How a Real Estate Company Came to Own Three Cannabis Cultivation Facilities in Illinois
Marijuana Industry News October 13, 2019 MJ Shareholders
Three of the licensed cannabis cultivation facilities planning to serve Illinois’ forthcoming adult-use market will soon be owned by Innovative Industrial Properties (IIP), a California-based real estate investment trust (REIT) that acquires property assets and leases them back to cannabis licensees to provide them with capital.
“We believe that our years of experience in the regulated cannabis real estate industry and decades of commercial real estate experience overall have earned us a reputation as a reliable, trustworthy, long-term real estate capital partner,” IIP President and CEO Paul Smithers told Cannabis Business Times.
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So far, seven of Illinois’ existing medical cannabis cultivation facilities have been licensed to grow product for the state’s adult-use market, which is set to launch Jan. 1, 2020. Cresco Labs secured three of the licenses, PharmaCann won two, and Ascend Wellness and Columbia Care scored one license each in the first round, according to a Chicago Sun-Times report.
Ascend sold its licensed facility to IIP late last year, Chicago Sun-Times reported, and Cresco announced last month that it, too, had reached an agreement to sell two of its three properties to the company for approximately $46.3 million.
“This sale-and-leaseback agreement with IIP represents a non-dilutive capital solution for Cresco Labs that will support the expansion of our Illinois operations in preparation for the legalization of adult-use cannabis on Jan. 1, 2020,” Cresco Labs CEO and Co-Founder Charlie Bachtell said in a public statement. “A portion of the proceeds from the sale of the two properties will be utilized to create the scale in our cultivation capacity and retail dispensary network necessary to meet the significant increase in demand projected from the legalization of adult-use cannabis and the expansion of the medical-use program in Illinois. With the Illinois cannabis market projected to reach $2 billion to $4 billion in annual sales at maturity, the expansion of our operations will position Cresco Labs to build upon our leading market share and significantly increase the revenue we generate from Illinois in the coming years.”
Cresco’s agreement with IIP is expected to close within the next 30 days.
“Regarding Cresco Labs, we signed definitive agreements to purchase two facilities in Illinois and expect to execute long-term leases at closing, and are working expeditiously to complete our property diligence and move towards closing,” Smithers said.
As for Ascend, IIP worked closely with the company’s management team to facilitate an overall business acquisition, where IIP would act as Ascend’s long-term real estate partner, Smithers said.
“As a part of the transaction, we provided Ascend additional capital to make certain enhancements to the facility that are expected to vastly increase the facility’s productive capacity, as they focus on meeting the demand in the state,” he said.
Overall, IIP acts as a provider of real estate capital to the cannabis industry. By acquiring and leasing back licensees’ real estate assets, IIP provides operators quick, liquid cash that they can reinvest into their core operations, Smithers said.
In Illinois, IIP’s acquisitions provide licensed operators with the capital necessary to make the leap to the adult-use market, he said. “We believe, as a general matter, that we provide a key, reliable capital source for licensed operators to allow them to focus less on financing of real estate capital, and more on the roll-out and expansion of their operations.”
IIP currently owns 31 properties, totaling approximately 2.2 million square feet, across 12 states: Arizona, California, Colorado, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New York, Ohio and Pennsylvania.
While IIP does initiate conversations with licensed operators to discuss ways they can work together, Smithers said many of IIP’s transactions are sourced through recommendations from its existing relationships.
“We focus on supporting our existing tenants with their ongoing growth capital needs, including expansions of existing facilities to meet demand in a state, as well as expansion of their operations to other states,” he said. “We conduct a thorough underwriting of our tenants prior to acquiring a facility and entering into a long-term lease, utilizing the decades of experience our team brings from underwriting tenants in life science and other high-growth industries.”
Under Illinois law, cannabis companies can only hold three cultivation licenses a piece, but IIP acts as a landlord, not a cannabis licensee, and is therefore not subject to the same regulations.
“We are strictly a landlord—all of our leases are structured as long-term, pure triple-net leases, and we do not in any way participate in the operations of the licensed operator tenant,” Smithers said.
Through its due diligence processes, IIP focuses on ensuring that its tenants remain in compliance with all applicable state and local regulations, he added.
“Our essential strategy has been, and continues to be, to leverage our reputation and experience as a reliable long-term real estate capital partner to the regulated cannabis industry and provide creative real estate capital solutions that meet the critical capital needs of our tenant partners,” Smithers said. “Over time, while we continue to diversify our business on both geographic and tenant levels, we remain exclusively dedicated to being the go-to real estate capital provider for this dynamic, high-growth industry.”
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