Cannabis REIT Claims PharmaCann Defaulted on Multiple Leases Across the U.S.

Innovative Industrial Properties (IIP), a leading cannabis real estate investment trust (REIT) based in San Diego, has accused multistate cannabis operator PharmaCann of defaulting on several of its leases. The alleged defaults, which cover properties in six states, have raised concerns regarding the financial stability and operational challenges faced by the cannabis industry’s real estate sector.

IIP’s Claims: Rent Defaults on Multiple Properties

According to a recent press release, IIP claims that PharmaCann failed to meet its December rent obligations, amounting to $4.2 million, across six of its leased properties. These properties, located in Illinois, Massachusetts, Michigan, New York, Ohio, and Pennsylvania, are part of PharmaCann’s national portfolio of cannabis cultivation and retail operations.

In response to the defaults, IIP has reportedly applied security deposits held under the lease agreements to cover the unpaid rent, including applicable late penalties and interest charges. The REIT’s move to tap into the security deposits underscores the serious nature of the lease violations and signals potential future legal actions, including eviction.

Cross-Default Provision and the Ripple Effect

While PharmaCann reportedly made full payment of its December rent on five other leases — totaling $90,000 — the presence of a cross-default provision in its contracts with IIP complicated matters further. Under this provision, a default on any single lease triggers defaults on all other leases, even if they were otherwise paid in full.

IIP alleges that the cross-default clause led to defaults on PharmaCann’s fully paid leases as well, compounding the situation. This provision is standard in many commercial lease agreements and is designed to protect landlords from the risk of a tenant’s financial instability spreading across multiple properties.

As a result of this cross-default trigger, IIP is now seeking to enforce the terms of its leases more aggressively, including the possibility of eviction proceedings if PharmaCann does not address the outstanding obligations. The REIT has indicated that it is committed to protecting its interests and ensuring that the terms of the leases are upheld.

Ongoing Negotiations Between IIP and PharmaCann

Despite the claims and the threat of eviction, PharmaCann’s spokesperson, Jeremy Unruh, has downplayed the significance of the dispute, suggesting that the matter is likely to be resolved through ongoing negotiations. “We do not view this action as a material impediment to resolving outstanding issues with IIP,” Unruh stated in an email to MJBizDaily on Monday.

Unruh added that PharmaCann remains dedicated to maintaining its operations and continues to focus on delivering high-quality products and services to its patients and consumers. “Throughout this period, PharmaCann remains committed to delivering the high-quality, patient- and consumer-focused products and services that have defined PharmaCann for the past decade,” he emphasized.

The cannabis operator, headquartered in Chicago, appears confident that the issue will be resolved amicably, but the situation underscores the ongoing financial pressures faced by cannabis operators, particularly those dealing with large real estate portfolios.

The Financial Impact: PharmaCann’s Leases with IIP

The lease agreements in question represent a significant portion of PharmaCann’s operational expenses. According to IIP, the 11 leases PharmaCann holds with IIP subsidiaries accounted for 17% of the total rental revenue during the September quarter and the first nine months of the year.

Given the size of these obligations, any defaults or delays in payment can have significant financial consequences for both parties. For IIP, which specializes in real estate for the cannabis sector, maintaining stable rental income from its tenants is crucial to sustaining its business model. For PharmaCann, the ability to meet these lease obligations is vital to its operational stability and long-term growth.

PharmaCann’s portfolio, which spans multiple states and includes cultivation facilities, dispensaries, and other cannabis-related operations, has been under increasing financial strain. Like many other cannabis operators, PharmaCann faces challenges related to high tax rates, regulatory complexities, and ongoing market volatility, which can affect cash flow and the ability to meet financial commitments.

A Growing Trend: Cannabis Operators and Real Estate Disputes

PharmaCann is not alone in facing challenges with commercial real estate obligations. Across the cannabis industry, operators have been grappling with the complexities of leasing and real estate management. Cannabis companies often lease industrial properties for cultivation and processing, as well as retail space for dispensaries. The cannabis industry’s legal status — federally illegal, but state-legal in many regions — creates additional hurdles when it comes to real estate deals, financing, and navigating landlord-tenant relationships.

In recent years, the cannabis real estate sector has been facing increased scrutiny, with both landlords and tenants adjusting to a rapidly evolving market. For REITs like IIP, which specialize in cannabis-related properties, maintaining profitable and stable lease agreements is essential for their continued growth and shareholder returns.

As the cannabis industry matures, disputes between landlords and operators may become more common, especially as operators seek to navigate financial difficulties, regulatory challenges, and shifting market conditions. Lease defaults, late payments, and the threat of eviction can have cascading effects on the broader cannabis market, impacting not only individual operators but also investors, real estate companies, and ancillary service providers.

Potential Outcomes: Eviction or Settlement?

The current standoff between IIP and PharmaCann may ultimately result in eviction, financial penalties, or a negotiated settlement. IIP has made it clear that it intends to pursue aggressive action to enforce its leases if necessary. However, with both parties actively negotiating, a resolution may still be on the horizon.

PharmaCann’s spokesperson has suggested that the matter will be resolved without major disruption, emphasizing that the company remains committed to its mission. If a deal is reached, it could involve a renegotiation of lease terms, payment plans, or other adjustments to help PharmaCann get back on track financially. Alternatively, if negotiations fail, IIP could move forward with eviction proceedings, potentially creating significant disruption for PharmaCann’s operations in several states.

What This Means for the Broader Cannabis Industry

The ongoing dispute between IIP and PharmaCann highlights a critical issue facing the cannabis sector: the vulnerability of cannabis operators to real estate-related risks. While many operators have successfully navigated the complexities of state-level cannabis regulations, the underlying financial pressures, including high real estate costs, remain a significant concern.

As more cannabis businesses enter the market and expand their operations, the dynamics of real estate leasing will continue to play a pivotal role in shaping the industry’s future. Operators will need to carefully balance their real estate obligations with the financial realities of running a cannabis business. Meanwhile, REITs like IIP will need to ensure that they are adequately protecting their investments while maintaining positive relationships with their tenants.

Ultimately, this dispute serves as a reminder of the challenges faced by both cannabis operators and real estate investors in an industry that continues to evolve rapidly. Whether the outcome is a negotiated settlement or a more contentious legal battle, the situation will likely serve as a case study for future cannabis real estate transactions.

As IIP and PharmaCann work toward resolving their lease dispute, the cannabis industry is closely watching the outcome. With both parties facing pressure to reach an agreement, the case could set a precedent for future cannabis-related real estate disputes. The resolution of this issue will not only impact the involved parties but could also provide valuable lessons for other cannabis operators and REITs navigating the complex world of cannabis real estate.