Innovative Industrial Properties, Inc. (“IIPR” as listed on the NYSE) is a real estate investment trust (“REIT”) focused on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators for their regulated state-licensed cannabis facilities.

Commenced on April 25, 2022, the IIPR class action lawsuit – captioned Mallozzi v. Innovative Industrial Properties, Inc., No. 22-cv-02359 (D.N.J.) – charges IIPR and certain top executive officers with violations of the Securities Exchange Act of 1934.

The Complaint filed against IIPR alleges that defendants made false and/or misleading statements and/or failed to disclose: (1) that IIPR’s focus is to be a cannabis company lender rather than a REIT; (2) that the true values of IIPR’s properties are significantly lower than the Company represented; (3) existential issues plagued its top customers; (4) that, as a result, IIPR’s top customers may not be able to continue making payments to IIPR  and IIPR  would face significant issues replacing these customers; and (5) that consequently, defendants’ statements about IIPR’s business, operations, and prospects were materially false and misleading and/or lacked a reasonable basis at all relevant times.

These allegations stem from a report released by market researcher Blue Orca Capital (“Blue Orca”) on April 14, 2022 (the “Report”), that described IIPR as “a marijuana bank masquerading as a REIT. IIPR’s model is to conduct sale-leaseback transactions with cannabis producers who are otherwise prohibited from borrowing money because of federal regulations.”

The Report explained that “[i]n exchange for overpaying for properties from cannabis companies and funding the tenant improvements to build out the facilities, IIPR receives repayment of the loan in the form of long-term lease agreements at 11–14% yields. In effect, IIPR is less of a traditional REIT, and more of a marijuana bank, lending to cannabis companies who otherwise would not have access to the banking system to grow their businesses. This works so long as the tenants can repay their loans by continuing to make their lease payments, meaning IIPR’s business and valuation is contingent on high quality tenants.”

The Report also stated that “unlike with other REITs, IIPR cannot expect to recover the lost income from defaulting tenants because it appears that the actual values of its properties are substantially below their carrying value on IIPR’s balance sheet.”

On the day Blue Orca released the Report, IIPR responded in a press release[1] stating:

[Blue Orca] fails to have any comprehension of the scope of significant infrastructure improvements that are needed for the transformation of a standard industrial building to a mission-critical facility with the enhanced environmental controls and other building systems necessary for regulated cannabis cultivation and processing … [g]iven the flawed nature and disinformation contained in this [Blue Orca] report, other than the clarification set forth above, the [Blue Orca] report’s content does not warrant a response…”

Pursuant to a stipulation filed on the case docket, IIPR has fourteen (14) days after the appointment of a “Lead Plaintiff” to answer. The deadline for a Lead Plaintiff to be appointed is June 24, 2022. As of the date of this publication, IIPR has yet to file an Answer and/or move for dismissal. If this action survives a motion to dismiss, plaintiffs will be emboldened to pursue similar claims against REITs, attacking the sale-leaseback structure.

[1] “Innovative Industrial Properties Responds to Short-Seller Report.” Business Wire, Berkshire Hathaway, 14 Apr. 2022, https://www.businesswire.com/news/home/20220414005821/en/Innovative-Industrial-Properties-Responds-to-Short-Seller-Report.