Texas Original Holdings, LLC (Texas Original) is the latest cannabis company to sell its property to Innovative Industrial Properties, Inc. (IIP) (NYSE: IIPR) and then enter into a long-term lease. The purchase price for the property was approximately $12.0 million (excluding transaction costs), which was derived from costs Texas Original incurred to acquire the 25 acres of land and develop the property through the date of closing. IIP said that at the time of closing, the majority of project site work had been completed and two of the four buildings have been dried in with interior finish out under construction.
Texas Original is one of three vertically integrated cannabis license holders in Texas, is the only provider headquartered in the state, and is estimated to hold a large majority of the current market share within Texas’ medical cannabis program. However, the program is extremely restrictive and very small. In addition to that, the state is currently dominated by very conservative politicians, that have little interest in further legalization.
Texas Original is expected to complete construction of the approximately 85,000 square foot industrial and hybrid greenhouse facility, for which IIP has agreed to provide reimbursement of up to approximately $10.0 million, consisting of completion of building shell, interior buildout of cultivation and production rooms, and mechanical, electrical and plumbing systems. Assuming full reimbursement for the construction, IIP’s total investment in the property is expected to be $22.0 million (excluding transaction costs), or approximately $259 per square foot. Upon completion, the property is expected to include approximately 49,000 square feet of cultivation space, with the balance of the space utilized for manufacturing, processing, testing, and administrative activities.
Some investors are apparently becoming concerned about the valuations that IIP is giving these properties leading to a shareholder lawsuit. The class action complaint alleges that Innovative Industrial Properties‘ focus is to be a cannabis company lender rather than a REIT and that the true values of the company’s properties are significantly lower than Innovative Industrial Properties represents. Green Market Report has pointed out the company’s exposure to Parallel Cannabis and it seems this case is following that line of concern. it alleges that “there are existential issues in its top customers” and as a result, “its top customers may not be able to continue making payments to Innovative Industrial Properties and the company would face significant issues replacing these customers; and as a result, defendants’ statements about its business, operations, and prospects, were materially false and misleading and/or lacked a reasonable basis at all relevant times.”