatory Authority, Inc. (“ FINRA ”) and all other applicable laws, rules and regulations. The Company solely determined, without any direct or indirect participation by the Underwriters, the Invitees who will purchase Reserved Securities (including the amount to be purchased by such persons) sold by the Underwriters. To the extent that such Reserved Securities are not orally confirmed for purchase by Invitees by 8:00 A.M. (New York City time) on the first business day after the date of this Agreement, such Reserved Securities may be offered to the public as part of the public offering contemplated hereby.
C- 2 -1 |
The Company has filed with the Securities and Exchange Commission (the “ Commission ”) a registration statement on Form S-11 (No. 333-214148), including the related preliminary prospectus or prospectuses, covering the registration of the sale of the Securities under the Securities Act of 1933, as amended (the “ 1933 Act ”). Promptly after execution and delivery of this Agreement, the Company will prepare and file a prospectus in accordance with the provisions of Rule 430A (“ Rule 430A ”) of the rules and regulations of the Commission under the 1933 Act (the “ 1933 Act Regulations ”) and Rule 424(b) (“ Rule 424(b) ”) of the 1933 Act Regulations. The information included in such prospectus that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective pursuant to Rule 430A(b) is herein called the “ Rule 430A Information .” Such registration statement, including the amendments thereto, the exhibits thereto and any schedules thereto, at the time it became effective, and including the Rule 430A Information, is herein called the “ Registration Statement .” Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the “ Rule 462(b) Registration Statement ” and, after such filing, the term “ Registration Statement ” shall include the Rule 462(b) Registration Statement. Each prospectus used prior to the effectiveness of the Registration Statement, and each prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a “ preliminary prospectus .” The final prospectus, in the form first furnished to the Underwriters for use in connection with the offering of the Securities, is herein called the “ Prospectus .” For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the Prospectus or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system (“ EDGAR ”).
As used in this Agreement:
“ Applicable Time ” means [ · ] [a.m./p.m.], Eastern time, on [ · ], 2016 or such other time as agreed by the Company and the Representative.
“ General Disclosure Package ” means any Issuer General Use Free Writing Prospectuses issued at or prior to the Applicable Time, the prospectus that is included in the Registration Statement as of the Applicable Time and the information included on Schedule III hereto, all considered together.
“ Issuer Free Writing Prospectus ” means any “issuer free writing prospectus,” as defined in Rule 433 of the 1933 Act Regulations (“ Rule 433 ”), including without limitation any “free writing prospectus” (as defined in Rule 405 of the 1933 Act Regulations (“ Rule 405 ”)) relating to the Securities that is (i) required to be filed with the Commission by the Company, (ii) a “road show that is a written communication” within the meaning of Rule 433(d)(8)(i), whether or not required to be filed with the Commission, or (iii) exempt from filing with the Commission pursuant to Rule 433(d)(5)(i) because it contains a description of the Securities or of the offering that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g).
“ Issuer General Use Free Writing Prospectus ” means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors (other than a “ bona fide electronic road show,” as defined in Rule 433 (the “ Bona Fide Electronic Road Show ”)), as evidenced by its being specified in Schedule III hereto.
“ Issuer Limited Use Free Writing Prospectus ” means any Issuer Free Writing Prospectus that is not an Issuer General Use Free Writing Prospectus.
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“ Testing-the-Waters Communication ” means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the 1933 Act.
“ Written Testing-the-Waters Communication ” means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the 1933 Act.
1. Representations and Warranties.
(a) Representations and Warranties by the Company and the Operating Partnership . Each of the Company and the Operating Partnership, jointly and severally, represents and warrants to each Underwriter as of the date hereof, the Applicable Time, the Closing Time (as defined below) and any Date of Delivery (as defined below), and agrees with each Underwriter, as follows:
(i) Registration Statement and Prospectuses . Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto has (A) been prepared by the Company in conformity with the requirements of the 1933 Act and the 1933 Act Regulations; (B) been filed with the Commission under the 1933 Act; (C) become effective under the 1933 Act, and (D) been delivered by the Company to the Representative. The Company has complied to the Commission’s satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement, the Rule 462(b) Registration Statement or any post-effective amendment thereto has been issued under the 1933 Act, no order preventing or suspending the use of any preliminary prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted or are pending or, to the Company’s knowledge, contemplated.
Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, conformed and will conform in all material respects, at the time it became effective, to the requirements of the 1933 Act and the 1933 Act Regulations. Each preliminary prospectus (including the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment or supplement thereto), any supplement thereto or any prospectus wrapper prepared in connection therewith, and the Prospectus conformed in all material respects when filed with the Commission pursuant to Rule 424(b) of the 1933 Act Regulations to the requirements of the 1933 Act and the 1933 Act Regulations. Each preliminary prospectus delivered to the Underwriters for use in connection with this offering and the Prospectus was or will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
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(ii) Accurate Disclosure . Neither the Registration Statement, any Rule 462(b) Registration Statement nor any amendment thereto, at the times they became effective, at the Closing Time or at any Date of Delivery, contained, contains or will contain an untrue statement of a material fact or omitted, omits or will omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. As of the Applicable Time, neither (A) the General Disclosure Package nor (B) any individual Issuer Limited Use Free Writing Prospectus, when considered together with the General Disclosure Package, and (C) any individual Written Testing-the-Waters Communication, when considered together with the General Disclosure Package, contained, contains or will contain an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Neither the Prospectus nor any amendment or supplement thereto (including any prospectus wrapper), as of its date, at the time of any filing with the Commission pursuant to Rule 424(b), at the Closing Time or at any Date of Delivery, contained, contains or will contain an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement (or any amendment thereto), any Rule 462(b) Registration Statement, the General Disclosure Package, any individual Issuer Limited Use Free Writing Prospectus or the Prospectus (or any amendment or supplement thereto (including any prospectus wrapper)), made in reliance upon and in conformity with written information furnished to the Company through the Representative by or on behalf of any Underwriter specifically for inclusion therein. For purposes of this Agreement, the only information so furnished shall be the information in the first paragraph under the heading “Underwriting—Commissions and Discounts” and the information in the second and third paragraphs and in the last sentence of the fourth paragraph under the heading “Underwriting—Price Stabilization, Short Positions and Penalty Bids” in the Prospectus (collectively, the “ Underwriter Information ”).
(iii) Issuer Free Writing Prospectuses . Each Issuer Free Writing Prospectus conformed or will conform in all material respects to the requirements of the 1933 Act and the 1933 Act Regulations on the date of first use, and the Company has complied with all prospectus delivery and any filing requirements applicable to such Issuer Free Writing Prospectus pursuant to the 1933 Act Regulations. The Company has not made any offer relating to the Securities that would constitute an Issuer Free Writing Prospectus without the prior written consent of the Representative. The Company has retained in accordance with the 1933 Act Regulations all Issuer Free Writing Prospectuses that were not required to be filed pursuant to the 1933 Act Regulations. No Issuer Free Writing Prospectus conflicts or will conflict with the information contained in the Registration Statement or the Prospectus, and any preliminary or other prospectus deemed to be a part thereof that has not been superseded or modified. The Company has made available a Bona Fide Electronic Road Show in compliance with Rule 433(d)(8)(ii) such that no filing of any “road show” (as defined in Rule 433(h)) is required in connection with the offering of the Securities.
(iv) Company Not Ineligible Issuer . The Company was not, at the time of filing of Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto and at the earliest time thereafter that the Company or another offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) of the 1933 Act Regulations) of the Securities, and at the date hereof is not, an “ineligible issuer” (as defined in Rule 405 of the 1933 Act Regulations), without taking account of any determination by the Commission pursuant to Rule 405 that it is not necessary that the Company be considered an ineligible issuer.
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(v) Independent Accountants . BDO USA, LLP, whose report appears in the Registration Statement, and is included in the General Disclosure Package and the Prospectus, is an independent public accounting firm with respect to the Company as required by the 1933 Act, the 1933 Act Regulations and the Public Company Accounting Oversight Board (including the rules and regulations promulgated by such entity). BDO USA, LLP has not during the periods covered by the financial statements included in the Registration Statement, the General Disclosure Package and the Prospectus, provided to the Company any non-audit services, as such term is defined in Section 10A(g) of the Securities Exchange Act of 1934, as amended (“ 1934 Act ”).
(vi) Financial Statements; Non-GAAP Financial Measures . The historical financial statements (including the related notes and supporting schedules) included in the Registration Statement, the General Disclosure Package and the Prospectus comply as to form in all material respects with the requirements of Regulation S-X under the 1933 Act, are accurate in all material respects and present fairly the financial position of the Company on a consolidated basis at the date indicated; said financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“ GAAP ”) applied on a consistent basis throughout the periods involved. The supporting schedules, if any, present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Registration Statement, the General Disclosure Package and the Prospectus present fairly the information shown therein in all material respects and have been compiled on a basis consistent with that of the audited financial statements included therein. The pro forma financial statements and the related notes thereto included in the Registration Statement, the General Disclosure Package and the Prospectus, if any, present fairly in all material respects the information shown therein, have been prepared in accordance with the Commission’s rules and guidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. The pro forma financial statements in the Registration Statement comply as to form with the applicable requirements of Regulation S-X of the 1933 Act in all material respects. No other financial statements or supporting schedules of the Company or any of its subsidiaries are required to be included in the Registration Statement, the General Disclosure Package or the Prospectus under the 1933 Act and the 1933 Act Regulations. All disclosures contained in the Registration Statement, the General Disclosure Package or the Prospectus regarding “non-GAAP financial measures” (as such term is defined by the rules and regulations of the Commission) comply in all material respects with Regulation G of the 1934 Act and Item 10 of Regulation S-K of the 1933 Act, to the extent applicable.
(vii) No Material Adverse Change in Business . Since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package or the Prospectus, except as otherwise stated therein, (A) there has been no material adverse change in or affecting the business affairs, business, earnings, condition (financial or otherwise), results of operations, stockholders’ equity, properties, management or prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a “ Material Adverse Effect ”), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to such entities considered as one enterprise or incurred any liability or obligation, direct or contingent, that is material to such entities considered as one enterprise, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company or any of its subsidiaries on any class of the capital stock or other equity interest of such entity.
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(viii) Good Standing of the Company . The Company has been duly organized, is validly existing and in good standing as a corporation under the laws of the State of Maryland with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement, the General Disclosure Package and the Prospectus and to enter into and perform its obligations under this Agreement and, as the sole general partner of the Operating Partnership, to cause the Operating Partnership to enter into and perform the Operating Partnership’s obligations under this Agreement. The Company is duly qualified as a foreign corporation to transact business and in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of its businesses, except where the failure to be so qualified or in good standing would not, singly or in the aggregate, result in a Material Adverse Effect.
(ix) Good Standing of the Operating Partnership . The Operating Partnership has been duly formed, is validly existing and in good standing as a limited partnership under the laws of the State of Delaware with full partnership power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement, the General Disclosure Package and the Prospectus and to enter into and perform its obligations under this Agreement. The Operating Partnership is duly qualified as a foreign partnership to transact business and in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of its businesses, except where the failure to be so qualified or in good standing would not, singly or in the aggregate, result in a Material Adverse Effect. The Company is the sole general partner of the Operating Partnership. The aggregate percentage interests of the Company and the limited partners in the Operating Partnership at the Closing Time, after giving effect to the offering of the Securities and the related transactions, will be as set forth in the Prospectus; provided, that to the extent that any portion of the option described in Section 2(b) hereof is exercised at the Closing Time, the percentage interest of the Company and of such limited partners in the Operating Partnership will be adjusted accordingly.
(x) Good Standing of Subsidiaries . Each subsidiary of the Company has been duly organized, is validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, has corporate or similar power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement, the General Disclosure Package and the Prospectus, and is duly qualified to transact business and in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of its business, except where the failure to be so qualified or in good standing would not, singly or in the aggregate, result in a Material Adverse Effect. All of the issued and outstanding capital stock or other ownership interests of each subsidiary has been duly authorized and validly issued, is (as applicable) fully paid and non-assessable and is, or upon consummation of the offering of the Securities and the related transactions will be, owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. None of the outstanding shares of capital stock or other ownership interests of any subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such subsidiary. The Company does not, and will not upon consummation of the offering of the Securities and the related transactions, own or control, directly or indirectly, any corporation, association or other entity that is or will be a “significant subsidiary” (within the meaning of Rule 1-02(w) of Regulation S-X) other than the entities listed on Exhibit 21 to the Registration Statement. For the purposes of this Agreement, “subsidiary” means each direct and indirect subsidiary of the Company, including, without limitation, the Operating Partnership.
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(xi) Partnership Agreement . The Agreement of Limited Partnership of the Operating Partnership (the “ Partnership Agreement ”), has been duly and validly authorized by the Company, in its capacity as sole general partner of the Operating Partnership, and at the Closing Time will be duly executed and delivered by the Company, as general partner, and will be a valid and binding agreement, enforceable in accordance with its terms, except to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or similar laws affecting creditors’ rights generally and by general equitable principles and, with respect to equitable relief, the discretion of the court before which any proceeding therefor may be brought (regardless of whether enforcement is sought in a proceeding at law or in equity) and, with respect to any indemnification provisions contained therein, except as rights under those provisions may be limited by applicable law or policies underlying such law.
(xii) Capitalization . The authorized, issued and outstanding shares of capital stock of the Company are as set forth in the Registration Statement, the General Disclosure Package and the Prospectus under the caption “Capitalization” (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the Registration Statement, the General Disclosure Package and the Prospectus or pursuant to the exercise, redemption, or exchange of convertible or exchangeable securities, options or warrants referred to in the General Disclosure Package and the Prospectus, including limited partner interests and preferred limited partner interests in the Operating Partnership). The issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and non-assessable, conform to the description thereof contained in the Registration Statement, General Disclosure Package and Prospectus and were issued in compliance with federal and state securities laws and not in violation of any preemptive right, resale right, right of first refusal or similar right. The issuance of such shares of capital stock of the Company was exempt from registration or qualification under the 1933 Act and applicable state securities laws. The issued and outstanding limited partnership interests in the Operating Partnership have been duly authorized for issuance by the Operating Partnership to the Company and are validly issued and fully paid, conform to the description thereof contained in the Registration Statement, General Disclosure Package and Prospectus and were issued in compliance with federal and state securities laws and not in violation of any preemptive right, resale right, right of first refusal or similar right. The issuance of such limited partnership interests in the Operating Partnership was exempt from registration or qualification under the 1933 Act and applicable state securities laws. The Company’s stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder conform in all material respects to the descriptions thereof contained in the Prospectus. Except as disclosed in the Registration Statement, the General Disclosure Package or the Prospectus, no options, warrants or other rights to purchase, agreements or other obligations to issue, or rights to convert any obligations into or exchange any securities or interests for shares of the Company’s or its subsidiaries’ capital stock, including limited partnership interests in the Operating Partnership or other ownership interests of the Operating Partnership or exchange any securities for shares of the Company’s capital stock are outstanding.
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(xiii) Authorization of Agreement. This Agreement has been duly authorized, executed and delivered by the Company and the Operating Partnership.
(xiv) Authorization and Description of Securities . The Securities have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued, fully paid and non-assessable, will conform to the description thereof contained in the Registration Statement, General Disclosure Package and Prospectus, will be issued in compliance with federal and state securities laws and will not be issued in violation of any preemptive right, resale right, right of first refusal or similar right. The Common Stock conforms in all material respects to all statements relating thereto contained in the Registration Statement, the General Disclosure Package and the Prospectus and such description conforms in all material respects to the rights set forth in the instruments defining the same. No holder of Securities will be subject to personal liability solely by reason of being such a holder. The certificates to be used to evidence title to the Common Stock will be in substantially the form filed as an exhibit to the Registration Statement and will, at the Closing Time and on each Date of Delivery (if any) be substantially in such form.
(xv) Authorization and Description of Founder Securities . The shares of Common Stock to be issued in exchange for the outstanding shares of Class B common stock, par value $0.001 per share, of the Company (“ Founders Securities ”) have been duly authorized for issuance and, when issued and delivered by the Company against payment of the consideration therefor, will be validly issued, fully paid and non-assessable, will conform to the description thereof contained in the Registration Statement, General Disclosure Package and Prospectus, will be issued in compliance with federal and state securities laws and will not be issued in violation of any preemptive right, resale right, right of first refusal or similar right. The issuance of the Founders Securities will be exempt from registration or qualification under the 1933 Act and applicable state securities laws.
(xvi) Registration Rights . There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the 1933 Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the 1933 Act.
(xvii) Absence of Violations and Defaults . Neither the Company nor any of its subsidiaries is (A) in violation of its charter, bylaws or similar organizational documents, (B) in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease, license or other agreement or instrument to which the Company or any subsidiary is a party or by which it is bound or to which any of the properties or assets of the Company or any subsidiary is subject (collectively, “ Agreements and Instruments ”), except for such violations that would not, singly or in the aggregate, result in a Material Adverse Effect, or (C) except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, in violation of any federal, state, local or foreign statute or rule, or any order, rule or regulation of any arbitrator, court or governmental, regulatory or administrative agency or body or any self-regulatory organization or other non-governmental regulatory authority having jurisdiction over the Company or any of its subsidiaries or any of their respective properties, assets or operations (each, a “ Governmental Entity ”).
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(xviii) Absence of Conflicts . The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein and in the Registration Statement, the General Disclosure Package and the Prospectus (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described therein under the caption “Use of Proceeds”) and the compliance by the Company and the Operating Partnership with their respective obligations hereunder have been duly authorized by all necessary corporate or other action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Company or any subsidiary pursuant to, the Agreements and Instruments (except for such conflicts, breaches, defaults or Repayment Events or liens, charges or encumbrances that would not, singly or in the aggregate, result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter, bylaws or similar organizational documents of the Company or any of its subsidiaries, or, except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, any applicable law, statute, rule, regulation, judgment, order, writ or decree of any Governmental Entity. As used herein, a “ Repayment Event ” means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of its subsidiaries.
(xix) Absence of Labor Dispute . No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any subsidiary’s principal suppliers, manufacturers, customers or contractors, which, in either case, would result in a Material Adverse Effect.
(xx) Employee Benefits . (A) The Company and each of its subsidiaries or their “ERISA Affiliates” (as defined below) are in compliance in all respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder (“ ERISA ”); (B) no “reportable event” (as defined in ERISA) has occurred with respect to any “employee benefit plan” (as defined in ERISA) for which the Company or any of its subsidiaries or ERISA Affiliates would have any liability; (C) the Company and each of its subsidiaries or their ERISA Affiliates have not incurred and do not reasonably expect to incur liability under Title IV of ERISA with respect to termination of, or withdrawal from, any “employee benefit plan”; and (D) each “employee benefit plan” for which the Company and each of its subsidiaries or any of their ERISA Affiliates would have any liability that is intended to be qualified under Section 401(a) of the Code, is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification; except, in the cases of (A), (B), and (C), as would not reasonably be expected to have a Material Adverse Effect. “ ERISA Affiliate ” means, with respect to the Company or any of its subsidiaries, any member of any group of organizations described in Sections 414(b), (c) or (m) of the Code or Section 4001(b)(1) of ERISA of which the Company or such subsidiary is a member.
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(xxi) Absence of Proceedings . There is no action, suit, proceeding, inquiry or investigation before or brought by any Governmental Entity now pending or, to the knowledge of the Company, threatened against the Company or any subsidiary, which is required to be disclosed in the Registration Statement, or which would reasonably be expected to result in a Material Adverse Effect, or would reasonably be expected to materially and adversely affect the consummation of the transactions contemplated in this Agreement or the performance by the Company and the Operating Partnership of their obligations hereunder; and the aggregate of all pending legal or governmental proceedings to which the Company or any subsidiary is a party or of which any of their respective properties or assets is the subject which are not described in the Registration Statement, the General Disclosure Package and the Prospectus, including ordinary routine litigation incidental to the business, would not result in a Material Adverse Effect.
(xxii) Accuracy of Descriptions . The statements made in the Registration Statement, the General Disclosure Package and the Prospectus under the caption “Description of Securities,” insofar as it purports to constitute a summary of the terms of the Common Stock, and under the captions “Prospectus Summary—Our Company,” “Prospectus Summary—Our Initial Property,” “Prospectus Summary—Our Operating Structure,” “Prospectus Summary—Restrictions on Ownership and Transfer of our Securities,” “Prospectus Summary—Federal Income Tax Status,” “Prospectus Summary—Distribution Policy,” “Prospectus Summary—Lock-Up Agreements,” “Risk Factors,” “Distribution Policy,” “Restrictions Imposed by the USA Patriot Act and Related Acts,” “Business—Market Opportunity—The Regulated Medical-Use Cannabis Industry,” Business—Market Opportunity—The Federal Legal Landscape,” “Business—Our Target Markets,” “Business—Our Initial Property,” “Business—Our Leases,” “Business—Our Operating Structure,” “Business—Governmental Regulation,” “Our Management—Executive Officer and Director Compensation,” “Certain Relationships and Related Transactions,” “Policies with Respect to Certain Activities,” “Description of Securities,” “Certain Provisions of Maryland Law and Our Charter and Bylaws,” “Shares Eligible for Future Sale,” “Our Operating Partnership and the Partnership Agreement,” “Material U.S. Federal Income Tax Considerations,” “ERISA Matters,” and “Underwriting,” insofar as such statements constitute summaries of the terms of statutes, rules or regulations, legal matters or governmental proceedings or agreements, contracts and other documents, are accurate and fair summaries of the terms of such statutes, rules or regulations, legal matters or governmental proceedings or agreements, contracts and other documents in all material respects. All agreements between the Company or any of its subsidiaries and any other party expressly referenced in the Registration Statement, the General Disclosure Package and the Prospectus are legal, valid and binding obligations of the Company or such subsidiary, as applicable, enforceable against the Company or such subsidiaries, as applicable, as appropriate, in accordance with their respective terms, except to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or similar laws affecting creditors’ rights generally and by general equitable principles and, with respect to equitable relief, the discretion of the court before which any proceeding therefor may be brought (regardless of whether enforcement is sought in a proceeding at law or in equity) and, with respect to any indemnification provisions contained therein, except as rights under those provisions may be limited by applicable law or policies underlying such law. The Company’s operating policies, investment guidelines and other policies described in the Registration Statement, General Disclosure Package and Prospectus accurately reflect in all material respects the current intentions of the Company with respect to the operation of its business, and no material deviation from such guidelines or policies is currently contemplated.
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(xxiii) Accuracy of Exhibits . There are no legal or governmental proceedings or contracts or other documents of a character required to be described in the Registration Statement, the General Disclosure Package and the Prospectus or, in the case of documents to be filed as exhibits to the Registration Statement, which are not described and filed as required.
(xxiv) Absence of Further Requirements . No consent, approval, authorization, license or order of, or filing or registration of or with, any Governmental Entity is necessary or required for the execution, delivery and performance by the Company or any subsidiary of its obligations hereunder, in connection with the offering, issuance and sale of the Securities hereunder, or its consummation of the transactions contemplated by this Agreement or the Registration Statement, the General Disclosure Package and the Prospectus, or the application of the proceeds from the sale of the Securities as described under “Use of Proceeds” in the Registration Statement, General Disclosure Package and Prospectus, except such as have been obtained or made and except for (A) such as have been obtained or as may be required under the 1933 Act, the 1933 Act Regulations, the rules of the New York Stock Exchange (the “ NYSE ”), applicable state or foreign securities laws or the by-laws and rules of FINRA, and (B) such as have been obtained under the laws and regulations of jurisdictions outside the United States in which the Reserved Securities were offered .
(xxv) Possession of Licenses and Permits . Except as described in the Registration Statement, the General Disclosure Package and the Prospectus, the Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, “ Governmental Licenses ”) issued by the appropriate Governmental Entities necessary to conduct the business now operated by them, except where the failure so to possess would not, singly or in the aggregate, result in a Material Adverse Effect. The Company and its subsidiaries are in compliance with the terms and conditions of all Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, result in a Material Adverse Effect. All of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not, singly or in the aggregate, result in a Material Adverse Effect. Neither the Company nor any subsidiary has received any notice of proceedings relating to the revocation or modification of any Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect.
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(xxvi) Title to Personal Property . Each of the Company and its subsidiaries have good and marketable title to all of its assets and personal property owned by it, free and clear of all liens, encumbrances and defects, except such as are described in the Registration Statement, the General Disclosure Package and the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and all assets and personal property held under lease by the Company and its subsidiaries are held by it under valid, subsisting and enforceable leases, with such exceptions as do not materially interfere with the use made and proposed to be made of such assets by the Company and its subsidiaries and the Company does not have notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company and its subsidiaries under any such leases or affecting or questioning the rights of the Company and its subsidiaries to be in the continued possession of the leased premises under such leases.
(xxvii) Property . Neither the Company nor the Operating Partnership owns any real property.
(xxviii) No Acquisitions or Dispositions . (A) There are no contracts, letters of intent, term sheets, agreements, arrangements or understandings with respect to the direct or indirect acquisition or disposition by any of the Company or its subsidiaries of interests in assets or real property that are required to be described in the Registration Statement, the General Disclosure Package and the Prospectus that are not so described; and (B) neither the Company nor any of its subsidiaries has sold any real property to a third party during the immediately preceding 12 calendar months.
(xxix) Environmental Laws . Except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) the Company has not violated and is not in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products, asbestos-containing materials, mold or any hazardous materials as defined by or regulated under any Environmental Laws (as defined below) (collectively, “ Hazardous Materials ”) or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, “ Environmental Laws ”), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, and (C) there are no pending or known threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company.
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(xxx) Accounting Controls and Disclosure Controls . The Company and each of its subsidiaries (A) make and keep accurate books and records and (B) maintain effective internal control over financial reporting (as defined under Rule 13-a15 and 15d-15 under the rules and regulations of the Commission under the 1934 Act (the “ 1934 Act Regulations ”)) and a system of internal accounting controls sufficient to provide reasonable assurances that (1) transactions are executed in accordance with management’s general or specific authorization, (2) transactions are recorded as necessary to permit preparation of the Company’s financial statements in conformity with GAAP and to maintain accountability for its assets, (3) access to the Company’s assets is permitted only in accordance with management’s general or specific authorization, and (4) the recorded accountability for the Company’s assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Since the Company’s incorporation, except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, there has been (A) no material weakness in the Company’s internal control over financial reporting (whether or not remediated) and (B) no change in the Company’s internal control over financial reporting that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting. Since the date of the most recent audited financial statements of the Company, except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, the Company has not been advised of (A) any significant deficiencies in the design or operation of internal controls that could adversely affect the ability of the Company to record, process, summarize and report financial data, and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the internal controls of the Company.
(xxxi) Compliance with the Sarbanes-Oxley Act . The Company has taken all necessary actions to ensure that, upon and at all times after the filing of the Registration Statement, the Company and its officers and directors, in their respective capacities as such, will be in compliance with all provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder or implementing provisions thereof (the “ Sarbanes-Oxley Act ”) that are then in effect and with which the Company is required to comply as of the effectiveness of the Registration Statement, and is actively taking steps to ensure that it will be in compliance with other provisions of the Sarbanes-Oxley Act not currently in effect, upon the effectiveness of such provisions, or which will become applicable to the Company at all times after the effectiveness of the Registration Statement.
(xxxii) Critical Accounting Policies . The section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Registration Statement, General Disclosure Package and Prospectus accurately and fully describes, in all material respects, (A) the accounting policies that the Company believes are the most important in the portrayal of the Company’s financial condition and results of operations and that require management’s most difficult, subjective or complex judgments (“ Critical Accounting Policies ”); (B) the judgments and uncertainties affecting the application of Critical Accounting Policies; and (C) the likelihood that materially different amounts would be reported under different conditions or using different assumptions and an explanation thereof.
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(xxxiii) Federal Tax Status . Commencing with its taxable year ending December 31, 2016, the Company will be organized in conformity with the requirements for qualification and taxation as a real estate investment trust (a “ REIT ”) under the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (collectively, the “ Code ”), and will operate in a manner that will enable it to meet the requirements for qualification and taxation as a REIT under the Code. The proposed ownership and method of operation of the Company as described in the Registration Statement, the General Disclosure Package and the Prospectus will enable the Company to meet the requirements for qualification and taxation as a REIT under the Code for the Company’s taxable years ending December 31, 2016 and thereafter. The Company intends to qualify as a REIT under the Code for the Company’s taxable years ending December 31, 2016 or, if later, the first year in which the Company has material real estate assets and operations, and thereafter, and the Company does not know of any event that would reasonably be expected to cause the Company to fail to qualify as a REIT under the Code during any such time. All statements regarding the Company’s qualification and taxation as a REIT and descriptions of the Company’s organization, ownership and proposed method of operation set forth in the Registration Statement, the General Disclosure Package and the Prospectus are true, correct and complete in all material respects. Each of the Company’s direct or indirect corporate subsidiaries has been, is, and will be a “taxable REIT subsidiary” within the meaning of Section 856(l) of the Code, and the Company is not aware of any fact that would negatively impact such qualification. Each other direct and indirect subsidiary of the Company has been properly treated since formation, and will continue to be properly treated, as a partnership or a disregarded entity (rather than an association or partnership taxable as a corporation) within the meaning of Section 7701 of the Code and all applicable regulations under the Code and no election has been made to the contrary. The Operating Partnership is and will be treated as a partnership within the meaning of Sections 7701(a)(2) and 761(a) of the Code and not as a publicly traded partnership taxable as a corporation under Section 7704 of the Code.
(xxxiv) Payment of Taxes . The Company and its subsidiaries (A) have paid all material federal, state, local and foreign taxes (whether imposed directly, through withholding or otherwise and including any interest, additions to tax or penalties applicable thereto) required to be paid through the date hereof, other than those being contested in good faith by appropriate proceedings and for which adequate reserves have been provided on the books of the applicable entity, (B) have timely filed all material tax returns required to be filed through the date hereof, and all such tax returns are correct and complete in all material respects, and (C) have established adequate reserves for all taxes that have accrued but are not yet due and payable. The charges, accruals and reserves on the books of the Company and its subsidiaries in respect of any income and corporation tax liability for any years not finally determined are adequate to meet any assessments or re-assessments for additional income tax for any years not finally determined, except to the extent of any inadequacy that would not result in a Material Adverse Effect. No tax deficiency has been asserted against the Company or any of its subsidiaries, nor does any such entity know of any tax deficiency that is likely to be asserted and, if determined adversely to any such entity, would reasonably be expected to have a Material Adverse Effect.
(xxxv) Possession of Intellectual Property . The Company and its subsidiaries own or possess adequate rights to use all material patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, know-how, software, systems and technology (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) necessary for the conduct of its business as described in the Registration Statement, the General Disclosure Package and the Prospectus, and has no reason to believe that the conduct of its business will conflict with, and has not received any notice of any claim of conflict with, any such rights of others. There is no pending or, to the knowledge of the Company, threatened action, suit, proceeding, or claim by others challenging the rights of the Company or any subsidiary in or to such rights. There is no pending or, to the Company’s knowledge, threatened action, suit, proceeding, or claim by others that the Company or any subsidiary infringes, misappropriates, or otherwise violates any such rights of others.
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(xxxvi) Insurance . The Company and its subsidiaries carry or are entitled to the benefits of insurance, with financially sound and reputable insurers, in such amounts and covering such risks as the Company believes is generally maintained by companies of established repute engaged in the same or similar business and in such amounts as is commercially reasonable for the value of the properties, in the aggregate, by the Company and its subsidiaries, and all such insurance is in full force and effect. The Company has no reason to believe that it or the Operating Partnership will not be able (A) to renew its existing insurance coverage as and when such policies expire or (B) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Effect. Neither the Company nor any of its subsidiaries has been denied any insurance coverage which it has sought or for which it has applied.
(xxxvii) Investment Company Act . Neither the Company nor the Operating Partnership is required, or upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described under “Use of Proceeds” in the Registration Statement, the General Disclosure Package and the Prospectus will be required, to register as an “investment company” or an entity “controlled” by an “investment company” within the meaning of such terms under the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder.
(xxxviii) Absence of Manipulation . Neither the Company nor any affiliate of the Company has taken, nor will the Company or any affiliate take, directly or indirectly, any action designed to or that has constituted or that could reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities, and has taken no action which would directly or indirectly violate Regulation M or which would constitute a special selling effort as such term is defined under Regulation M.
(xxxix) Foreign Corrupt Practices Act . None of the Company, any of its subsidiaries, or, to the knowledge of the Company, any director, officer, agent, employee, affiliate or other person acting on behalf of such entity is aware of or has taken any action, directly or indirectly, that would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “ FCPA ”), including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any “foreign official” (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA and the Company and, to the knowledge of the Company, its affiliates have conducted their businesses in compliance with the FCPA, and the Company has instituted and maintains policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance by the Company and its subsidiaries therewith.
(xl) Money Laundering Laws . The operations of the Company and its subsidiaries are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Entity (collectively, the “ Money Laundering Laws ”); and no action, suit or proceeding by or before any Governmental Entity involving the Company or any subsidiary with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.
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(xli) No Conflicts with OFAC Laws . None of the Company, any of its subsidiaries or, to the knowledge of the Company, any director, officer, agent, employee, affiliate or representatives of the Company or any of its subsidiaries is an individual or entity (“ Person ”) currently the subject or target of any sanctions administered or enforced by the United States Government, including, without limitation, the U.S. Department of the Treasury’s Office of Foreign Assets Control, the United Nations Security Council, the European Union, Her Majesty’s Treasury, or other relevant sanctions authority (collectively, “ Sanctions ”), nor is the Company located, organized or resident in a country or territory that is the subject of Sanctions; and the Company will not directly or indirectly use the net proceeds of the sale of the Securities, or lend, contribute or otherwise make available such net proceeds to any subsidiaries, joint venture partners or other Person, to fund any activities of or business with any Person, or in any country or territory, that, at the time of such funding, is the subject of Sanctions or in any other manner that will result in a violation by any Person (including any Person participating in the transaction, whether as underwriter, advisor, investor or otherwise) of Sanctions.
(xlii) Distribution of Offering Material . The Company and its subsidiaries have not distributed and, prior to the later to occur of the Closing Time and the completion of the distribution of the Securities, will not distribute any offering material in connection with the offering and sale of the Securities other than any preliminary prospectus, the Prospectus, any issuer free writing prospectus, or any other materials, if any, permitted by the 1933 Act.
(xliii) Restrictions on Distributions . No subsidiary of the Company is currently prohibited, directly or indirectly, from paying any distributions to the Company or the Operating Partnership, from making any other distribution on such subsidiary’s equity interests, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary’s property or assets to the Company or any other subsidiary of the Company, except as described in or contemplated by the Prospectus.
(xliv) Prior Sales of Common Stock . Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, the Company has not sold, issued or distributed any shares of Common Stock.
(xlv) No Equity Awards . Except for grants disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, the Company has not granted to any person or entity, a stock option or other equity-based award to purchase or receive Common Stock or limited partnership interests in the Operating Partnership pursuant to an equity-based compensation plan or otherwise.
(xlvi) No Finder’s Fee . Except for the Underwriters’ discounts and commissions payable by the Company to the Underwriters in connection with the offering of the Securities contemplated herein or as otherwise disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, the Company has not incurred any liability for any brokerage commission, finder’s fees or similar payments in connection with the offering of the Securities contemplated hereby.
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(xlvii) Approval of Listing . The Securities have been approved for listing, subject to official notice of issuance, on the NYSE.
(xlviii) Absence of Certain Relationships . No relationship, direct or indirect, exists between or among the Company or its subsidiaries, on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company, on the other hand, that is required to be described in the Registration Statement, the General Disclosure Package and the Prospectus which is not so described. The Company has not, directly or indirectly, including through any subsidiary, extended credit, arranged to extend credit, or renewed any extension of credit, in the form of a personal loan, to or for any executive officer of the Company or the Operating Partnership, or to or for any family member or affiliate of any director or executive officer of the Company or the Operating Partnership.
(xlix) No Integration . Neither the Company nor the Operating Partnership has sold or issued any securities that would be integrated with the offering of the Securities contemplated by this Agreement pursuant to the 1933 Act, the 1933 Act Regulations or the interpretations thereof by the Commission.
(l) Sale of Reserved Securities . In connection with any offer and sale of Reserved Securities outside the United States, each preliminary prospectus, the Prospectus, any prospectus wrapper and any amendment or supplement thereto, at the time it was distributed, complied and will comply in all material respects with any applicable laws or regulations of foreign jurisdictions. The Company has not offered, or caused the Representative to offer, Reserved Securities to any person with the specific intent to unlawfully influence (A) a customer or supplier of the Company or any of its affiliates to alter the customer’s or supplier’s level or type of business with any such entity or (B) a trade journalist or publication to write or publish favorable information about the Company or any of its affiliates, or their respective businesses or products.
(li) Lending Relationship . Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, the Company (A) does not have any material lending or other relationship with any bank or lending affiliate of any Underwriter and (B) does not intend to use any of the net proceeds from the sale of the Securities to repay any outstanding debt owed to any affiliate of any Underwriter.
(lii) No Ratings . The Company has no debt securities or preferred stock that is rated by any “nationally recognized statistical rating agency” (as such term is defined by the Commission for purposes of Rule 436(g)(2) of the 1933 Act).
(liii) No FINRA Affiliations . There are no affiliations or associations between any member of FINRA and any of the Company's officers, directors or 5% or greater securityholders.
(liv) Statistical and Market-Related Data . All statistical and market-related data included in the Registration Statement, the General Disclosure Package and the Prospectus are based on or derived from sources that the Company believes, after reasonable inquiry, to be reliable and accurate, and such data agree with the sources from which they are derived, and, to the extent required, the Company has obtained the written consent to the use of such data from such sources.
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(lv) Emerging Growth Company . From the time of the initial confidential submission of the Registration Statement to the Commission (or, if earlier, the first date on which the Company engaged directly or through any person authorized to act on its behalf in any Testing-the-Waters Communication) through the date hereof, the Company has been and is an “emerging growth company” as defined in Section 2(a) of the 1933 Act (an “ Emerging Growth Company ”).
(lvi) Testing-the-Waters Communications . The Company reconfirms that the Representative has been authorized to act on its behalf in undertaking Testing-the-Waters Communications. The Company has not distributed any Written Testing-the-Waters Communications.
(b) Officer’s Certificates . Any certificate signed by any officer of the Company and delivered to the Representative or counsel for the Underwriters in connection with the offering of the Securities shall be deemed a representation and warranty by the Company and the Operating Partnership, as to matters covered thereby, to each Underwriter.
2. Sale and Delivery to Underwriters; Closing .
(a) Initial Securities . Subject to the terms and conditions and upon the basis of the representations, warranties and agreements herein set forth, the Company agrees to issue and sell to each Underwriter, severally and not jointly, and each Underwriter, severally and not jointly, agrees, to purchase from the Company, at the price per share set forth in Schedule I , the number of Initial Securities set forth opposite such Underwriter’s name in Schedule I attached hereto, plus any additional number of Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof, subject, in each case, to such adjustments among the Underwriters as the Representative in its sole discretion shall make to eliminate any sales or purchases of fractional shares.
(b) Option Securities . In addition, subject to the terms and conditions and upon the basis of the representations, warranties and agreements herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase up to an additional [ · ] shares of Common Stock, at the price per share set forth in Schedule I , less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial Securities but not payable on the Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering overallotments made in connection with the offering and distribution of the Initial Securities upon notice by the Representative to the Company setting forth the number of Option Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of delivery (a “ Date of Delivery ”) shall be determined by the Representative, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time. If the option is exercised as to all or any portion of the Option Securities, each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total number of Option Securities then being purchased which the number of Initial Securities set forth in Schedule I opposite the name of such Underwriter bears to the total number of Initial Securities, subject, in each case, to such adjustments as the Representative in its sole discretion shall make to eliminate any sales or purchases of fractional shares.
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(c) Delivery of and Payment for the Securities. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of DLA Piper LLP (US), 1251 Avenue of the Americas, 27 th Floor, New York, New York 10020, or at such other place as shall be agreed upon by the Representative and the Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Representative and the Company (such time and date of payment and delivery being herein called “ Closing Time ”). In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Representative and the Company, on each Date of Delivery as specified in the notice from the Representative to the Company. Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company against delivery to the Representative for the respective accounts of the Underwriters of certificates for the Securities to be purchased by them. It is understood that each Underwriter has authorized the Representative, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial Securities and the Option Securities, if any, which it has agreed to purchase. Ladenburg, individually and not as representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial Securities and the Option Securities, if any, to be purchased by any Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration . Certificates for the Initial Securities and the Option Securities, if any, shall be in such denominations and registered in such names as the Representative may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The Initial Securities and any Option Securities shall be delivered by or on behalf of the Company to the Representative, through the facilities of The Depository Trust Company, for the account of the several Underwriters. The certificates for the Initial Securities and the Option Securities, if any, will be made available for examination and packaging by the Representative in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be.
3. Covenants of the Company and the Operating Partnership . The Company and the Operating Partnership, jointly and severally, covenant with each Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests . The Company, subject to Section 3(b), will comply with the requirements of Rule 430A, and will notify the Representative immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective or any amendment or supplement to the Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(e) of the 1933 Act concerning the Registration Statement and (v) if the Company becomes the subject of a proceeding under Section 8A of the 1933 Act in connection with the offering of the Securities. The Company will effect all filings required under Rule 424(b), in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order, prevention or suspension and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment.
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(b) Continued Compliance with Securities Laws . The Company will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and in the General Disclosure Package and the Prospectus. If at any time when a prospectus relating to the Securities is (or, but for the exception afforded by Rule 172 of the 1933 Act Regulations (“ Rule 172 ”), would be) required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to (i) amend the Registration Statement in order that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) amend or supplement the General Disclosure Package or the Prospectus in order that the General Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser or (iii) amend the Registration Statement or amend or supplement the General Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will (A) promptly give the Representative notice of such event, (B) furnish the Representative with copies of any such documents prior to such proposed filing or use, as the case may be, (C) promptly prepare any amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the General Disclosure Package or the Prospectus comply with such requirements and, a reasonable amount of time prior to any proposed filing or use, furnish the Representative with copies of any such amendment or supplement and (D) promptly file with the Commission any such amendment or supplement; provided that the Company shall not file or use any such amendment or supplement to which the Representative or counsel for the Underwriters shall reasonably object. The Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. The Company has given the Representative notice of any filings made pursuant to the 1934 Act or 1934 Act Regulations within 48 hours prior to the Applicable Time; the Company will give the Representative notice of its intention to make any such filing from the Applicable Time to the Closing Time and will furnish the Representative with copies of any such documents a reasonable amount of time prior to such proposed filing, as the case may be, and will not file or use any such document to which the Representative or counsel for the Underwriters shall reasonably object. If at any time when a prospectus relating to the Securities is (or, but for the exception afforded by Rule 172, would be) required by the 1933 Act to be delivered in connection with sales of the Securities and following issuance of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement relating to the Securities or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made at that subsequent time, not misleading, the Company will promptly notify the Representative and will promptly amend or supplement, at its own expense, such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.
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(c) Delivery of Registration Statements . The Company has furnished or will deliver to the Representative and counsel for the Underwriters, without charge, signed copies of the Registration Statement as originally filed and each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to the Representative, without charge, a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits) for each of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses . The Company has delivered to each Underwriter, without charge, as many copies of each preliminary prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each Underwriter, without charge, during the period when a prospectus relating to the Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the 1933 Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) Blue Sky Qualifications . The Company will use its best efforts, in cooperation with the Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representative may designate and to maintain such qualifications in effect so long as required to complete the distribution of the Securities; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.
(f) Rule 158 . The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide to the Underwriters the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act (subject to Rule 158 under the 1933 Act).
(g) Use of Proceeds . The Company will use the net proceeds from the sale of the Securities in the manner set forth in the Registration Statement, General Disclosure Package and Prospectus under the caption, “Use of Proceeds.”
(h) Listing . The Company will use its best efforts to effect and maintain the listing of the Common Stock (including the Securities) on the NYSE.
(i) Restriction on Sale of Securities . During a period of 180 days from the date of the Prospectus, the Company and the Operating Partnership will not, without the prior written consent of the Representative, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, including without limitation limited partnership interests in the Operating Partnership, or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder, (B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and referred to in the General Disclosure Package and the Prospectus, including the issuance of the Founders Securities as described in the Prospectus, or (C) any shares of Common Stock, limited partnership interests in the Operating Partnership, dividend equivalent rights or other equity-based awards issued, or options to purchase Common Stock granted, pursuant to existing employee benefit plans of the Company referred to in the General Disclosure Package and the Prospectus (including the filing of a registration statement on Form S-8 relating to such existing employee benefit plans of the Company referred to in the General Disclosure Package and the Prospectus).
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If the Representative, in its sole discretion, agrees to release or waive the restrictions set forth in a lock-up agreement described in Section 5(n) hereof for an officer or director of the Company and provides the Company with notice of the impending release or waiver at least three business days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release through a major news service at least two business days before the effective date of the release or waiver.
(j) Reporting Requirements . The Company will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations during the period when a Prospectus relating to the Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the 1933 Act. Additionally, the Company shall report the use of proceeds from the issuance of the Securities as may be required under Rule 463 under the 1933 Act.
(k) Issuer Free Writing Prospectuses . The Company agrees that, unless it obtains the prior written consent of the Representative, it will not make any offer relating to the Securities that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a “free writing prospectus,” or a portion thereof, required to be filed by the Company with the Commission or retained by the Company under Rule 433; provided that the Representative will be deemed to have consented to the Issuer Free Writing Prospectuses listed on Schedule III hereto and any “road show that is a written communication” within the meaning of Rule 433(d)(8)(i) that has been reviewed by the Representative. The Company represents that it has treated or agrees that it will treat each such free writing prospectus consented to, or deemed consented to, by the Representative as an “issuer free writing prospectus,” as defined in Rule 433, and that it has complied and will comply with the applicable requirements of Rule 433 with respect thereto, including timely filing with the Commission where required, legending and record keeping. If at any time following issuance of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement, any preliminary prospectus or the Properties or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Representative and will promptly amend or supplement, at its own expense, such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.
(l) Absence of Manipulation . Except as contemplated herein or in the General Disclosure Package and the Prospectus, each of the Company and the Operating Partnership will not take, directly or indirectly, any action designed to or that would constitute or that might reasonably be expected to cause or result in, stabilization or manipulation of the price of any securities of the Company to facilitate the sale or resale of the Securities.
(m) Qualification and Taxation as a REIT . The Company will use its best efforts to meet the requirements for qualification and taxation as a REIT under the Code for its taxable year ending December 31, 2016, and the Company will use its best efforts to continue to qualify for taxation as a REIT under the Code and will not take any action to revoke or otherwise terminate the Company’s REIT election, unless the Company’s board of directors determines in good faith that it is no longer in the best interests of the Company and its stockholders to be so qualified.
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(n) Transfer Agent . The Company will maintain a transfer agent and, if necessary under the jurisdiction of formation of the Company, a registrar for its Common Stock.
(o) Sarbanes-Oxley . The Company will comply with all effective applicable provisions of the Sarbanes-Oxley Act.
(p) Notification of Material Events . The Company, during the period when the Prospectus is (or but for the exemption in Rule 172 would be) required to be delivered under the 1933 Act or the 1934 Act, shall notify the Representative of the occurrence of any material events respecting its (including those of the Operating Partnership) activities, affairs or condition, financial or otherwise, if, but only if, as a result of any such event it is necessary, in the opinion of counsel, to amend or supplement the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is (or but for the exemption in Rule 172 would be) delivered to a purchaser, and the Company will forthwith supply such information as shall be necessary in the opinion of counsel to the Company and the Underwriters for the Company to prepare any necessary amendment or supplement to the Prospectus so that, as so amended or supplemented, the Prospectus will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is (or but for the exemption in Rule 172 would be) delivered to a purchaser, not misleading.
(q) Compliance with FINRA Rules . The Company hereby agrees that it will ensure that the Reserved Securities will be restricted as required by FINRA or the FINRA rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of this Agreement. The Underwriters will notify the Company as to which persons will need to be so restricted. At the request of the Underwriters, the Company will direct the transfer agent to place a stop transfer restriction upon such securities for such period of time. Should the Company release, or seek to release, from such restrictions any of the Reserved Securities, the Company agrees to reimburse the Underwriters for any reasonable expenses (including, without limitation, legal expenses) they incur in connection with such release.
(r) Testing-the-Waters Materials . If at any time following the distribution of any Written Testing-the-Waters Communication there occurred or occurs an event or development as a result of which such Written Testing-the-Waters Communication included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Representative and will promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission.
(s) Emerging Growth Company . The Company will promptly notify the Representative if the Company ceases to be an Emerging Growth Company at any time prior to the later of (i) completion of the distribution of the Securities within the meaning of the Securities Act and (ii) completion of the 180-day restricted period referred to in Section 3(i).
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4. Payment of Expenses .
(a) Expenses . The Company will pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and each amendment thereto, (ii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any stock, transfer or other taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters, (iii) the fees and disbursements of the Company’s counsel, accountants and other advisors, (iv) the qualification of the Securities under the securities laws of the several jurisdictions as provided in Section 3(e) hereof and the preparation, printing and distribution of a Blue Sky Memorandum (including related fees and expenses of counsel to the Underwriters in amount not to exceed $5,000), (v) the preparation, printing and delivery to the Underwriters of copies of each preliminary prospectus, each Issuer Free Writing Prospectus and the Prospectus and any amendments or supplements thereto and any costs associated with electronic delivery of any of the foregoing by the Underwriters to investors, (vi) the fees and expenses of any transfer agent or registrar for the Securities, (vii) the costs and expenses of the Company relating to investor presentations on any “road show” undertaken in connection with the marketing of the Securities, including without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations, travel and lodging expenses of the officers of the Company and any such consultants, and the cost of aircraft and other transportation chartered or owned by the Company or its affiliates and used in connection with the road show, (viii) the filing fees incident to the review by FINRA of the terms of the sale of the Securities (including related fees and expenses of counsel to the Underwriters in an amount not to exceed $20,000), (ix) the fees and expenses incurred in connection with the listing of the Securities on the New York Stock Exchange and (x) the costs and expenses (including, without limitation, any damages or other amounts payable in connection with legal or contractual liability) associated with the reforming of any contracts for sale of the Securities made by the Underwriters caused by a breach of the representation contained in the third sentence of Section 1(a)(ii).
(b) Underwriter Expenses . Except to the extent otherwise provided in Section 4(a) or Section 4(c) hereof, the Underwriters will pay all of their own costs and expenses, including the fees and disbursements of counsel for the Underwriters.
(c) Termination of Agreement . If this Agreement is terminated by the Representative in accordance with the provisions of Section 5(q) or Section 9(a)(i) or (iii) hereof, the Company shall reimburse the Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriters.
5. Conditions of Underwriters’ Obligations . The respective obligations of the several Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company and the Operating Partnership contained herein or in certificates of any officer of the Company or any of its subsidiaries delivered pursuant to the provisions hereof, to the performance by the Company and the Operating Partnership of their respective covenants and other obligations hereunder, and to each of the following additional terms and conditions:
(a) Effectiveness of Registration Statement; Rule 430A Information . The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto has been issued under the 1933 Act, no order preventing or suspending the use of any preliminary prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted or are pending or, to the Company’s knowledge, contemplated; and the Company has complied with each request (if any) from the Commission for additional information. A prospectus containing the Rule 430A Information shall have been filed with the Commission in the manner and within the time frame required by Rule 424(b) without reliance on Rule 424(b)(8) or a post-effective amendment providing such information shall have been filed with, and declared effective by, the Commission in accordance with the requirements of Rule 430A.
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(b) No Amendments or Supplements . No prospectus or amendment or supplement to the Registration Statement, the Prospectus, any preliminary prospectus or any Issuer Free Writing Prospectus shall be filed to which the Underwriters shall have reasonably objected in writing.
(c) Opinion of Counsel for the Company and the Operating Partnership . At the Closing Time, the Representative shall have received the favorable opinion and 10b-5 statement, dated as of the Closing Time, of Foley & Lardner LLP, counsel for the Company and the Operating Partnership, in form and substance reasonably satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters, to the effect set forth in Exhibit A-1 hereto and to such further effect as counsel to the Underwriters may reasonably request.
(d) Opinion of Tax Counsel for the Company and the Operating Partnership . At the Closing Time, the Representative shall have received the favorable opinion, dated as of the Closing Time, of Foley & Lardner LLP, tax counsel for the Company and the Operating Partnership, in form and substance reasonably satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters, to the effect set forth in Exhibit A-2 hereto and to such further effect as counsel to the Underwriters may reasonably request.
(e) Opinion of Counsel for Underwriters . At Closing Time, the Representative shall have received the favorable opinion and 10b-5 statement, dated as of the Closing Time, of DLA Piper LLP (US), counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters, with respect to such matters as the Underwriters may reasonably request.
(f) Accountant’s Comfort Letter; Company Financial Information . At the time of the execution of this Agreement, the Representative shall have received from BDO USA, LLP a letter, dated such date, in form and substance satisfactory to the Representative, together with signed or reproduced copies of such letter for each of the other Underwriters containing statements and information of the type ordinarily included in accountants’ “comfort letters” to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the General Disclosure Package and the Prospectus.
(g) Bring-down Comfort Letter; Company Financial Information . At the Closing Time, the Representative shall have received from BDO USA, LLP a letter, dated as of the Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (f) of this Section, except that the specified date referred to shall be a date not more than three business days prior to the Closing Time.
(h) Officers’ Certificate . At the Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the General Disclosure Package or the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business, and the Representative shall have received a certificate of the Chief Executive Officer and the Chief Financial Officer of the Company, dated the Closing Time, to the effect set forth in Exhibit B-1 hereto.
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(i) Certificate of the Chief Financial Officer and Chief Accounting Officer . At the time of execution of this Agreement, the Representative shall have received a certificate of the Chief Financial Officer and the Chief Accounting Officer of the Company, dated as of such date, in form and substance reasonably satisfactory to counsel for the Underwriters, to the effect set forth in Exhibit B-2 . At the Closing Time, the Representative shall have received a certificate, dated as of the Closing Time, of the Chief Financial Officer and the Chief Accounting Officer of the Company confirming that the certificate delivered by the Company at the time of execution of this Agreement pursuant to the prior sentence of this Section 5(i) hereof remains true and correct as of the Closing Time.
(j) Comfort Letter; Tenant Financial Information. At the time of the execution of this Agreement, the Representative shall have received from Martin, Hood, Friese & Associates, LLC a letter, dated such date, in form and substance satisfactory to the Representative, together with signed or reproduced copies of such letter for each of the other Underwriters containing statements and information of the type ordinarily included in accountants’ “comfort letters” to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the General Disclosure Package and the Prospectus.
(k) Bring-down Comfort Letter; Tenant Financial Information . At the Closing Time, the Representative shall have received from Martin, Hood, Friese & Associates, LLC a letter, dated as of the Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (j) of this Section, except that the specified date referred to shall be a date not more than three business days prior to the Closing Time.
(l) Approval of Listing . At the Closing Time, the Securities shall have been approved for listing on the NYSE, subject only to official notice of issuance.
(m) No Objection . FINRA shall have confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements relating to the offering of the Securities.
(n) Lock-Up Agreements . At the date of this Agreement, the Representative shall have received an agreement substantially in the form of Exhibit C-1 hereto signed by the persons listed on Schedule II hereto (by power of attorney or otherwise.
(o) Conditions to the Purchase of Option Securities . In the event that the Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the Option Securities, the representations and warranties of the Company and the Operating Partnership contained herein and the statements in any certificates furnished by the Company and any of its subsidiaries hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Representative shall have received:
(i) Officers’ Certificate . A certificate, dated such Date of Delivery, of the Chief Executive Officer and the Chief Financial Officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(h) hereof remains true and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company and the Operating Partnership . The favorable opinion and 10b-5 statement of Foley & Lardner LLP, counsel for the Company and the Operating Partnership, in form and substance reasonably satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof.
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(iii) Opinion of Tax Counsel for Company and the Operating Partnership . The favorable opinion of Foley & Lardner LLP, tax counsel for the Company and the Operating Partnership, in form and substance satisfactory reasonably to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(d) hereof.
(iv) Opinion of Counsel for Underwriters . The favorable opinion and 10b-5 statement of DLA Piper LLP (US), counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(e) hereof.
(v) Bring-down Comfort Letter; Company Financial Information . A letter from BDO USA, LLP, in form and substance satisfactory to the Representative and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the Representative pursuant to Section 5(g) hereof, except that the “specified date” in the letter furnished pursuant to this paragraph shall be a date not more than three business days prior to such Date of Delivery.
(vi) Bring-down Comfort Letter; Tenant Financial Information . A letter from Martin, Hood, Friese & Associates, LLC, in form and substance satisfactory to the Representative and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the Representative pursuant to Section 5(k) hereof, except that the “specified date” in the letter furnished pursuant to this paragraph shall be a date not more than three business days prior to such Date of Delivery.
(vii) Certificate of the Chief Financial Officer and Chief Accounting Officer . A certificate of the Chief Financial Officer and Chief Accounting Officer of the Company, dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the Representative pursuant to Section 5(i) hereof.
(p) Additional Documents . At the Closing Time and at each Date of Delivery (if any) counsel for the Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be reasonably satisfactory in form and substance to the Representative and counsel for the Underwriters.
(q) Termination of Agreement . If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of Option Securities on a Date of Delivery which is after the Closing Time, the obligations of the several Underwriters to purchase the relevant Option Securities, may be terminated by the Representative by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7, 8, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20 and 21 shall survive any such termination and remain in full force and effect.
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6. Indemnification .
(a) Indemnification of Underwriters . The Company and the Operating Partnership agree, jointly and severally, to indemnify and hold harmless each Underwriter, its affiliates (as such term is defined in Rule 501(b) under the 1933 Act (each, an “ Affiliate ”)), its selling agents and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in (A) any preliminary prospectus, any Issuer Free Writing Prospectus, any Written Testing-the-Waters Communication, the General Disclosure Package or the Prospectus (or any amendment or supplement thereto), or (B) in any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the offing of the Securities (“ Marketing Materials ”), including any road show or investor presentation made to investors by the Company (whether in person or electronically) , or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company;
(iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by the Representative), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above;
provided, however , that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in the Registration Statement (or any amendment thereto), including the Rule 430A Information, or any preliminary prospectus, any Issuer Free Writing Prospectus or any preliminary prospectus, any Issuer Free Writing Prospectus, the General Disclosure Package or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with the Underwriter Information. The indemnity agreement set forth in this Section 6(a) shall be in addition to any liabilities that the Company or the Operating Partnership may otherwise have.
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(b) Indemnification of Company, Directors and Officers . Each Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information, or any preliminary prospectus, any Issuer Free Writing Prospectus, the General Disclosure Package or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with the Underwriter Information. The indemnity agreement set forth in this Section 6(b) shall be in additional to any other liabilities that each Underwriter may otherwise have.
(c) Actions against Parties; Notification . Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action (including any governmental investigation) commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. The indemnifying party shall be entitled, to the extent that it shall elect, jointly with any other indemnifying party similarly notified, to assume the defense of such action, with counsel reasonably satisfactory to the indemnified party, to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the indemnifying party has failed within a reasonable time to retain counsel reasonably satisfactory to the indemnified party, (iii) the indemnified party shall have reasonably concluded that there may be legal defenses available to it that are different from or in addition to those available to the indemnifying party, or (iv) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them, and in any such event the reasonable fees and expenses of one separate counsel (and any additional local counsels) shall be paid by the indemnifying party. If the indemnifying party does not elect to assume the defense, then such firm shall be designated in writing by the Representative, in the case of parties indemnified pursuant to Section 6(a), and by the Company in the case of parties indemnified pursuant to Section 6(b). No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse . If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) or settlement of any claim in connection with any violation referred to in Section 6(e) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement.
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(e) Indemnification for Reserved Securities . In connection with the offer and sale of the Reserved Securities, the Company agrees to indemnify and hold harmless the Underwriters, their Affiliates and selling agents and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, from and against any and all loss, liability, claim, damage and expense (including, without limitation, any legal or other expenses reasonably incurred in connection with defending, investigating or settling any such action or claim), as incurred, (i) arising out of the violation of any applicable laws or regulations of foreign jurisdictions where Reserved Securities have been offered, (ii) arising out of any untrue statement or alleged untrue statement of a material fact contained in any prospectus wrapper or other material prepared by or with the consent of the Company for distribution to Invitees in connection with the offering of the Reserved Securities or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (iii) caused by the failure of any Invitee to pay for and accept delivery of Reserved Securities which have been orally confirmed for purchase by any Invitee by 8:00 A.M. (New York City time) on the first business day after the date of the Agreement or (iv) related to, or arising out of or in connection with, the offering of the Reserved Securities.
7. Contribution . If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Operating Partnership, on the one hand, and the Underwriters, on the other hand, from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Operating Partnership, on the one hand, and of the Underwriters, on the other hand, in connection with the statements or omissions, or in connection with any violation of the nature referred to in Section 6(e) hereof, which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Operating Partnership, on the one hand, and the Underwriters, on the other hand, in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Company and the Operating Partnership, on the one hand, and the total underwriting discount received by the Underwriters, on the other hand, in each case as set forth on the cover of the Prospectus, bear to the aggregate initial public offering price of the Securities as set forth on the cover of the Prospectus.
The relative fault of the Company and the Operating Partnership, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Operating Partnership or by the Underwriters and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission or any violation of the nature referred to in Section 6(e) hereof.
The Company, the Operating Partnership and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission.
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Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and each Underwriter’s Affiliates and selling agents shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company or the Operating Partnership within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company or the Operating Partnership. The Underwriters’ respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial Securities set forth opposite their respective names in Schedule I hereto and not joint.
The provisions of this Section shall not affect any agreement among the Company and the Operating Partnership with respect to contribution.
8. Representations, Warranties and Agreements to Survive . All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or any of its subsidiaries or the Operating Partnership submitted pursuant hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or its Affiliates or selling agents, any person controlling any Underwriter, its officers or directors, any person controlling the Company or any person controlling the Operating Partnership and (ii) delivery of and payment for the Securities.
9. Termination of Agreement .
(a) Termination . The Representative may terminate this Agreement, by notice to the Company, at any time at or prior to the Closing Time (i) if there has been, in the judgment of the Representative, since the time of execution of this Agreement or since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package or the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Representative, impracticable or inadvisable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or the New York Stock Exchange, or (iv) if trading generally on the NYSE Amex or the New York Stock Exchange or in the Nasdaq Global Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by order of the Commission, FINRA or any other governmental authority, or (v) a material disruption has occurred in commercial banking or securities settlement or clearance services in the United States or with respect to Clearstream or Euroclear systems in Europe, or (vi) if a banking moratorium has been declared by either federal or state authorities.
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(b) Liabilities . If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7, 8, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20 and 21 shall survive such termination and remain in full force and effect.
10. Default by One or More of the Underwriters . If one or more of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the “Defaulted Securities”), the Representative shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representative shall not have completed such arrangements within such 24-hour period, then:
(i) if the number of Defaulted Securities does not exceed 10% of the number of Securities to be purchased on such date, each of the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or
(ii) if the number of Defaulted Securities exceeds 10% of the number of Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the Underwriters to purchase, and the Company to sell, the Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the Underwriters to purchase and the Company to sell the relevant Option Securities, as the case may be, either the (i) Representative or (ii) the Company shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement, the General Disclosure Package or the Prospectus or in any other documents or arrangements. As used herein, the term “Underwriter” includes any person substituted for an Underwriter under this Section 10.
11. Notices . All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Representative at Ladenburg Thalmann & Co. Inc., 570 Lexington Avenue, New York, New York 1002, Attention: Steven Kaplan (Fax: (212) 409-2169), with a copy to DLA Piper LLP (US), 1251 Avenue of the Americas, 27 h Floor, New York, New York 10020, Attention: Kerry E. Johnson, Esq. (Fax: (917) 778-8698); notices to the Company and the Operating Partnership shall be directed to them at Innovative Industrial Properties, Inc., 17190 Bernardo Center Drive, San Diego, California 92128, Attention: Paul E. Smithers (Fax: ([ · ]); and with a copy to Foley & Lardner LLP, 100 North Tampa Street, Suite 2700, Tampa, Florida 33602, Attention: Carolyn Long, Esq. (Fax: (813) 221-4210).
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12. Research Analyst Independence . The Company acknowledges that the Underwriters’ research analysts and research departments are required to be independent from their respective investment banking divisions and are subject to certain regulations and internal policies, and that such Underwriters’ research analysts may hold views and make statements or investment recommendations and/or publish research reports with respect to the Company and/or the offering that differ from the views of their respective investment banking divisions. The Company hereby waives and releases, to the fullest extent permitted by law, any claims that the Company may have against the Underwriters with respect to any conflict of interest that may arise from the fact that the views expressed by their independent research analysts and research departments may be different from or inconsistent with the views or advice communicated to the Company by such Underwriters’ investment banking divisions. The Company acknowledges that each of the Underwriters is a full service securities firm and as such from time to time, subject to applicable securities laws, may effect transactions for its own account or the account of its customers and hold long or short positions in debt or equity securities of the companies that may be the subject of the transactions contemplated by this Agreement.
13. No Advisory or Fiduciary Relationship . The Company and its subsidiaries acknowledge and agree that (a) the purchase and sale of the Securities pursuant to this Agreement, including the determination of the initial public offering price of the Securities and any related discounts and commissions, is an arm’s-length commercial transaction between the Company and its subsidiaries, on the one hand, and the several Underwriters, on the other hand, (b) in connection with the offering of the Securities and the process leading thereto, each Underwriter is and has been acting solely as a principal and is not the agent or fiduciary of the Company, any of its subsidiaries, or their respective stockholders, equity interest holders, creditors, employees or any other party, (c) no Underwriter has assumed or will assume an advisory or fiduciary responsibility in favor of the Company or its subsidiaries with respect to the offering of the Securities or the process leading thereto (irrespective of whether such Underwriter has advised or is currently advising the Company or any of its subsidiaries on other matters) and no Underwriter has any obligation to the Company or any of its subsidiaries with respect to the offering of the Securities except the obligations expressly set forth in this Agreement, (d) the Underwriters and their respective affiliates may be engaged in a broad range of transactions that involve interests that differ from those of each of the Company and its subsidiaries, and (e) none of the Underwriters or legal counsel for the Underwriters has provided any legal, accounting, regulatory or tax advice to the Company or its subsidiaries with respect to the offering of the Securities and the Company and its subsidiaries have consulted their own respective legal, accounting, regulatory and tax advisors to the extent they deemed appropriate.
14. Parties . This Agreement shall each inure to the benefit of and be binding upon the Underwriters, the Company and the Operating Partnership and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters, the Company and the Operating Partnership and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Underwriters, the Company and the Operating Partnership and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase.
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15. Trial by Jury . The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates), the Operating Partnership and each of the Underwriters hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
16. Consent to Jurisdiction; Waiver of Immunity . Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby (“ Related Proceedings ”) shall be instituted in (i) the federal courts of the United States of America located in the City and County of New York, Borough of Manhattan or (ii) the courts of the State of New York located in the City and County of New York, Borough of Manhattan (collectively, the “ Specified Courts ”), and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a “ Related Judgment ”), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party’s address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum.
17. GOVERNING LAW . THIS AGREEMENT AND ANY CLAIM, CONTROVERSY OR DISPUTE ARISING UNDER OR RELATED TO THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF, THE STATE OF NEW YORK, WITHOUT REGARD TO ITS CHOICE OF LAW PROVISIONS.
18. TIME . TIME SHALL BE OF THE ESSENCE OF THIS AGREEMENT. EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
19. Partial Unenforceability . The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable.
20. Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement.
21. Effect of Headings . The Section headings herein are for convenience only and shall not affect the construction hereof.
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If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Underwriters, the Company and the Operating Partnership in accordance with its terms.
Very truly yours, | ||
INNOVATIVE INDUSTRIAL PROPERTIES, INC. | ||
By: | ||
Name: | ||
Title: | ||
IIP OPERATING PARTNERSHIP, LP | ||
By: | Innovative Industrial Properties, Inc., | |
as the sole general partner | ||
By: | ||
Name: | ||
Title: |
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Accepted: | ||
Ladenburg Thalmann & Co. Inc. | ||
For itself and as Representative | ||
of the several Underwriters named | ||
in Schedule I hereto | ||
By: | ||
Authorized Representative |
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Exhibit 4.2
Exhibit 5.1
November 16, 2016
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. 333-214148) (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 October 17, 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;
5. A certificate of the SDAT as to the good standing of the Company, dated as of November 15, 2016; and
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Innovative industrial properties, inc. November 16, 2016 Page 2 |
6. A certificate executed by Brian J. Wolfe, 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. November 16, 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 | |
/s/ Foley & Lardner LLP |
Exhibit 8.1
November 16, 2016
Attorney Work Product
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 October 4, 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. |
Innovative Industrial Properties, Inc.
Page 2
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.
Innovative Industrial Properties, Inc.
Page 3
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, or if later, the first year in which the Company has material real estate assets and operations, 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.
Innovative Industrial Properties, Inc.
Page 4
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.
Innovative Industrial Properties, Inc.
Page 5
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 | |
/s/ Foley & Lardner LLP |
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 November 4, 2016, relating to the consolidated financial statements as of September 30, 2016 and for the period from June 15, 2016 (date of incorporation) through 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
November 16, 2016
Exhibit 23.4
Consent of Independent 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 June 13, 2016 (except for Note 14 which is as of November 16, 2016), relating to the financial statements of PharmaCann LLC, which comprise the balance sheets as of December 31, 2015 and December 31, 2014 and the related statements of income, members’ equity, and cash flows (Restated) for the year and period then ended, and the related notes to the financial statements and which are contained in that Prospectus.
We also consent to the reference to us under the caption “Experts” in the Prospectus.
Martin, Hood, Friese & Associates, LLC
Champaign, Illinois
November 16, 2016