Innovative Industrial Enters Into Long-Term Leases

Innovative Industrial Properties, a publicly traded company, is transitioning into long-term leases with its latest acquisition. The company, which focuses on sale-leasbacks for medical-use cannabis companies, has acquired a four-property portfolio in Southern California for $17.8 million and has single a long-term triple-net lease at each property with Medical Investor Holdings LLC, which operates under the name Vertical.

“We chose to enter into long-term leases for a number of reasons.  From the tenant’s perspective, these facilities are mission-critical for their businesses, and they prefer to maintain long-term control over these facilities,” Catherine Hastings, CFO, chief accounting officers and treasurer at Innovative Industrial Properties, tells GlobeSt.com. “With our long-term, triple-net lease structure and tenant options to extend the term of the lease, we provide that assurance to these tenants. From our perspective, we structure our leases on a long-term basis with the goal to provide predictable, long-term cash flows for our investors, and reduce our exposure to re-leasing costs.”

Innovative is a pioneer in serving the medical-use cannabis industry, which is still in its infancy. Although there has been a lot of chatter, investors have been slow to enter the market. “For as much press as the regulated cannabis industry receives, it still a nascent industry in its very early stages of development,” says Hastings. “As such, licensed operators are growing rapidly, and rolling out their operations in any state that requires significant capital investment into cultivation and processing facilities, either through ground-up development of new facilities or redevelopment of industrial buildings.”

The sale-leaseback strategy has been popular among operators. With legalization spreading across the country, state-by-state, cannabis companies see this as a way to unlock capital ties up in real estate for expansion. “Our tenants see the tremendous value of unlocking the capital in their real estate and redeploying that capital toward their growth initiatives,” says Hastings. “And we team up with our tenants creatively to do that, whether it be through ground-up development of new facilities, redevelopment of existing industrial buildings, additional tenant improvements for further enhancements of their facilities or sale-leaseback transactions with already-redeveloped facilities.”

This recent transaction grows Innovative’s footprint to 22 million square feet in 12 states nationwide while expanding its presence in California. “The California regulated cannabis market is very large, with tremendous growth potential as the state continues to transition from illicit sales to the regulated market,” says Hastings. “In fact, estimates have California being as large a market as Canada in just a few years.  The Vertical team brings together a tremendous wealth of experience in entrepreneurship, and growing and running successful companies in a variety of industries, which we believe will translate very well to this industry.”