Legal woes are piling on for Innovative Industrial Properties, as another shareholder has accused the cannabis-focused real estate investment trust of misleading investors about its due diligence on a key California-based marijuana company.
In a federal lawsuit filed last week in U.S. District Court in Maryland, where the publicly traded REIT is incorporated, Innovative Industrial Properties (IIP) investor Ross Weintraub accused Executive Chair Alan D. Gold, CEO Paul Smithers and other company officials of breaching their fiduciary duty by either failing to discover or declining to disclose key facts about one of the company’s main investments, Kings Garden.
Southern California-based Kings Garden operates massive cultivation and extraction facilities in the Coachella Valley desert near Palm Springs.
IIP’s business model involves purchasing built-out real estate from marijuana businesses and then leasing the property back to the companies at a profit – an arrangement that provides cannabis operators shut out from typical investments with some liquidity.
IIP drew negative attention last April when the short seller Blue Orca Capital said the REIT’s portfolio “appears to have degraded significantly.”
Blue Orca called IIP a “marijuana bank masquerading as a landlord.”
IIP responded in a statement that the short seller’s report “contains numerous false and misleading statements” and “demonstrates a basic lack of understanding” about the company’s business model.
In its April 2022 report, Blue Orca noted that IIP either failed to discover or declined to tell shareholders about a 2019 lawsuit that accused Kings Garden of fraud and selling marijuana on the illicit market.
That report triggered an initial lawsuit filed by investor Michael Mallozzi.
Last summer, Kings Garden defaulted on a $2.3 million monthly lease payment on its Southern California properties.
Kings Garden and IIP settled a subsequent lawsuit out of court, as MJBizDaily reported, but the default seemed to validate Blue Orca’s skepticism.
IIP’s legal action against Kings Garden also led to Weintraub’s suit filed last week.
In IIP’s filings, the company “admitted that rather than check whether King had been cleared by the United States Department of Justice for federal licensing and had been ‘screened and cleared at all levels,’ IIPR merely accepted King’s word that it was true,” Weintraub’s lawsuit alleges.
“Taking the word of a person that was later alleged to be a fraudster, is in stark contrast from what the Company told investors it was doing in its business practices to ensure investors that it was not risking their money getting into business with unethical, criminal perpetrators of fraud,” the suit continues.
IIP has yet to respond to the current lawsuit.
The company’s shares trade as IIPR on the New York Stock Exchange.