S-11 1 tm2030694-8_s11.htm FORM S-11 tm2030694-8_s11 - none - 35.2189849s
As filed with the Securities and Exchange Commission on October 22, 2021.
Registration Statement No. 333-            
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-11
FOR REGISTRATION
UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
Freehold Properties, Inc.
(Exact name of registrant as specified in governing instruments)
232 3rd Avenue N.
Franklin, TN 37064
(877) 981-0900
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Donald C. Brain
Chairman & Chief Executive Officer
Freehold Properties, Inc.
232 3rd Avenue N.
Franklin, TN 37064
Jeffery C. Walraven
Chief Operating Officer
Freehold Properties, Inc.
232 3rd Avenue N.
Franklin, TN 37064
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Andrew P. Campbell
David P. Slotkin
R. John Hensley
Morrison & Foerster LLP
2100 L Street, NW
Washington, DC 20037-1525
(202) 887-1500
Christina T. Roupas
Courtney M.W. Tygesson
Cooley LLP
444 West Lake Street, Suite 1700
Chicago, Illinois 60606
(312) 881-6500
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered
Proposed Maximum
Aggregate Offering Price(1)(2)
Amount of
Registration Fee
Common stock, $0.0001 par value per share
$ 115,000,000 $ 10,661
(1)
Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2)
Includes shares of common stock that may be purchased by the underwriters pursuant to the underwriters’ option to purchase additional shares.
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale thereof is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 22, 2021
           Shares
[MISSING IMAGE: lg_freehold-4c.jpg]
Freehold Properties, Inc.
Common Stock
Freehold Properties, Inc. is an internally managed real estate investment trust focused on financing specialized industrial cultivation/processing and retail/dispensary cannabis properties, with contingent purchase options that are exercisable only upon the legalization of cannabis under U. S. federal law or certain other events. We have elected to be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes commencing with our short taxable year ended December 31, 2019.
This is our initial public offering, and no public market currently exists for our common stock. We are offering all of the shares of our common stock to be sold in this offering. We have applied to list our common stock on The Nasdaq Capital Market, or Nasdaq, under the symbol “FHP.”
We expect the initial public offering price of our common stock to be between $      and $      per share.
To assist us in complying with the limitations on the concentration of ownership of a REIT imposed by the Internal Revenue Code of 1986, as amended, among other purposes, our charter prohibits, with certain exceptions, ownership by any person of more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock, the outstanding shares of any class or series of our preferred stock or the aggregate outstanding shares of all classes and series of our capital stock. See “Description of Capital Stock — Restrictions on Ownership and Transfer.”
We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 22 of this prospectus for a discussion of certain risk factors that you should consider before investing in our common stock.
Per Share
Total
Public offering price
$      $     
Underwriting discounts and commissions(1)
$ $
Proceeds, before expenses, to us
$ $
(1)
See “Underwriting” for a detailed description of the compensation payable to the underwriters.
We have granted the underwriters an option to purchase up to an additional           shares of our common stock at the public offering price, less the underwriting discount, within 30 days after the date of this prospectus, solely to cover overallotments, if any.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the common stock on or about           , 2021.
Book-Running Managers
Stifel
Cowen
The date of this prospectus is           , 2021

 
TABLE OF CONTENTS
Page
1
22
55
57
58
59
60
61
63
75
100
117
119
121
123
128
135
138
140
147
168
171
171
171
171
F-1
 
i

 
You should rely only on the information contained in this prospectus, any free writing prospectus prepared by us or information to which we have referred you. Neither we nor the underwriters have authorized any dealer, salesperson or other person to provide you with different or additional information. If anyone provides you with different or inconsistent information, you should not rely on it. We and the underwriters are not making an offer to sell shares of our common stock in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus and any free writing prospectus prepared by us is accurate only as of their respective dates or on the date or dates which are specified in these documents. Our business, financial condition, liquidity, results of operations and prospects may have changed since those dates.
MARKET DATA
Industry data pertaining to our business contained in this prospectus consists of estimates based on data and reports compiled by industry professional organizations and analysts and our knowledge of our industry. Although we believe the industry and market data to be reliable, this information could prove to be inaccurate. Industry and market data could be wrong because of the method by which sources obtained their data and because information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. You should carefully consider the inherent risks and uncertainties associated with the market and other industry data contained in this prospectus. Forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties as the other forward-looking statements in this prospectus.
SPIN-OFF OF PROPERTY PORTFOLIO
Our board of directors determined that it is in the best interests of the Company and our stockholders to focus on the financing, rather than ownership, of cannabis properties and to spin off our real estate portfolio, which we refer to as the Spin-Off. The Spin-Off will be completed immediately prior to the effectiveness of the registration statement of which this prospectus forms a part (the date on which the Spin-Off occurs, the ‘‘Spin-Off Date’’). Prior to the Spin-Off, our assets included six operating cannabis properties that were leased to subsidiaries of Curaleaf Holdings, Inc., or Curaleaf, pursuant to triple-net leases that expire in August 2029. Following the Spin-Off, these six properties will be owned by Freehold Fee Simple, Inc., or Freehold Fee Simple or FFS. Unless the context suggests otherwise, the information in this prospectus assumes the Spin-Off has occurred. See “Structure and Formation of Our Company” for additional information.
 
ii

 
PROSPECTUS SUMMARY
The following summary highlights some of the information contained elsewhere in this prospectus. It is not complete and does not contain all of the information you should consider before making a decision to invest in our common stock. You should read carefully the more detailed information set forth under the heading “Risk Factors” and the other information included in this prospectus, including our historical consolidated financial statements and related notes and our unaudited pro forma consolidated financial statements and related notes. Unless indicated otherwise, the information in this prospectus assumes (1) the common stock to be sold in this offering is sold at $      per share, which is the midpoint of the price range for the common stock to be sold in this offering set forth on the front cover page of this prospectus, (2) the underwriters do not exercise their option to purchase additional shares of our common stock and (3) the Spin-Off has occurred.
In this prospectus, unless the context suggests otherwise, references to “the Company,” “we,” “us” and “our” refer to Freehold Properties, Inc., a Maryland corporation, together with its consolidated subsidiaries, including Freehold Properties Operating Partnership, LP, a Delaware limited partnership, or our operating partnership, of which Freehold OP GP, LLC, a Delaware limited liability company, or the general partner, a wholly owned subsidiary of our company, is the sole general partner.
Our Company
We are an internally managed real estate investment trust focused on financing specialized industrial cultivation/processing and retail/dispensary cannabis properties, with contingent purchase options that are exercisable only upon the legalization of cannabis under U.S. federal law or certain other events. As of the date of this prospectus, our portfolio is comprised of six mortgage loans and one note receivable with an aggregate principal amount of $38.7 million.
Our goal is to become the real estate capital financier of choice for high-quality established state-licensed cannabis operators, primarily through the origination of long-term mortgage loans secured by specialized industrial cultivation/processing and retail/dispensary properties. We believe mortgage loans secured by such properties that are operated by high-quality operators have the potential to provide higher returns as compared to mortgage loans secured by traditional net-leased retail and industrial real estate assets. We believe there are a variety of factors that could drive these higher returns, including our ability to identify management teams with the relevant experience and operational expertise to execute sustainable business models, our rigorous asset-level underwriting, and a current regulatory backdrop that limits traditional debt and equity capital availability for cannabis operators. In addition, we expect most mortgage loans we originate to include a contingent purchase option for a price equal to (i) the original agreed-upon valuation upon which the mortgage loan was advanced, plus (ii) a pro rata portion of the aggregate real estate valuation increase, if any, since the origination of the loan, based upon the loan-to-value ratio established at the time of loan origination. The purchase options will be exercisable only upon the legalization of cannabis under U.S. federal law or certain other events. We believe these contingent purchase options for the properties securing our mortgage loans will allow us to recognize the majority of any appreciation of the market value of the properties, subject to the legalization of cannabis under U.S. federal law or certain other events. However, there can be no assurances that cannabis will ever be legalized under U.S. federal law or that our purchase options otherwise will become exercisable.
The cannabis industry is nascent and still in a phase of rapid growth. It is an industry that is both real estate dependent and capital-intensive. We believe this creates opportunities for us to provide flexible financing solutions to cannabis operators as they seek the capital required to grow their businesses. We believe there is both a near-term opportunity to take advantage of a dislocation in pricing in the cannabis real estate finance market and a long-term opportunity to establish the Company as a market leader in a specialized sector with significant growth potential. We intend to capitalize on what we expect will be a need for significantly higher levels of investment in cannabis properties resulting from the continuing trend of states legalizing or changing laws related to adult- and medical-use cannabis in their respective states.
Specialized industrial cultivation/processing cannabis properties are required to be operated by businesses that have completed rigorous state-licensing processes. The number of licenses granted in a particular state is typically restricted, which creates a barrier to entry for competing properties that tends to favor well-capitalized, experienced and sophisticated operators. We intend to target the origination of mortgage
 
1

 
loans secured by cannabis properties that generally are improved with state-of-the-art infrastructure and equipment to facilitate optimal growing conditions, including enhanced HVAC systems for climate and humidity control, high-capacity fertigation systems, specialized lighting systems and sophisticated building management, cultivation monitoring and security systems. These facilities result in improved yields from optimized and automated environmental conditions such as lighting, temperature and watering with no need for pesticides or herbicides.
For retail/dispensary cannabis properties, we intend to focus on the origination of mortgage loans secured by properties that have already been qualified and licensed for retail cannabis sales, which we believe gives strategic defensibility to the operators’ business and the real estate securing our loans. Finding locations for retail/dispensary cannabis properties can be difficult because they not only need to be in highly desirable locations but also need to satisfy local zoning requirements and overcome any local objections. Each city and state has its own requirements and specifications for an entitlement process, but generally these conditional-use permitting processes are complex. For example, in contrast to the initial markets that legalized cannabis (Colorado, Washington, Oregon), the new markets are typically more oligopolistic with cities implementing strict ordinances that require dispensaries to be located a certain distance away from certain properties, such as schools, parks and churches. Cities also seek to avoid “clustering” of retail stores and cannabis dispensaries and, therefore, require a minimum distance between them, resulting in less competition for a retail location once it is established. Local regulations also vary widely, are subject to exceptions and grandfathering, and can be enormously complex to navigate.
Our Management Team
Our management team has extensive real estate finance and diverse corporate operating experience. We believe that our management team’s depth of experience in financing transactions and managing commercial real estate businesses, building diverse, high-growth businesses and operating in highly regulated industries, including alcohol, healthcare and cannabis, positions us favorably to take advantage of financing opportunities for cannabis-related real estate. Our management team is led by the individuals listed below. See “Management” for more information about our management team.

Donald C. Brain, Co-Founder, Chief Executive Officer and Chairman of our Board of Directors.    Mr. Brain has over 40 years of experience, including the last 15 years as a founder, investor, executive, partner and entrepreneur in a diverse set of companies in regulated wine and spirits production, regulated alcohol distribution and real estate across a variety of sectors.

Jeffery C. Walraven, Co-Founder, Chief Operating Officer and a Member of our Board of Directors.    Mr. Walraven has 29 years of experience, including five years as the executive vice president and chief financial officer of MedEquities Realty Trust, Inc. (formerly NYSE: MRT), and over 20 years of public accounting experience, most recently as an assurance managing partner of the Memphis office of BDO USA, LLP.

Louis S. Yi, Chief Financial Officer.   Mr. Yi has approximately 21 years of experience in investment banking, including over ten years at FBR Capital Markets, most recently as a managing director in real estate investment banking and head of equity-linked securities across all sectors.

Benjamin H. Hendren, Senior Vice President and Chief Accounting Officer.   Mr. Hendren has 19 years of experience, including 15 years with BDO USA, LLP, with three years as an assurance partner, and most recently as the chief financial officer of Salus Workers’ Compensation, a managing general agent and third party administrator specializing in workers’ compensation insurance.

John A. Travis, Senior Vice President and Chief of Acquisitions and Asset Management.   Mr. Travis has over 30 years of experience, including in business development, marketing, technology utilization, process development, project management and specialized engineering that enables him to assess the highly engineered, capital-intensive, controlled environment for specialized industrial cultivation/ processing properties.
In addition, James G. Mueller, one of our co-founders and a former member of our board of directors, will serve as an advisor to our board of directors, investment committee and management team after the completion of this offering. Mr. Mueller has extensive experience investing in alternative agriculture and
 
2

 
cannabis companies and, since May 1996, has served as the chairman of the board of directors of Mid America Capital, Inc., a Midwest-based investment banking and advisory firm specializing in middle-market mergers and acquisitions and troubled company acquisitions. We intend to enter into a consulting arrangement with Mr. Mueller upon the completion of this offering. See “Management — Consulting Agreement.”
Market Opportunity
We believe the convergence of changing public attitudes, increased legalization momentum in various states and a more relaxed federal enforcement posture toward regulated cannabis use creates an attractive opportunity to provide financing for regulated specialized industrial cultivation/processing and retail/dispensary cannabis properties in the adult- and medical-use cannabis industry. Further, the increased sophistication of the regulated cannabis industry and the development of strong business, operational and compliance practices have made the sector more attractive for investment. Increasingly, stated-licensed, regulated cannabis facilities are becoming sophisticated business enterprises that use state-of-the-art technologies and well-honed business and operational processes to maximize product yield and revenues. Furthermore, growers and dispensaries have developed an increasing portfolio of products into which they are able to incorporate legal cannabis in a safe and appealing manner, including a variety of edibles, drinks and topicals.
We believe the following conditions create a favorable environment for financing real estate assets that can be used to support the regulated adult- and medical-use cannabis industry:

significant industry growth in recent years and expected continued growth;

continued state-level legalization of adult- and medical-use cannabis, which we believe is driven in part by states’ desire to generate additional tax revenue;

a shift in public opinion, especially with respect to adult- and medical-use cannabis;

the real estate-dependent and capital-intensive nature of the cannabis industry; and

limited access to capital for cannabis operators resulting in pricing dislocation and favorable demand environment for REITs.
U.S. Cannabis Market
According to New Frontier Data, cannabis’ total addressable U.S. market is expected to more than triple from $13 billion in 2019 to nearly $43 billion in 2025, driven by favorable regulatory changes, gradual growth in population and rising prevalence rate, both in availability and usage. The key underlying trend in this growth is the rising share of the legal market from just 17% in 2019 to a projected 42% in 2025, driven by states’ legalization of cannabis use.
 
3

 
[MISSING IMAGE: tm2030694d6-bc_annual4c.jpg]
Continued State-Level Legalization
The United States’ dominance of the global legal cannabis market is a result of favorable regulatory conditions at the state level. Cannabis legalization at the state level began with California’s adoption of the Compassionate Use Act of 1996. As of the date of this prospectus, 38 states and the District of Columbia allow medical-use of cannabis, and 18 of those states and the District of Columbia also allow for adult-use cannabis, including Connecticut, which passed adult-use cannabis laws in July 2021.
State cannabis legalization efforts are gaining substantial momentum as evidenced by the approval of several ballot initiatives and referenda in the November 2020 election cycle. In particular, Arizona, Montana and New Jersey voters approved adult-use authorization measures and South Dakota legalized medical-use cannabis. Beyond these latest November 2020 measures, Connecticut passed adult-use laws in June 2021, Pennsylvania is considering legislation to permit adult-use cannabis in the next one-to-two years and Florida could place adult-use cannabis on its ballot in the near term.
 
4

 
[MISSING IMAGE: tm2030694d6-map_states4clr.jpg]
Another factor driving the state-level legalization trend is the tax revenue that cannabis can generate. While most states tax based on price (ad valorem), several states also tax cannabis based on weight or, in the case of Illinois, by tetrahydrocannabinol, or THC, content. In addition to levying excise taxes, most states also levy the state general sales tax on adult-use cannabis. Tax revenues generated from cannabis sales are growing rapidly in many states. For example, excise tax collected by Colorado authorities on the sale of adult-use cannabis grew from just over $80 million in 2015 to more than $250 million in 2019 and Alaska’s cannabis tax collections grew more than 10 times from 2017 to 2019, based on data reported by the respective state departments.
Shifting Public Attitudes Support Legalization
The growing support for cannabis legalization among U.S. consumers is also a key growth driver. According to a 2019 survey by Pew Research, 67% of Americans are in favor of legalizing cannabis, compared to 31% in 2000, while the percentage of Americans opposing legalization has almost halved from 63% in 2000 to 32% in 2019. The support is highest among millennials (80%), but is also strong among Generation X (63%) and baby boomers (61%). There is also broad support across the political spectrum, with 76% of Democrats, 68% of Independents and 51% of Republicans supporting legalization, according to an October 2019 Gallup survey.
Prospects of Federal Legalization
While state-level legalization is expected to act as a growth driver in the short-to-medium term, the passage of one or more of the following four pieces of federal legislation would be expected to drive additional growth: (1) Secure and Fair Enforcement Banking Act, or the SAFE Banking Act, which would amend federal law so that commercial banking and other financial institutions could legally offer services to state-compliant cannabis businesses; (2) Marijuana Opportunity, Reinvestment and Expungement Act, or the MORE Act, which would decriminalize cannabis at the federal level by removing it from the list of Schedule I controlled substances; (3) Strengthening the Tenth Amendment Through Entrusting States Act, or the STATES Act, which would allow states that have legalized cannabis through their legislatures or citizen initiatives to regulate cannabis in a manner they deem best; and (4) Cannabis Administration and Opportunity
 
5

 
Act, or the CAOA, which would, among other things, deschedule cannabis and promote states setting their own cannabis policies and laws.
In addition, in July 2021, the recently formed Cannabis Freedom Alliance, or CFA, issued a white paper entitled Recommendations for Federal Regulation of Legal Cannabis. The CFA is a coalition of advocacy and business organizations seeking to end the prohibition and criminalization of cannabis in the United States in a manner consistent with helping all Americans achieve their full potential and limiting the number of barriers that inhibit innovation and entrepreneurship in a free and open market. The goal of the CFA white paper analysis is to continue pressing and influencing Congress on cannabis reform legislation to address federal regulation and tax issues, financial services, clinical research, interstate commerce and technical barriers to trade, social equity, criminal justice and respect of states’ reserved powers.
Real Estate-Dependent and Capital-Intensive Business
According to a survey published in the 2019 Marijuana Business Factbook, among cannabis producers/ processors, the most expensive startup costs are equipment and real estate. Producers/processors must purchase not only extraction equipment but also cultivation equipment. They must find a physical location suited for processing and manufacturing cannabis as well as growing it — or consider separate locations and the increased real estate costs that go with such an approach.
The situation is similar for cannabis retailers. Among vertically integrated retailers, more than half of the businesses surveyed in the 2019 Marijuana Business Factbook cite real estate and renovations as their highest startup expenses, accounting for an average of 66% of their total costs. Approximately one-third of stand-alone retailers cited real estate and renovations as their most significant startup costs, accounting for an average of 56% of their total costs. Vertically integrated retailers typically require separate buildings for their cultivation and retail operations, which contributes to the higher cited costs for those businesses. Real estate that is suitable for cultivation may come at significant cost as well, depending on the location and state.
Limited Access to Capital by Cannabis Operators Resulting in Pricing Dislocation and Favorable Demand Environment for REITs
The licensed specialized industrial cultivation/processing and retail/dispensary sale of cannabis are each real estate dependent and capital-intensive. However, despite their state licenses, cannabis operators’ access to both real estate and capital has been constrained due to the current federal regulatory environment. This has resulted in a significant opportunity for cannabis REITs. The status of state-licensed cannabis under U.S. federal law and current U.S. federal regulations have significantly limited the ability of state-licensed cannabis operators to access the U.S. banking system and traditional sources of capital. In addition, for those operators that can access banking services, the cost of such access is extremely high due to regulatory guidelines and reporting requirements for offering banking services to cannabis-related businesses. While pending legislation could improve banking access for cannabis businesses, the current nature of the industry creates a significant opportunity for REITs like Freehold to provide financing to cannabis operators through mortgage loans and other similar transactions and generate favorable returns on such investments.
In addition, the inefficiency of the equity and debt capital markets for cannabis operators is creating growth opportunities and pricing power for those cannabis REITs that are well capitalized and have the underwriting capabilities to fill the funding gap. With the current federal regulatory environment presently unchanged and cost of equity and debt capital while declining remains expensive, we believe that cannabis operators will continue to leverage their real estate to acquire growth capital, acting as a key growth driver for REITs that have the capital and the underwriting capabilities to identify high-quality operators and thus emerge as beneficiaries of this environment.
Our Competitive Strengths
We believe that the following competitive strengths will support the accretive growth of our business and the implementation of our business plan:

Operator-First Financing Philosophy and Experience-Driven Underwriting.   Our operator-first financing philosophy and underwriting process focus on several factors, including the following aspects:
 
6

 

Management Team — Consider the management team’s track record of success in the cannabis industry and other industries. Do they tell a story of interest to investors, drive strong brand strategy, and/or have well defined industry objectives on which they are executing?

Financial Strength — Analyze the operator’s corporate-level financial information to gain understanding of overall financial strength. Does the operator have profitable assets in good markets, and is there a sightline to profitability? Is it capitalized sufficiently to fund working capital and capital expenditure needs? Is there predictability in cash flows indicating ability to meet the required debt service interest payments?

Access to Capital — Review the operator’s historical ability to raise capital. Has it been able to successfully raise capital at a reasonable cost? Are there capital structure matters that may have long-term impact to its successful operations and our ability to transact future deals with it? Can it continue to raise capital outside of transactions with us?

Operational Culture — Conduct site visits and in person meetings with key management members to gain an understanding of their operational conditions, processes and asset quality. Is there a strong culture and goal-driven, successful attitude that permeates all levels of the operation? Are the assets built with considered engineering design, and quality of construction intended to be operated for the long term? Or are they patched together by learn-as-you-go methods?

Regulatory Compliance — Assess the operator’s regulatory capability and history of compliance. Are there or have there been any compliance issues throughout its locations of operation? Is it successfully able to navigate the regulatory application process to gain or acquire new licenses?
We believe our underwriting process will support our ability to identify high-quality operators and deliver attractive risk-adjusted returns to our stockholders.

High-Quality Portfolio.   As of the date of this prospectus, our portfolio is comprised of six mortgage loans and one note receivable with an aggregate principal amount of $38.7 million. The properties securing our mortgage loans include two specialized industrial cultivation/processing properties and four retail/dispensary properties located in Florida, Massachusetts and New Jersey that are leased to subsidiaries of Curaleaf Holdings, Inc. (CSE: CURA; OTCQX: CURLF), a vertically integrated, multi-state operator.

Early-Mover Advantage in a Rapidly Growing and Undercapitalized Industry.   The licensed cultivation, processing and retail sale of cannabis are both real estate dependent and capital-intensive. Despite the growth of the U.S. cannabis industry, cannabis operators’ access to both real estate and capital has been constrained due to the current federal regulatory environment. We believe cannabis operators’ need for capital to fund the growth of their businesses will result in significant opportunities for us to finance specialized industrial cultivation/processing and retail/dispensary cannabis properties that can provide stable and increasing interest income, along with the potential for shared long-term value appreciation through our contingent purchase options that are exercisable only upon the legalization of cannabis under U.S. federal law or certain other events. We believe our enhanced ability to access the capital markets as a public company will allow us to secure an early-mover advantage in the industry and take advantage of the barriers to entry in the cannabis industry created by state licensing and other regulations to become an integral real estate financing source for high-quality cannabis operators.

Scalable Platform.    We believe our team is skilled at internally deploying and customizing our process platforms such as accounting, finance and asset management, which makes us capable of substantially decreasing relative administrative overhead as we grow the size of portfolio. In addition to our existing and growing network of relationships, we employ technology to substantially increase our throughput of opportunities well beyond the capacity of traditional relationship and deal development methods. We believe these factors, along with the nature of our long-term financing structure, will enable us to support a significant increase in the size of our portfolio without a proportionate increase in administrative or management costs.
 
7

 

Experienced Management Team with Extensive Relationships.   Our management team is experienced in financing transactions and managing commercial real estate businesses, building diverse, high-growth businesses and operating in highly regulated industries, including alcohol and healthcare. In addition, our management team has experience underwriting non-traditional real estate and corporate credit and managing all aspects of a public company. Our management team and members of our board of directors have long-standing relationships with owners, operators and developers of cannabis properties, who we believe value their industry knowledge and commitment to working in a cooperative and supportive manner. We believe these relationships will provide us access to an ongoing pipeline of attractive financing opportunities that may not be available to our competitors.

Strong Alignment of Economic and Incentive Interests.   We believe the interests of our management team, our board of directors and our stockholders are strongly aligned. Upon completion of this offering, our management team and directors will collectively own approximately    % of our company on a fully diluted basis, which we believe aligns their interests with those of our stockholders. In addition, at our inception in 2019, we issued 311,991 shares of our common stock to Curaleaf as partial consideration for our original acquisition of six properties from them, and we may use our equity to fund a portion of future financing transactions with additional operators.
Our Business and Growth Strategies
Our strategy is to finance specialized industrial cultivation/processing and retail/dispensary properties in the regulated adult- and medical-use cannabis markets that are operated by high-quality operators, thereby generating attractive returns for our stockholders.
Our business and growth strategies include the following:

Focus on High-Quality Operators while Utilizing a Flexible Financing Strategy.   We believe it is critical to identify and lend to the highest quality operators with strong financial foundations and operational expertise to navigate the dynamic changes in the cannabis industry, including expansion of the cannabis market due to new states adopting medical-use laws or existing states with only medical-use expanding their laws to include adult-use. We do not believe the market has been efficient in pricing the difference between lower- and higher-tier operators. Given the real estate-dependent and capital-intensive business of cannabis operators, we will endeavor to grow alongside operators like Curaleaf and others as they identify new locations and markets to expand their businesses. As such, we believe the composition of our portfolio should be dynamic given the evolving cannabis market. We will evaluate the composition of the collateral securing our mortgage loans in terms of retail versus cultivation, adult-use versus medical-use and geography in the context of a number of factors, including the needs of our borrowers, industry trends and regulatory changes. We will maintain a flexible financing strategy and continuously monitor these factors in order to optimally position our portfolio both offensively and defensively in the market. In addition, if cannabis is legalized under U.S. federal law, we may pursue acquisitions of cannabis properties through traditional sale-leaseback transactions or purchases from existing borrowers pursuant to our contingent purchase options.

Focus on Financing Cannabis Real Estate for Income.   We finance real property that is operated by licensed cannabis operators, and we believe our financing opportunities will continue to expand as additional states legalize adult- and medical-use cannabis. We currently focus on the origination of long-term mortgage loans with terms ranging from 15 to 30 years and initial fixed interest rates with annual interest rate escalators, with interest-only payments prior to maturity. Our financing structures also are designed to provide us with key credit support for our mortgage interest, including interest reserves (generally three to six months), and in certain cases, various provisions for cross-default, cross-collateralization and corporate or parent guarantees, when appropriate. We expect these features to help insulate us from variability in operator cash flows at individual properties and enable us to minimize our expenses while we build our portfolio.

Focus on Financing Cannabis Real Estate for Appreciation through Contingent Purchase Options.   We believe there are several factors that could drive an appreciation in cannabis real estate collateral values, including regulatory changes, continued maturation of the industry, changes in investor
 
8

 
sentiment and operator-specific performance. We intend to participate and capture the appreciation opportunity through strict non-prepayment of the mortgage loans and contingent purchase options for the properties securing our mortgage loans that will be included in most mortgage loans we originate. The purchase options will be coterminous with the mortgage loans and will be exercisable only upon the legalization of cannabis under U.S. federal law or certain other events whereby fee simple ownership of cannabis real estate assets is compliant with U.S. federal law. The exercise price of each purchase option is expected to equal (i) the original agreed-upon valuation upon which the mortgage loan was advanced, plus (ii) a pro rata portion of the aggregate real estate valuation increase, if any, since the origination of the loan, based upon the loan-to-value ratio established at the time of loan origination. The purchase price in excess of the principal balance of the mortgage loan is expected to be payable in cash, shares of our common stock, OP units or a combination of the foregoing, in our sole discretion. We believe our contingent purchase options for the properties securing our mortgage loans will allow us to recognize the majority of any appreciation of the market value of the properties, subject to the legalization of cannabis under U.S. federal law or certain other events. However, there can be no assurances that cannabis will ever be legalized under U.S. federal law or that our purchase options otherwise will become exercisable.

Adherence to Rigorous Underwriting Criteria.   Our operator-first underwriting and investment philosophy focuses primarily on the quality and credit worthiness of the operator and the quality and design of its assets. In executing that philosophy, we have developed a set of decision making criteria for evaluating our potential operator relationships and approaching financing opportunities through our rigorous underwriting process. See “— Our Underwriting Process.” We believe the cannabis industry continues to grow substantially and has many desirable operators with an addressable market of existing and needed assets allowing us to forgo distressed and speculative financings and instead focus on high-quality operators and strong collateral assets that provide sustainable long-term income and real estate value appreciation opportunity for our stockholders through the contingent purchase options included in our loans.

Actively Monitor the Performance of Our Borrowers/Operators and Industry Trends.   We actively monitor the financial and operational performance of our borrowers and guarantors and of the specific facilities securing our loans through a variety of methods, such as reviewing periodic financial reporting and operating data and meetings with the facility management teams. Integral to our asset management philosophy is our desire to continue our existing long-term relationships with our borrowers and develop new long-term relationships so that they view us as a valuable financing source. Our management also communicates regularly with their counterparts at our borrowers and others who closely follow the cannabis industry, in order to maintain knowledge about changing regulatory and business conditions. We believe this knowledge, combined with our management team’s and board’s experience in the real estate and cannabis industries, allows us to anticipate changes in our borrowers’ operations in sufficient time to strategically and financially plan for changing economic, market and regulatory conditions. Collectively, these activities will provide us with leading indicators to proactively evaluate when protective or other actions may be needed.
 
9

 
Our Portfolio
The following table contains information regarding the loans in our portfolio as of the date of the prospectus (dollars in thousands):
Loan
Property Address
Property
Type
Original
Funding
Date
Original
Loan
Maturity
Principal
Balance(2)
Percentage
of
Portfolio
Amortization
During
Term
Initial
Interest
Rate
FFS – Loan 1
30 Worcester Road
Webster, MA
Cultivation/
Processing
    (1)
8/2039 $ 14,465 37.4% No 11.12%(3)
FFS – Loan 2
111 Coolidge Avenue Bellmawr, NJ
Cultivation/
Processing
    (1)
8/2039 $ 12,725 32.9% No 10.51%(3)
FFS – Loan 3
3218 US Highway 1
Fort Pierce, FL
Retail/
Dispensary
    (1)
8/2039 $ 1,788 4.6% No 10.50%(3)
FFS – Loan 4
640 Creek Road Bellmawr, NJ
Retail/
Dispensary
    (1)
8/2039 $ 1,701 4.4% No 10.51%(3)
FFS – Loan 5
910 W.
International
Speedway
Boulevard Daytona
Beach, FL
Retail/
Dispensary
    (1)
8/2039 $ 1,515 3.9% No 10.50%(3)
FFS – Loan 6
170 Commercial
Street, Unit 3
Provincetown, MA
Retail/
Dispensary
    (1)
8/2039 $ 1,131 2.9% No 10.44%(3)
Private Co – 1
Unsecured note
N/A
1/2021 1/2026 $ 5,399 13.9% Yes 6.00%(4)
Total/Weighted Average
$ 38,724 100% 10.13%
(1)
The six FFS loans will be funded on the Spin-Off Date.
(2)
For the six FFS loans, the principal balance is as of the Spin-Off Date. The principal balance of the unsecured note is as of September 30, 2021.
(3)
The interest rate for each FFS loan is subject to annual increases based on increases in the consumer price index. 
(4)
This loan bears interest at 0% through December 31, 2021, then at 6.00% per year through maturity on January 1, 2026, and requires monthly payments of interest beginning January 2022 and equal quarterly principal payments beginning April 2022 fully amortizing the note at maturity in January 2026.
For each FFS loan, if the loan is repaid prior to the maturity date, the amount due is equal to the (i) the outstanding principal balance of the loan, plus (ii) the greater of (A) the undiscounted remaining interest payments under the loan and (B) 96% of the amount that the property has appreciated in value from the loan origination date to the loan repayment date.
Portfolio Collateral Overview
Our mortgage loans are secured by various types of assets of our borrowers, including primarily real property and certain personal property, including licenses, equipment, and other assets to the extent permitted by applicable laws and the regulations governing our borrowers.
 
10

 
The table below represents the real estate collateral securing our loans as of the date of this prospectus. The values in the table below were measured at the time of underwriting and based on various sources of data available at such time (dollars in thousands):
Loan
Property Address
Property Type
Building
Sg. Ft.
Principal
Balance(1)
Percentage
of Mortgage
Portfolio
Estimated
Real Estate
Value
Real Estate
Collateral
Coverage
FFS – Loan 1
30 Worcester Road Webster, MA
Cultivation/ Processing
105,000 $ 14,465 43.4% $ 15,068 1.04x
FFS – Loan 2
111 Coolidge Avenue Bellmawr, NJ
Cultivation/Processing
42,433 $ 12,725 38.2% $ 13,255 1.04x
FFS – Loan 3
3218 US Highway 1 Fort Pierce, FL
Retail/ Dispensary
10,311 $ 1,788 5.4% $ 1,862 1.04x
FFS – Loan 4
640 Creek Road Bellmawr, NJ
Retail/ Dispensary
9,571 $ 1,701 5.1% $ 1,772 1.04x
FFS – Loan 5
910 W. International Speedway Boulevard Daytona Beach, FL
Retail/ Dispensary
5,620 $ 1,515 4.5% $ 1,578 1.04x
FFS – Loan 6
170 Commercial Street, Unit 3 Provincetown, MA
Retail/ Dispensary
2,700 $ 1,131 3.4% $ 1,178 1.04x
Total/Weighted Average
175,635 $ 33,325 100% $ 34,713 1.04x
(1)
For the six FFS loans, the principal balance is as of the Spin-Off Date. The principal balance of the unsecured note is as of September 30, 2021.
Our Financing Pipeline
Our management team and board of directors have an extensive network of long-standing relationships with owners, operators and developers of commercial real estate properties and cannabis operations. We believe this network of relationships will provide us access to an ongoing pipeline of attractive financing and other investment opportunities, which may not be available to our competitors.
In addition to the secured mortgages in our portfolio, we are actively seeking and evaluating additional specialized industrial cultivation/processing and retail/dispensary cannabis properties to finance with the net proceeds of this offering. We have identified and are in various stages of reviewing 35 cannabis properties for potential mortgage originations of approximately $131 million. The properties are located in five states and are operated by seven different operators. We expect the interest rates of these mortgage loans to be between 8% and 13% depending on property type. We have not entered into definitive agreements with respect to any potential financing and there can be no assurance that we will consummate the financing of any of the properties in our current pipeline on the terms anticipated, or at all.
We also have had extensive discussions with a third-party commercial real estate investment firm about an arrangement pursuant to which such firm would acquire cannabis properties from operators that prefer to enter into sale-leaseback transactions, rather than mortgage loans with us. Under this arrangement, we would finance such acquisitions through mortgage loans with expected loan-to-value ratios of 70% to 90% secured by the acquired properties and enter into contingent purchase option agreements similar to those we have entered into with Freehold Fee Simple. See “Our Business — Contingent Purchase Options.” In addition, in the event that we determine to foreclose upon a property due to a default by one of our borrowers in the future, this investment firm may acquire such property upon such foreclosure. In addition, after the completion of this offering, this investment firm also may acquire the six properties from Freehold Fee Simple, subject to our existing mortgage loans and contingent purchase options. Neither we nor Freehold Fee Simple have entered into definitive agreements with this investment firm regarding the arrangements described above and there can be no assurance that we or Freehold Fee Simple will enter into transactions with this investment firm in the future.
 
11

 
Our Underwriting Process
We believe our management team’s depth of experience in a diverse set of industries, including cannabis, real estate, the regulated alcohol market, insurance, investment banking and specialty engineering, as well as operational expertise in creating and managing businesses provides us with a unique set of skills to underwrite potential financing transactions and cannabis operators. Key factors that we consider in the underwriting process include the following:
1.
Operator:   We seek to identify and lend to high-quality operators by focusing on the following:

Management Team — Evaluate the qualifications, experience and track record of the operator’s executive management team;

Financial Strength — Analyze the operator’s historical and projected financial information to gain an understanding of the operator’s overall financial and credit strength and history of, or pathway to, profitability, and determine predictability in cash flows indicating ability to meet the required debt service interest payments;

Access to Capital — Evaluate the operator’s capital raising history and ability to access affordable and sustainable capital via traditional or alternative financing solutions;

Operational Efficiency — Conduct site visits (targeted assets and others in operator’s system) and other due diligence to gain an understanding of the operational conditions, processes and level of efficiency, including cultivation and extraction capacities, potencies, yield, harvests/crop cycles per year and product testing results; and

Regulatory Compliance — Review the operator’s licensure, policies and procedures, relationships with local and state regulators and history of regulatory compliance to assess the operator’s regulatory compliance capabilities.
2.
Asset Location and Market Environment:   We seek to finance operators and assets that are specifically suited to operate within the regulatory environments and market conditions in which they are located. We evaluate the asset location within the market, local economic and demographic data, barriers to entry, cannabis-related demand drivers, state and local regulatory environment and the overall competitive landscape of the market. We balance these factors with the experience of the operator and will finance assets in more mature markets, such as Colorado or California, as long as the operator has a proven track record of market loyalty and penetration.
3.
Asset Quality, Design and Operation:   We evaluate the asset’s construction quality, condition, design, projected capital needs and property condition assessments. In addition, we utilize traditional corporate and real estate operating metrics, such as corporate debt service and rent coverage, to quantitatively assess the historical and projected financial performance of the asset and its contribution to the operator’s overall corporate performance.
4.
Asset Type:   We believe the composition of our portfolio should be dynamic given the evolving cannabis market and regulations governing it. We will evaluate the composition of our loan portfolio in terms of retail versus cultivation, adult-use versus medical-use and geography in the context of a number of factors, including the needs of our borrowers, industry trends and regulatory changes. We will maintain a flexible financing strategy that we believe is in compliance with federal laws and continuously monitor these factors in order to optimally position our portfolio both offensively and defensively in the market.
We believe our underwriting process enables us to finance highly desirable properties with strong performing cannabis operators that will support our ability to deliver attractive risk-adjusted returns to our stockholders.
Summary Risk Factors
Investing in our common stock involves a high degree of risk. Prospective investors are urged to carefully consider the matters discussed under “Risk Factors” prior to making an investment in our common stock. Such risks include, but are not limited to:
 
12

 

We have a limited operating history and may not be able to operate our business successfully or generate sufficient revenue to make or sustain distributions to our stockholders.

Our growth will depend on our ability to finance cannabis real estate assets, and we may be unable to consummate financings on advantageous terms or at all.

Our growth depends on external sources of capital, which may not be available on favorable terms or at all.

There may only be a limited number of cannabis-related properties and high-quality operators that meet our underwriting and investment criteria, which could adversely affect the growth of our business.

Competition for the capital that we provide may reduce the return of our loans, which could adversely affect our operating results and financial condition.

Our loan portfolio is, and may continue to be, concentrated in a limited number of borrowers, which subjects us to increased risks due to the unfavorable performance of any borrower and the decline in value of any collateral property.

Our contingent purchase options may become worthless if the value of the collateral declines below the outstanding principal balance of the applicable loan or if the conditions required for us to exercise the option never occur.

We will not own real estate used in cannabis-related operations due to current statutory prohibitions, which will limit our remedies in the event that any of our borrowers default under the terms of their mortgage loans with us.

As a lender, we generally are not in a position to exert influence on borrowers, and our borrowers may make decisions that could decrease the value of our loans to such borrowers or the collateral securing our loans.

Failure to succeed in new markets may have an adverse impact on our results of operations and ability to make distributions to our stockholders.

We depend on key personnel whose continued service is not guaranteed and each of whom would be difficult to replace.

Some of our borrowers may be start-up businesses and may be unable to make interest payments with funds from operations or at all, which could adversely affect our business, financial condition, results of operations and ability to make distributions to our stockholders and the market price of our common stock.

Cannabis remains illegal under federal law and, therefore, strict enforcement of federal laws regarding cannabis would likely result in our inability and the inability of our borrowers to execute our respective business plans.

Certain of our borrowers may engage in operations for the adult-use cannabis industry, and as a result, our borrowers may be subject to additional risks associated with such adult-use cannabis operations.

Our ability to grow our business depends on state laws pertaining to the cannabis industry.

We and our borrowers may have difficulty accessing the service of banks, which could have a material adverse effect on our business and growth prospects.

Laws and regulations affecting the regulated cannabis industry are frequently changing, which could materially adversely affect our business, and we cannot predict the impact that future regulations may have on us or our borrowers.

Failure to qualify as a REIT would cause us to be taxed as a regular corporation, which could adversely affect the value of our stock and substantially reduce funds available for distributions to stockholders.

There has been no public market for our common stock prior to this offering and an active trading market for our common stock may not develop and be sustained following this offering.
 
13

 

Maintenance of our exemption from registration under the 1940 Act imposes limits on our operations. Your investment return may be reduced if we are required to register as an investment company under the 1940 Act.
Structure and Formation of Our Company
Background
We were incorporated in the state of Maryland on June 24, 2019 and commenced operations upon the closing of our initial private placement on August 28, 2019. We were formed as a holding company for our operating partnership, Freehold Properties Operating Partnership, LP, which was formed on April 23, 2019. On August 29, 2019, through a series of sale-leaseback transactions with subsidiaries of Curaleaf, we acquired six operating cannabis properties, consisting of two specialized industrial cultivation/processing properties and four retail/dispensary properties, for total consideration of $28.3 million (excluding transaction costs), including $25.5 million in cash and $2.8 million in shares of our common stock. In connection with our acquisition of the properties, we leased the properties to subsidiaries of Curaleaf pursuant to triple-net leases that expire in August 2029 and are guaranteed by Curaleaf, Inc. Subsequent to our acquisition of the properties, we invested an additional $5.4 million to fund the renovation of one property.
Spin-Off of Property Portfolio
Our board of directors determined that it is in the best interests of the Company and our stockholders to focus on the financing, rather than ownership, of cannabis properties and to spin off our previously owned real estate portfolio, which will be completed immediately prior to the effectiveness of the registration statement of which this prospectus forms a part. We believe that this change allows us to operate in compliance with Section 856 of the U.S. Controlled Substances Act of 1970, as amended, or the CSA, which generally prohibits the management or control of properties used for manufacturing, distributing or using any controlled substance. The following transactions will occur concurrently with, or prior to, the Spin-Off:

Freehold Fee Simple was incorporated as a Maryland corporation on May 28, 2021, with our operating partnership as the sole stockholder.

FFS Operating Company, LLC, or FFS OC, was formed as a Delaware limited liability company on September 7, 2021, with Freehold Fee Simple as the sole member and manager.

Our operating partnership will contribute to FFS OC 100% of the membership interests in our operating partnership’s wholly owned subsidiaries that own the six properties.

In connection with our operating partnership’s contribution of its property-owning subsidiaries to FFS OC, the property-owning subsidiaries, as borrowers, will issue separate mortgage notes to a newly formed subsidiary of our operating partnership, or FHP Lender. The notes will have an aggregate principal amount of $33.3 million, with the principal amount of each mortgage note being equal to 96% of the value of the applicable property at the time of the Spin-Off. Each note will be secured by a first mortgage on the applicable property. For additional terms of the mortgage loans, see “Our Portfolio.”

FHP Lender will enter into separate option agreements with FFS OC and each property-owning subsidiary of Freehold Fee Simple, pursuant to which FHP Lender will have a contingent option to purchase each of the six properties that will be exercisable only upon the legalization of cannabis under U.S. federal law or certain other events. Each option agreement will have a term of 18 years. The purchase price for each property will be equal to (i) the value of the property at the time of the Spin-Off, plus (ii) if the property has appreciated in value since the time of the Spin-Off, 4% of the amount that the property has appreciated in value at the time of the purchase. The purchase price in excess of the principal balance of the mortgage loan will be payable in cash, shares of our common stock, OP units or a combination of the foregoing, in our sole discretion. For additional terms of the option agreements, see “Our Business — Contingent Purchase Options.”

We will enter into an administrative services agreement with Freehold Fee Simple, pursuant to which we will provide Freehold Fee Simple with certain services, including technology, accounting,
 
14

 
financial reporting and tax services, in exchange for an annual fee of $24,000, payable monthly. The services we provide to Freehold Fee Simple under the administrative services agreement will not include any property management or other services related to the management or control of the properties or the leases with respect thereto.

We will effect a taxable distribution of all outstanding shares of Freehold Fee Simple’s common stock to our common stockholders on a pro rata basis, pursuant to which our common stockholders will receive one share of common stock of Freehold Fee Simple for each share of our common stock.
Any material amendment or waiver related to our existing agreements with Freehold Fee Simple, as well as any new material agreements or arrangements with Freehold Free Simple, will require the approval of a majority of our independent directors.
Our Structure
We conduct our business through an umbrella partnership REIT, or UPREIT, structure, consisting of our operating partnership and subsidiaries of our operating partnership. Through our wholly owned subsidiary, Freehold OP GP, LLC, we are the sole general partner of our operating partnership, and we presently own all of the units of limited partnership interest in our operating partnership, or OP units. In the future, we may issue OP units to third parties in connection with future financing transactions, as compensation or otherwise.
The following chart illustrates our organizational structure after giving effect to the Spin-Off and this offering.
[MISSING IMAGE: tm2030694d8-fc_organbw.jpg]
Our Tax Status
We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our short taxable year ended December 31, 2019. Our qualification as a REIT will depend upon our ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code of 1986, as amended, or the Code, relating to, among other things, the sources of our gross income, the composition and
 
15

 
values of our assets, our distribution levels and the diversity of ownership of our stock. We believe that, commencing with such short taxable year, we were organized and have operated in conformity with the requirements for qualification as a REIT under the Code, and we intend to continue to operate in such a manner.
As a REIT, generally we will not be subject to U.S. federal income tax on the REIT taxable income that we currently distribute to our stockholders. Under the Code, REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute annually at least 90% of their REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, to their stockholders. If we fail to qualify as a REIT in any calendar year and we do not qualify for certain statutory relief provisions, our income would be subject to U.S. federal income tax at regular corporate rates, and we would be precluded from qualifying for treatment as a REIT until the fifth calendar year following the year in which we failed to qualify. Even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some federal, state and local taxes on our income and properties and to federal income and excise taxes on our undistributed income. In addition, taxable income generated by any taxable REIT subsidiaries, or TRSs, of ours will be subject to federal, state and local income tax. See “Material U.S. Federal Income Tax Considerations.”
Restrictions on Ownership and Transfer
To assist us in complying with the limitations on the concentration of ownership of a REIT imposed by the Code, among other purposes, our charter prohibits, with certain exceptions, ownership by any person of more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock, the outstanding shares of any class or series of our preferred stock or the aggregate outstanding shares of all classes and series of our capital stock. See “Description of Capital Stock — Restrictions on Ownership and Transfer.”
Distribution Policy
We intend to make regular quarterly distributions to holders of shares of our common stock.
Distributions declared by us will be authorized by our board of directors in its sole discretion out of funds legally available therefor and will depend upon a number of factors, including restrictions under applicable law, the capital requirements of our company and the distribution requirements necessary to qualify and maintain our qualification as a REIT. We may be required to fund distributions from working capital or with a portion of the net proceeds from this offering or borrow to provide funds for such distributions, or we may choose to make a portion of the required distributions in the form of a taxable stock dividend to preserve our cash balance. However, we currently have no intention to use the net proceeds from this offering to make distributions nor do we currently intend to make distributions using shares of our common stock. See “Distribution Policy.”
Prior Private Placements
On August 28, 2019 and September 13, 2019, we sold an aggregate of 3,223,320 shares of our common stock to certain institutional and individual investors at a price per share of $9.09. On August 29, 2019, we issued an additional 311,991 shares of our common stock to an affiliate of Curaleaf in exchange for the contribution of certain real property at a price per share of $9.09. On September 27, 2019 and January 13, 2020, we sold an aggregate of 1,150,000 shares of our common stock to certain institutional and individual investors at a price per share of $10.00.
We refer to the foregoing offerings collectively as our prior private placements. Each of our prior private placements was made in reliance upon exemptions from registration provided by Section 4(a)(2) of the Securities Act and Regulation D thereunder. The aggregate net proceeds to us from our prior private placements, after deducting offering expenses and fees payable by us, were approximately $41 million.
Registration Rights Agreement
In connection with our prior private placements, we entered into a registration rights agreement for the benefit of the purchasers in those offerings. Under this registration rights agreement, we have agreed to use
 
16

 
our commercially reasonable efforts to cause a resale shelf registration statement to become effective under the Securities Act as promptly as practicable after the filing of such registration statement, and in any event, subject to certain exceptions, no later than May 31, 2022, and to maintain such registration statement continuously effective under the Securities Act for a specified period. The original deadline under the registration rights agreement was extened by the stockholders in accordance with the terms of the registration rights agreement. See “Description of Capital Stock — Registration Rights.”
1940 Act Exemption
We intend to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act of 1940, as amended, or the 1940 Act. We believe we will not be considered an investment company as defined in the 1940 Act because we will not engage primarily, propose to engage primarily, or hold ourselves out as being engaged primarily, in the business of investing, reinvesting or trading in securities. Further, we intend to conduct our business in a manner so that neither we nor our operating partnership, on an unconsolidated basis, own investment securities (as that term is defined in Section 3(a)(2) of the 1940 Act) in excess of 40% of the value of our or its respective total assets (exclusive of U.S. Government securities and cash items). For these purposes, investment securities include securities issued by majority-owned subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, which may limit the types of businesses in which we engage through our subsidiaries. For more information, see “Risk Factors — Maintenance of our exemption from registration under the 1940 Act imposes limits on our operations. Your investment return may be reduced if we are required to register as an investment company under the 1940 Act” and “Our Business — Government Regulation — 1940 Act Exemption.”
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. For so long as we are an emerging growth company, among other things:

we are exempt from the requirement to obtain an attestation report from our auditors on our internal control over financial reporting pursuant to the Sarbanes-Oxley Act;

we may elect to defer compliance with new or revised accounting standards until such standards would apply to private companies;

we are permitted to provide less extensive disclosure about our executive compensation arrangements; and

we are not required to give our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements.
We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year following the fifth anniversary of this offering, (ii) the last day of the fiscal year during which our total annual revenue equals or exceeds $1.07 billion (subject to adjustment for inflation), (iii) the date on which we have, during the previous three year period, issued more than $1.0 billion in non-convertible debt or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards under Section 102(b) of the JOBS Act. As a result, we will comply with new or revised accounting standards on the relevant dates on or before which adoption of such standards is required for all public companies that are not emerging growth companies.
Corporate Information
Our principal executive office is located at 232 3rd Avenue N., Franklin, Tennessee 37064. Our telephone number is (877) 981-0900. Our website is located at www.freeholdprop.com. The information contained on, or accessible through, our website is not incorporated by reference into, and does not form a part of, this prospectus.
 
17

 
THE OFFERING
Common stock offered by us
       shares (plus up to an additional       shares that we may issue and sell upon exercise of the underwriters’ option to purchase additional shares)
Common stock to be outstanding after this offering
       shares(1)
Use of proceeds
We estimate that the net proceeds we will receive from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $      million (approximately $      million if the underwriters exercise their option to purchase additional shares in full).
We will contribute the net proceeds from this offering to our operating partnership in exchange for a number of OP units equal to the number of shares of our common stock issued and sold by us in this offering. Our operating partnership intends to use the net proceeds as follows: (i) approximately $      million to fund the origination of mortgage loans as described under “Our Business — Our Financing Pipeline;” ​(ii) approximately $0.1 million to redeem our 12.5% Series A Redeemable Cumulative Preferred Stock, or our Series A Preferred Stock; and (iii) the remaining net proceeds, if any, to finance cannabis properties in accordance with our investment strategy and for working capital and general corporate purposes.
Directed Share Program
The underwriters have reserved for sale, at the initial public offering price per share, up to          shares of our common stock being offered for sale to business associates, directors, employees and friends and family members of our employees. The number of shares available for sale to the general public in this offering will be reduced to the extent these persons purchase reserved shares. Any reserved shares not purchased will be offered by the underwriters to the general public on the same terms as the other shares. If purchased by these persons, these shares will not be subject to a lock-up restriction, except in the case of shares purchased by any director or executive officer.
Proposed Nasdaq symbol
FHP
Risk factors
Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under the heading “Risk Factors” beginning on page 20 of this prospectus and all other information in this prospectus before making a decision to invest in our common stock.
(1)
Includes (i) an aggregate of 569,248 restricted shares of our common stock granted to our executive officers, non-employee directors and certain other employees prior to this offering and (ii)       restricted shares of our common stock expected to be granted to our executive officers, certain other employees and Mr. Mueller upon completion of this offering. Excludes (i)       shares of our common stock issuable upon exercise of the underwriters’ option to purchase additional shares in full, (ii) an aggregate of 234,400 performance-vesting restricted stock units granted to our executive officers and certain other employees prior to this offering, (iii) an aggregate of           performance-vesting restricted stock units expected to be granted to our executive officers, certain other employees and Mr. Mueller upon the completion of this offering, and (iv)          shares of common stock reserved for future issuance under our Equity Incentive Plan. See “Management — Executive Compensation — IPO Equity Grants.”
 
18

 
Restrictions on ownership of our common stock
Our charter prohibits, with certain exceptions, ownership by any person of more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock, the outstanding shares of any class or series of our preferred stock or the aggregate outstanding shares of all classes and series of our capital stock. See “Description of Capital Stock — Restrictions on Ownership and Transfer.”
 
19

 
Summary Selected Historical and Pro Forma Financial Data
The following tables set forth summary selected financial and operating data based on (i) our historical consolidated balance sheets as of September 30, 2021 and December 31, 2020, (ii) our unaudited pro forma consolidated balance sheet as of September 30, 2021, (iii) our historical consolidated statements of operations for the nine months ended September 30, 2021 and the year ended December 31, 2020 and (iv) our unaudited pro forma consolidated statement of operations for the nine months ended September 30, 2021 and the year ended December 31, 2020.
The unaudited pro forma financial and operating data have been derived from our historical consolidated financial statements. The unaudited pro forma consolidated balance sheet as of September 30, 2021 is presented to reflect adjustments to our historical balance sheet as if this offering, the Spin-Off and certain other transactions described herein were completed on September 30, 2021. The unaudited pro forma consolidated statement of operations for the nine months ended September 30, 2021 and the year ended December 31, 2020 are presented as if this offering, the Spin-Off and certain other transactions described herein were completed on January 1, 2020.
You should read the following summary selected financial and operating data in conjunction with: (i) our historical consolidated balance sheets as of September 30, 2021 and December 31, 2020 and our historical consolidated statements of operations for the nine months ended September 30, 2021 and the year ended December 31, 2020; (ii) our unaudited pro forma consolidated financial statements; and (iii) the “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this prospectus. We have based the unaudited pro forma adjustments on available information and assumptions that we believe are reasonable. The following unaudited pro forma financial and operating data are presented for informational purposes only and are not necessarily indicative of what our actual financial position would have been as of September 30, 2021 assuming this offering, the Spin-Off and certain other transactions described herein had been completed on September 30, 2021, what our actual results of operations would have been for the nine months ended September 30, 2021 and the year ended December 31, 2020 assuming this offering, the Spin-Off and certain other transactions described herein were completed on January 1, 2020 and are not, and should not be viewed as, indicative of our future results of operations or financial condition.
Consolidated Balance Sheet Data
(In thousands)
As of September 30, 2021
As of
December 31, 2020
Pro Forma
Historical
(unaudited)
(unaudited)
Assets
Total real estate, net
$       $ 30,550 $ 32,144
Notes receivable
5,399 5,399
Total Assets
$       $ 40,680 $ 40,668
Liabilities and Stockholders’ Equity
Total Liabilities
2,364 1,526
Total Stockholders’ Equity
38,316 39,142
Total Liabilities and Stockholders’ Equity
$ $ 40,680 $ 40,668
 
20

 
Consolidated Statement of Operations Data
(In thousands, except per share data)
Nine Months
ended September 30, 2021
Year ended
December 31, 2020
Pro Forma
(unaudited)
Historical
(unaudited)
Pro Forma
(unaudited)
Historical
Revenues
Rental income
$ 2,734 $ $ 3,532
Interest income
345
Total revenues
2,734 3,877
Expenses
General and administrative
2,731 3,291
Depreciation and amortization
1,600 2,091
Litigation settlement
435
Transaction costs
60 374
Total operating expenses
4,391 6,191
Other income (expense)
Impairment if real estate assets
(123)
Net loss
$ (1,657) $ $ (2,437)
Less: preferred stock dividends
(8) (15)
Net loss attributable to common stockholders
$ (1,665) $ $ (2,452)
Net loss per common share
Basic and diluted
$ (0.35) $ (0.52)
Weighted average common shares outstanding
Basic and diluted
4,751 4,733
Other Data
(In thousands, unaudited)
Nine Months
ended September 30, 2021
Year ended
December 31, 2020
Pro Forma
Historical
Pro Forma
Historical
FFO attributable to common stockholders(1)
$ (71) $ $ (245)
AFFO attributable to common stockholders(1)
774 1,016
(1)
Funds from operations, or FFO, attributable to common stockholders and adjusted funds from operations, or AFFO, attributable to common stockholders are non-GAAP financial measures. For definitions of FFO and AFFO and reconciliations of net loss attributable to common stockholders to FFO and AFFO, as well as a statement disclosing the reasons why our management believes that FFO and AFFO provide useful information to investors and, to the extent material, any additional purposes for which our management uses FFO and AFFO, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures.”
 
21

 
RISK FACTORS
An investment in our common stock involves a high degree of risk and should be considered highly speculative. Before making an investment decision, you should carefully consider the following risk factors, which address the material risks concerning our business and an investment in our common stock. If any of the risks discussed below occur, our business, prospects, liquidity, funds from operations, adjusted funds from operations, financial condition, results of operations and cash flows, and our ability to make distributions to our stockholders could be materially and adversely affected, in which case the market price of our common stock could decline significantly and you could lose all or part of your investment. Some statements in the following risk factors, constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”
Risks Related to Our Business and Growth Strategy
We have a limited operating history and may not be able to operate our business successfully or generate sufficient revenue to make or sustain distributions to our stockholders.
We were incorporated on June 24, 2019 to act as a holding company for our operating partnership, which was formed on April 23, 2019, and we commenced operations on August 28, 2019. As of the date of this prospectus, our assets consist of six mortgage loans and one note receivable with an aggregate principal amount of approximately $38.7 million. Further, as of the date of this prospectus, we have seven employees, including our executive officers. We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objectives and that the value of your investment could decline substantially. We cannot assure you that we will be able to operate our business successfully or profitably or in the manner described under “Our Business — Our Business and Growth Strategies.” Our business and growth prospects are dependent on our ability both to generate sufficient cash flow to pay our investors distributions and to achieve capital appreciation, and we cannot assure you that we will be able to do either. There can be no assurance that we will be able to generate sufficient revenue from operations to pay our operating expenses and make or sustain distributions to stockholders at attractive levels or at all. Our limited resources may also materially and adversely impact our ability to successfully implement our business plan. The results of our operations and the implementation of our business plan depend on several factors, including, among other things, the availability of opportunities to make loans, the availability of adequate equity and debt financing, the federal and state regulatory environment relating to the cannabis industry, and conditions in the financial markets and economic conditions.
Furthermore, we have no operating history as a public company, and our management team had limited experience in the cannabis industry prior to founding our company. We cannot assure you that the past experience of our senior management team will be sufficient to successfully operate our company as a public company.
Our growth will depend on our ability to finance cannabis real estate assets, and we may be unable to consummate financings on advantageous terms or at all.
Our growth strategy is focused on financing specialized industrial cultivation/processing and retail/dispensary cannabis properties in the regulated adult- and medical-use cannabis markets that are operated by high-quality operators. Our ability to expand through originating new mortgage loans consistent with our investment criteria is integral to our business strategy and requires that we identify and consummate suitable loan transactions that meet our investment criteria and are compatible with our growth strategy. We have not entered into binding commitments with respect to any potential financing opportunities and may be unable to complete any of the financings in our pipeline as described under “Our Business — Our Financing Pipeline.” We may not be successful in identifying and consummating mortgage loans or other financings for specialized industrial cultivation/processing and retail/dispensary cannabis properties that meet our investment criteria and objectives, which would impede our growth.
 
22

 
Our ability to originate mortgage loans and other financings on favorable terms is subject to the following risks, among others:

competition from other potential lenders, including public and private real estate investment trusts, or REITs, private equity investors and institutional investment funds, many of which may have greater financial and operational resources and lower costs of capital than we have and may be able to accept more risk than we can prudently manage;

existing or new competitors may adopt loan structures similar to ours, which would decrease our competitive advantage;

we may not successfully identify borrowers that meet our underwriting and investment criteria or borrowers may be unwilling to enter into transactions with us on the terms we expect;

we may incur significant costs and divert management attention in connection with evaluating and negotiating potential loans, including ones that we are subsequently unable to complete; and

we may provide loans to borrowers that do not perform as expected.
Our failure to identify attractive borrowers and originate loans on favorable terms or take advantage of other investment opportunities without substantial expense, delay or other operational or financial problems, would impede our growth and negatively affect our results of operations and cash available for distribution to our stockholders.
Our growth depends on external sources of capital, which may not be available on favorable terms or at all.
We intend to grow by providing financing for specialized industrial cultivation/processing and retail/dispensary cannabis properties, which we will fund only through newly issued equity or debt. We may not be in a position to take advantage of attractive investment opportunities for growth if we are unable, due to global or regional economic uncertainty, changes in the state or federal regulatory environment relating to the cannabis industry, our own operating or financial performance or otherwise, to access capital markets on a timely basis and on favorable terms or at all. In addition, U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gain and certain non-cash income, and that it pay U.S. federal income tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. Because we intend to grow our business, this limitation may require us to raise additional equity or incur debt at a time when it may be disadvantageous to do so.
Our access to capital will depend upon a number of factors over which we have little or no control, including the local, state or federal regulatory environment relating to the cannabis industry, general market conditions and the market’s perception of our current and potential future earnings. If general economic instability or downturn leads to an inability to borrow at attractive rates or at all, our ability to obtain capital to fund new loans could be negatively impacted. In addition, while we do not consider our company to be engaged in the cannabis industry, banks and other financial institutions may be reluctant to enter into lending transactions with us because we finance properties used in the adult- and medical-use cannabis industry. To date, we have been unable to obtain debt financing on terms and conditions that we find acceptable. If debt financing continues to be unavailable to us on acceptable terms, our growth may be limited and the value or market price of our common stock may be adversely impacted. See “— Risks Related to Regulation and Our Industry — We and our borrowers may have difficulty accessing the service of banks, which could have a material adverse effect on our business and growth prospects.”
If we are unable to obtain capital on terms and conditions that we find acceptable, we will not be able to provide financing when opportunities exist and may have to reduce our cash distributions to our stockholders. In addition, our ability to refinance all or any debt we may incur in the future, on acceptable terms or at all, is subject to all of the above factors, and will also be affected by our future financial position, results of operations and cash flows, which additional factors are also subject to significant uncertainties. Therefore, we may be unable to refinance any debt we may incur in the future, as it matures, on acceptable terms or at all. Any of these factors could have a material adverse effect on our business, financial condition, liquidity and results of operations.
 
23

 
There may only be a limited number of cannabis-related properties and high-quality operators that meet our underwriting and investment criteria, which could adversely affect the growth of our business.
We intend to lend to high-quality established state-licensed cannabis operators, primarily through the origination of long-term mortgage loans secured by specialized industrial cultivation/processing and retail/dispensary cannabis properties. However, the number of properties and operators that meet our underwriting and investment criteria could be limited in light of the financial condition and performance of cannabis operators and the current regulatory landscape regarding adult- and medical-use cannabis, including but not limited to, the rigorous state licensing processes, limits on the number of licenses granted in certain states and local jurisdictions within such states, zoning regulations related to specialized industrial cannabis cultivation/processing and retail/dispensary properties, the inability of potential borrowers to open bank accounts necessary to pay us, and the evolving federal and state regulatory landscape. Our inability to originate suitable mortgage loans would have a material and adverse effect on the growth of our business and our results of operations and cash available for distribution to our stockholders.
Competition for the capital that we provide may reduce the return of our loans, which could adversely affect our operating results and financial condition.
We compete as an alternative financing provider of debt financing to cannabis operators. Several competitors have recently entered the marketplace, and these competitors may prevent us from making attractive loans on favorable terms. Our competitors may have greater resources than we do and may be able to compete more effectively as a capital provider. In particular, larger companies may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Additionally, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of loans, deploy more aggressive pricing and establish more relationships than us. Our competitors may also adopt loan structures similar to ours, which would decrease our competitive advantage.
Moreover, we strategically benefit from the cannabis industry’s currently constrained access to U.S. capital markets and if such access is broadened, including if the New York Stock Exchange and/or the Nasdaq Stock Market were to permit the listing of plant-touching cannabis companies in the U.S., the demand among U.S. cannabis companies for private equity investments and debt financings, including our target loans, may materially decrease and could result in our competing with financial institutions that we otherwise would not. In addition, due to a number of factors (including but not limited to potentially greater clarity and/or unification of the laws and regulations governing cannabis by states and the federal government including through federal legislation or descheduling of cannabis, which may, in turn, encourage additional federally-chartered banks to provide their services to cannabis-related businesses), the number of entities and the magnitude of funds they have available to provide suitable capital may increase, resulting in increased competition and loans with terms less favorable to us. For example, Congress has introduced several proposed bills focused on the regulated cannabis industry, including the MORE Act, the STATES Act, the SAFE Banking Act and the CAOA. If the MORE Act, which was passed by the U.S. House of Representatives in December 2020, became law, it would, among other things, remove cannabis as a Schedule I controlled substance under the CSA and make available U.S. Small Business Administration funding for regulated cannabis operators. If the STATES Act, which was introduced into Congress in June 2018, became law, it would, among other things, exempt from federal CSA enforcement individuals who complied with the laws of states within which they operated. If the SAFE Banking Act became law, it would, among other things, provide protection from federal prosecution to banks and other financial institutions that provide financial services to state-licensed, compliant cannabis operators, which may include the provision of loans by financial institutions to such operators. If the CAOA became law, it would, among other things, deschedule cannabis and promote states setting their own cannabis policies and laws.
If any of the proposed bills in Congress became law, there would be further increased competition for the financing of cannabis-related properties, and such operators would have greater access to alternative financing sources with lower costs of capital. These factors may reduce the number of operators that wish to enter into loan transactions with us, or may result in us having to enter into loans on less favorable terms with borrowers, each of which may significantly adversely impact our profitability and ability to generate cash flow and make distributions to our stockholders.
 
24

 
Until we originate additional loans, we indirectly will be dependent on Curaleaf, and an event that has an adverse effect on Curaleaf’s business, financial position or results of operations could have a material adverse effect on our business, financial condition and results of operations.
As of the date of this prospectus, we have made six mortgage loans to Freehold Fee Simple in the aggregate principal amount of approximately $33.3 million. Freehold Fee Simple’s only assets are two specialized industrial cultivation/processing properties and four retail/dispensary properties that are leased to subsidiaries of Curaleaf pursuant to triple-net leases that are fully guaranteed by Curaleaf, Inc. As a result, Freehold Fee Simple’s ability to make interest payments to us under the terms of our loans depends entirely on the ability of Curaleaf to satisfy its rent payment and other obligations to Freehold Fee Simple.
There can be no assurance that Curaleaf or its subsidiaries will have sufficient assets, income and/or access to financing to enable them to satisfy their payment and other obligations to Freehold Fee Simple. We anticipate that the operating expenses and capital expenditures of Curaleaf will increase substantially in the foreseeable future as they continue to invest to increase their customer base, expand their marketing channels, hire additional employees and build-out and enhance their infrastructure. The expansion efforts of Curaleaf may prove more expensive than it anticipates, and it may not succeed in increasing its revenues and operating margins sufficiently to offset the anticipated higher expenses. Accordingly, Curaleaf may not be able to achieve or sustain profitability, and it may incur significant losses for the foreseeable future.
If the Curaleaf tenants are unable to meet their rent obligations to Freehold Fee Simple, or Curaleaf is unable to satisfy its obligations as a guarantor, Freehold Fee Simple would not be able to make interest payments to us under the terms of our loans, which would materially adversely affect our business, financial position and results of operations, including our ability to pay dividends to our stockholders. In addition, the inability of the Curaleaf tenants to satisfy their other obligations under their lease agreements with Freehold Fee Simple, such as the payment of taxes, insurance and utilities, could have a material adverse effect on the condition of the properties securing our loans to Freehold Fee Simple. In the event of a default by a tenant, Freehold Fee Simple may also experience delays in enforcing its rights as landlord and may incur substantial costs in protecting its investment and re-leasing the property, which would materially and adversely affect Freehold Fee Simple’s ability to make interest payments to us. For these reasons, if Curaleaf were to experience an adverse change in its business, financial position or results of operations or file for bankruptcy, our business, financial position and results of operations could also be materially and adversely affected. Moreover, Curaleaf and its subsidiaries may have difficulty accessing bankruptcy courts because the federal bankruptcy courts may not provide relief for parties who engage in the cannabis industry or cannabis related businesses. See “— Risks Related to Regulation and Our Industry — We and our borrowers may have difficulty accessing bankruptcy courts” below.
Although Curaleaf guarantees the obligations of the Curaleaf tenants under their lease agreements with Freehold Fee Simple, Curaleaf’s operations are conducted primarily through multiple subsidiaries, and Curaleaf has no material direct operations as a stand-alone entity. The assets of Curaleaf are comprised primarily of the equity interests it directly or indirectly holds in its subsidiaries, with such subsidiaries directly holding retail, dispensary or cultivation and processing operations and related cannabis operating assets. As result, Curaleaf is dependent on equity and debt financings, loans and dividends, distributions and other payments from its subsidiaries to generate the funds necessary to meet any future financial obligations as a guarantor of Freehold Fee Simple’s leases with subsidiaries of Curaleaf. Subsidiaries of Curaleaf are legally distinct from Curaleaf and may be prohibited or restricted from paying dividends or distributions, or otherwise making funds available to Curaleaf under certain conditions. For example, future debt obligations of Curaleaf or its subsidiaries may limit the ability of all or certain of those subsidiaries to pay dividends or distributions, or make loans, to Curaleaf. If Curaleaf is unable to obtain funds from its subsidiaries, Curaleaf may be unable to meet future obligations, if any, as guarantor of Freehold Fee Simple’s leases with its subsidiaries.
Our loan portfolio is, and may continue to be, concentrated in a limited number of borrowers, which subjects us to increased risks due to the unfavorable performance of any borrower and the decline in value of any collateral property.
As described above, as of the date of this prospectus, our portfolio is comprised of the six mortgage loans secured by properties owned by Freehold Fee Simple and leased to subsidiaries of Curaleaf and a
 
25

 
$5.4 million unsecured loan to an operator in Illinois. One consequence of having such a limited number of investments is that our results of operations, financial condition and cash flows may be substantially adversely affected by the unfavorable performance of any borrower and the decline in value of any collateral property.
The properties that secure the mortgage loans in our portfolio are located in Florida, Massachusetts and New Jersey, and the borrower under our unsecured loan is a cannabis operator in Illinois. Because of this geographic concentration, adverse circumstances or developments related to operations in these markets could negatively affect our borrowers’ ability to make interest payments to us and the value of our loans. Such factors include, but are not limited to, the following:

unexpected changes in regulatory requirements and other laws, including with respect to retail sale, distribution, cultivation and processing of cannabis, licensing, banking and insurance;

the responsibility of complying with, and monitoring our borrowers’ compliance with, multiple and often conflicting federal, state and local laws;

changes in tax laws in these states; and

the impact of regional or state specific business cycles and economic instability.
Although we intend to diversify our portfolio of loans over time, our portfolio could remain concentrated in a limited number of loans to a limited number of borrowers.
Our contingent purchase options may become worthless if the value of the collateral declines below the outstanding principal balance of the applicable loan or if the conditions required for us to exercise the option never occur.
We have entered into option agreements with Freehold Fee Simple, pursuant to which we have a contingent option to purchase each of the six properties securing our mortgage loans to Freehold Fee Simple. In addition, we expect most mortgage loans we originate to include a contingent purchase option for a price equal (i) the original agreed-upon valuation upon which the mortgage loan was advanced, plus (ii) a pro rata portion of the aggregate real estate valuation increase, if any, since the origination of the loan, based upon the loan-to-value ratio established at the time of loan origination. The purchase options will be exercisable only upon the legalization of cannabis under U.S. federal law or certain other federal regulatory changes that would permit fee simple ownership of cannabis-related real estate in the United States or would permit our common stock to be listed on a national securities exchange as an owner of fee simple title to cannabis-related real estate in the United States. Our purchase options may become worthless if the value of the collateral declines below the outstanding principal balance of the applicable loan or if the conditions required for us to exercise the option never occur.
We will not own real estate used in cannabis-related operations due to current statutory prohibitions, which will limit our remedies in the event that any of our borrowers default under the terms of their mortgage loans with us.
Although we will have the contractual ability to foreclose on, and take title to, the properties securing our mortgage loans upon a default by the borrower, we will not own real estate used in cannabis-related operations due to current statutory prohibitions, including Section 856 of the CSA, which relates to, among other things, the management or control of properties that are used for the manufacturing, distributing or using of any controlled substances. As a result, we will be forced to pursue other remedies upon any defaults by our borrowers, including forcing a sale of the property to another cannabis operator or using the property for non-cannabis related operations, and we can provide no assurances that such remedies will be as effective as us taking direct ownership of a property used in cannabis-related operations. The regulatory requirements related to real property used in cannabis-related operations may cause significant delays or difficulties in transferring a property to another cannabis operator. In addition, any alternative uses of cannabis-related properties may be limited due to the specialized nature of the facilities or may be less profitable than the cannabis-related operations, which would adversely affect the value of the collateral securing our loans and could result in us selling the property at a loss. Any of the foregoing could have a
 
26

 
material adverse effect on our business, financial condition, results of operations and ability to make distributions to our stockholders.
We may need to foreclose on loans that are in default, which could result in losses.
Subject to the limitations described above, we may find it necessary to foreclose on loans that are in default. Foreclosure processes are often lengthy and expensive. Results of foreclosure processes may be uncertain, as claims may be asserted by the relevant borrower or by other creditors or investors in such borrower that interfere with enforcement of our rights, such as claims that challenge the validity or enforceability of our loan or the priority or perfection of our security interests. Our borrowers may resist foreclosure actions by asserting numerous claims, counterclaims and defenses against us, including, without limitation, lender liability claims and defenses, even when the assertions may have no merit, in an effort to prolong the foreclosure action and seek to force us into a modification or buy-out of our loan for less than we are owed. In addition, the transfer of certain collateral to us may be limited or prohibited by applicable laws and regulations. For transferable collateral, foreclosure or other remedies available may be subject to certain laws and regulations, including the need for regulatory disclosure and/or approval of such transfer. If federal law were to change to permit cannabis companies to seek federal bankruptcy protection, the applicable borrower could file for bankruptcy, which would have the effect of staying the foreclosure actions and delaying the foreclosure processes and potentially result in reductions or discharges of debt owed to us. Foreclosure also may create a negative public perception of the collateral property, resulting in a diminution of its value. Even if we are successful in foreclosing on collateral property securing our loan, foreclosure-related costs, high loan-to-value ratios or declines in property values could prevent us from recovering the principal amount of our loans, and we could be required to record a valuation allowance for such losses. Any costs or delays involved in the foreclosure or a liquidation of the underlying property will reduce the net proceeds realized and, thus, increase the potential for loss. In addition, in the event a borrower defaults on any of its obligations to us and such debt obligations are equitized, we do not intend to directly hold such equity interests, which may result in additional losses on our loans in such entity.
Certain assets of our borrowers may not be used as collateral or transferred to third parties due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively impact our profitability.
Each state that has legalized cannabis in some form has adopted its own set of laws and regulations that differ from one another. In particular, laws and regulations differ among states regarding the collateralization or transferability of cannabis-related assets, such as cannabis licenses, cannabis inventory and ownership interests in licensed cannabis companies. Some states, including the states where our current borrowers operate, allow the collateralization or transferability of cannabis-related assets, but with restrictions, such as meeting certain eligibility requirements, utilization of state receiverships and/or upon approval by the applicable regulatory authority. Other states where our borrowers may operate in the future may prohibit the collateralization or transferability of certain cannabis-related assets, such as cannabis licenses. Such restrictions or prohibitions may cause delays or difficulties in transferring the properties securing our loans to another cannabis operator, which could have a material adverse effect on our business, financial condition, liquidity and results of operations. In addition, because the sales of such assets may be forced upon the borrower when time may be of the essence and available to a limited number of potential purchasers, the sales prices may be less than the prices obtained with more time in a larger market.
If we foreclose on properties securing our loans, we may have difficulty selling the properties due to the nature of specialized industrial cultivation/processing cannabis properties and the potentially limited number of high-quality operators for such properties, as well as for retail/dispensary cannabis properties.
Specialized industrial cultivation/processing cannabis properties are highly specialized and require substantial investment to make them suitable for such uses. In addition, there may be a limited number of high-quality operators of specialized industrial cultivation/processing and retail/dispensary cannabis properties or a limited number of operators in a particular market that have completed the state-licensing process. As a result, if we foreclose on properties securing our loans, we may have difficulty selling such properties and may be forced to sell a property to a lower quality operator. To the extent there is a change in law or we are unable to find a suitable cannabis operator, we may be forced to sell a property at a loss to a
 
27

 
party outside of the cannabis industry. Any of the foregoing could materially and adversely affect the value of our assets and our results of operations, financial condition and ability to pay dividends to our stockholders.
As a lender, we generally are not in a position to exert influence on borrowers, and our borrowers may make decisions that could decrease the value of our loans to such borrowers or the collateral securing our loans.
As a lender, we generally are not in a position to exert influence on borrowers. As a result, we are subject to the risk that our borrowers may make business decisions with which we disagree or may take risks or otherwise act in ways that do not serve our interests, which could decrease the value of our loans or the collateral securing our loans.
Failure to succeed in new markets may have an adverse impact on our results of operations and ability to make distributions to our stockholders.
As of the date of this prospectus, the loans in our portfolio are secured by, or otherwise relate to, properties located in Florida, Massachusetts, New Jersey and Illinois. We intend to finance specialized industrial cultivation/processing and retail/dispensary properties in markets where we do not currently conduct our business. When we originate loans in new markets, we may face risks associated with a lack of market knowledge, including the applicable state and local laws with respect to the cannabis industry, the availability and identity of quality borrowers, forging new business relationships in the area and unfamiliarity with local government requirements and procedures. Furthermore, the negotiation of a potential expansion into new markets would divert management time and other resources. As a result, we may have difficulties executing our business strategy in these new markets, which could have a negative impact on our results of operations and ability to make distributions to our stockholders.
We depend on key personnel whose continued service is not guaranteed and each of whom would be difficult to replace.
We depend on the efforts and expertise of Mr. Brain, our Chief Executive Officer and the Chairman of our Board of Directors, Mr. Walraven, our Chief Operating Officer and a member of our Board of Directors, Mr. Yi, our Chief Financial Officer, and our other officers to execute our business strategy. If one or more of these individuals were to no longer be employed by us, we may be unable to find suitable replacements. If we were to lose the services of one or more of these individuals and were unable to find suitable replacements, our business, financial condition, results of operations and ability to make distributions to our stockholders at expected levels or at all could be materially and adversely affected.
Some of our borrowers may be start-up businesses and may be unable to make interest payments with funds from operations or at all, which could adversely affect our business, financial condition, results of operations and ability to make distributions to our stockholders and the market price of our common stock.
The success of our investments will be materially dependent on the financial stability of our borrowers. Due to the limited number of high-quality cannabis operators with successful track records, some of our future borrowers may be independent or start-up cannabis operators about which there may be no or limited historical operating and financial information. As a result of this limited information, it is possible that we could make loans to borrowers that do not perform as expected and ultimately are unable to make interest and principal payments, which could adversely impact our business, financial condition, results of operations, cash flows and ability to make distributions to our stockholders and the market price of our common stock.
In addition, some of our borrowers may be start-up businesses that have little or no revenue when they enter into loans with us and, therefore, may be unable to make interest payments with funds from operations. As a result, we expect that these borrowers will make initial interest payments to us using proceeds of the loans from us or other cash on hand. In addition, we expect that such start-up businesses generally will be more vulnerable to adverse conditions resulting from federal and state regulations affecting their businesses or industries and will have more limited access to traditional forms of financing.
Some of our borrowers may be subject to significant debt obligations and may rely on other debt financing to make interest payments to us. Borrowers that are subject to significant debt obligations may be unable to make their interest payments if there are adverse changes in their business plans or prospects,
 
28

 
the regulatory environment in which they operate or in general economic conditions. In addition, the borrowers’ interest payments may reduce the working capital available to such entities and prevent them from devoting the resources necessary to develop and grow their operations and profitability. Furthermore, we may be unable to accurately assess, monitor and evaluate borrower credit quality on an ongoing basis.
Any loan defaults by a borrower could adversely affect our business, financial condition, results of operations, cash flows and ability to make distributions to our stockholders and the market price of our common stock. In the event of a default by a borrower, we may also experience delays in enforcing our rights and may incur substantial costs in protecting our investment.
We face significant risks associated with financing the development and redevelopment of properties.
We may, from time to time, finance the development or redevelopment of properties owned by other parties. Development and redevelopment activities entail risks that could adversely impact our financial condition and results of operations, including:

permitting or construction delays, which may result in increased project costs, as well as deferred revenue;

the operator’s revenues at a property may fail to meet our expectations for a number of reasons, including changes in market and economic conditions beyond the operator’s control and the development of competing properties;

poor performance or nonperformance by, or disputes with, contractors, subcontractors or other third parties on which the development or redevelopment is dependent;

labor stoppages, slowdowns or interruptions;

liabilities, expenses or project delays, stoppages or interruptions as a result of challenges by third parties in legal proceedings; and

weather-related and geological interference, including landslides, earthquakes, floods, drought, wildfires and other events, which may result in delays or increased costs.
Any delays in the development or redevelopment of properties that we finance or the abandonment of the project by our borrowers could adversely impact the ability of our borrowers to make principal and interest payments to us as they come due or otherwise meet their obligations to us, which could have a material adverse effect on our results of operations and the value of our loans.
Our loans may be risky, and we could lose all or part of any loan.
The loans in our portfolio are not, and we expect that substantially all of the loans we originate in the future will not be, rated by any rating agency and, if they were rated, would be rated as non-investment grade by rating agencies. The non-investment grade ratings for these assets typically result from the overall leverage of the loans, the lack of a strong operating history for the facilities underlying the loans, the borrowers’ credit history, the underlying facilities’ cash flow or other factors. For example, the six mortgage loans in our existing portfolio have loan-to-value ratios of approximately 96%, and we expect that our future mortgage loans also will have high loan-to-value ratios. As a result, these investments should be expected to have a higher risk of default and loss than investment grade rated assets. Although we expect our loans generally will be secured, such security does not guarantee that we will receive principal and interest payments according to the terms of the loan, or that the value of any collateral will be sufficient to allow us to recover all or a portion of the outstanding amount of such loan should we be forced to enforce our remedies. For example, if a property securing our loan is no longer able to be operated in the cannabis industry as a result of a change in law or otherwise, it is likely that the borrower will not be able to make payments in full or on time and we may be forced to foreclose on a property that has lost a significant portion of its value. This increases the risk that we will not be able to realize the full value of our mortgage loans. Any loss we incur may be significant and may reduce distributions to our stockholders and adversely affect the market price of our common stock.
 
29

 
The lack of liquidity in our loans may adversely affect our business.
We expect many of our loans will be relatively illiquid, including as a result of our borrowers’ involvement in the regulated cannabis industry. In addition, many of the loans we make, to the extent they constitute securities, will not be registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or disposition except in a transaction that is exempt from the registration requirements of, or otherwise in accordance with, those laws. We, therefore, may be unable to dispose of such loans in a timely manner, or at all, or if we are required and able to liquidate all or a portion of our portfolio, we could realize significantly less value than that which we had previously recorded for our loans. As a result, our ability to vary our portfolio in response to changes in economic, regulatory and other conditions or changes in our strategic plan may be relatively limited, which could adversely affect our results of operations and financial condition.
Due to our borrowers’ involvement in the regulated cannabis industry, we and our borrowers may have a difficult time obtaining or maintaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liabilities.
Insurance that is otherwise readily available, such as workers’ compensation, general liability, title insurance and directors’ and officers’ insurance, is more difficult and expensive for us and our borrowers to obtain because of our borrowers’ involvement in the regulated cannabis industry. We can provide no assurances that we or our borrowers will be able to obtain or continue to carry adequate insurance, or that the cost of such insurance will be available on economically viable terms or at all. If we or our borrowers are unable to obtain or maintain sufficient insurance coverage, it could inhibit our growth, expose us to additional risk and financial liabilities and may have a material adverse impact on our business, financial condition, results of operations, cash flows and ability to make distributions to our stockholders.
We face potential adverse consequences of bankruptcy or insolvency by our borrowers and other obligors.
We are exposed to the risk that our borrowers, guarantors or other obligors could become bankrupt or insolvent. Although our loan agreements will provide us with the right to exercise certain remedies in the event of default on the obligations owing to us or upon the occurrence of certain insolvency events, the bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization. Our rights and remedies as a lender, compared to a landlord, are generally more limited. As a result, our business, financial condition, results of operations and ability to make distributions to our stockholders could be adversely affected if an obligor becomes bankrupt or insolvent.
Moreover, our borrowers may have difficulty accessing bankruptcy courts under the theory that, since cannabis is illegal under federal law, the federal bankruptcy courts cannot provide relief for parties who engage in the cannabis industry or cannabis-related businesses, thereby further increasing the uncertainty and risk of loss to us in the case of the bankruptcy or insolvency of one of our borrowers or guarantors. See “— Risks Related to Regulation and Our Industry — We and our borrowers may have difficulty accessing bankruptcy courts.”
Some of our loans may be recorded at fair value and, as a result, there will be uncertainty as to the value of these loans.
Some of our loans may be in the form of positions or securities that are not publicly traded. Company personnel will perform valuations of our investments in consultation with professionals who provide advice as to methodology and data validity. However, no Company personnel are valuation experts. The fair value of securities and other investments that are not publicly traded may be difficult to determine and may involve substantial judgment on our part. We will value these investments quarterly at fair value, which likely will include use of and reliance on inputs that do not involve market quotations or other objective, transparent or observable characteristics. Because such valuations are subjective, the fair value of certain of our assets may fluctuate over short periods of time, and our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Our results of operations and the market price of our common stock could be adversely affected if the fair value of our investments significantly decreases from period to period or if our determinations regarding the fair value of these investments were materially higher than the values that we ultimately realize upon their
 
30

 
disposal. The valuation process can be particularly challenging during periods of economic turmoil, making valuations during such times more unpredictable and volatile.
Declines in market prices and liquidity in the capital markets can result in significant net unrealized depreciation of our portfolio, which in turn would reduce our net asset value.
Volatility in the capital markets can adversely affect our loan valuations. Decreases in the market values or fair values of our loans are recorded as unrealized depreciation. The effect of all of these factors on our portfolio can reduce our net asset value by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial realized and/or unrealized losses, which could have a material adverse effect on our business, financial condition or results of operations.
For loans recorded at cost, we may experience a decline in the fair value of our assets.
A decline in the fair market value of any loan or other investment that is recorded and carried at “cost” may require us to recognize an “other-than-temporary” impairment against such assets under GAAP if we were to determine that, with respect to any assets in unrealized loss positions, we do not have the ability and intent to hold such assets to maturity or for a period of time sufficient to allow for recovery to the original acquisition cost of such assets. If such a determination were to be made, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair value of such assets on the date they are considered to be other-than-temporarily impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale. If we experience a decline in the fair value of our assets, our results of operations, financial condition and our ability to make distributions to our stockholders could be materially and adversely affected.
Provisions for loan losses are difficult to estimate and could adversely affect our financial condition and results of operations.
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13 Financial Instruments — Credit Losses — Measurement of Credit Losses on Financial Instruments (Topic 326) (“ASU No. 2016-13”) and in April 2019, the FASB issued ASU No. 2019-04 Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (collectively, the “CECL Standard”). These updates change how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value. The CECL Standard replaces the “incurred loss” approach under existing guidance with an “expected loss” model for instruments measured at amortized cost. The CECL Standard requires entities to record allowances (“CECL Allowances”) for held-to-maturity and available-for-sale debt securities that are deducted from the carrying amount of the assets to present the net carrying value at the amounts expected to be collected on the assets. All assets subject to the CECL Standard, with few exceptions, will be subject to these CECL Allowances rather than only those assets where a loss is deemed probable under the other-than-temporary impairment model. Once we adopt the CECL Standard, it could create volatility in the level of our CECL Allowances for loan losses. If we are required to materially increase our level of CECL Allowances for loan losses for any reason, such increase could adversely affect our financial condition and results of operations.
The CECL Standard is effective for fiscal years, and interim periods within those years, beginning January 1, 2023 for private companies, with early adoption permitted. Once we adopt the CECL standard, the determination of CECL Allowances will require us to make certain estimates and judgments, which may be difficult to determine. Our estimates and judgments are based on a number of factors, including (i) whether cash from the borrower’s operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and (iii) the liquidation value of collateral, all of which remain uncertain and are subjective.
We may not be able to obtain or maintain required licenses and authorizations to conduct our business and may fail to comply with various state and federal laws and regulations applicable to our business.
In general, lending is a highly regulated industry in the United States and we are required to comply with, among other statutes and regulations, certain provisions of the Equal Credit Opportunity Act of
 
31

 
1974, or the Equal Credit Opportunity Act, that are applicable to commercial loans, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA Patriot Act, regulations promulgated by the Office of Foreign Asset Control, various laws, rules and regulations related to the cannabis industry and U.S. federal and state securities laws and regulations. In addition, certain states have adopted laws or regulations that may, among other requirements, require licensing of lenders and financiers, prescribe disclosures of certain contractual terms, impose limitations on interest rates and other charges, and limit or prohibit certain collection practices and creditor remedies.
There is no guarantee that we will be able to obtain, maintain or renew any required licenses or authorizations to conduct our business or that we would not experience significant delays in obtaining these licenses and authorizations. As a result, we could be delayed in conducting certain business if we were first required to obtain certain licenses or authorizations or if renewals thereof were delayed. Furthermore, once licenses are issued and authorizations are obtained, we are required to comply with various information reporting and other regulatory requirements to maintain those licenses and authorizations, and there is no assurance that we will be able to satisfy those requirements or other regulatory requirements applicable to our business on an ongoing basis, which may restrict our business and could expose us to penalties or other claims.
Any failure to obtain, maintain or renew required licenses and authorizations or failure to comply with regulatory requirements that are applicable to our business could result in material fines and disruption to our business and could have a material adverse effect on our business, financial condition, operating results and our ability to make distributions to our stockholders.
We rely on information technology in our operations and security breaches and other disruptions in our systems could compromise our and our borrowers’ information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our borrowers and business partners, including personally identifiable information of our borrowers and employees, on our networks. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. We also may incur costs to remedy any damage caused by such disruptions. Further, as we pursue our growth strategy and pursue new initiatives to improve our operations, we are also expanding our information technologies, resulting in a larger technological presence and corresponding exposure to cybersecurity risk. If we fail to assess and identify cybersecurity risks associated with our operations, we may become increasingly vulnerable to such risks. Additionally, the measures we have implemented to prevent security breaches and cyber incidents may not be effective. The theft, destruction, loss, misappropriation or release of sensitive or confidential information, or both, and intellectual property, or interference with our information technology systems or the technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation of privacy laws, potential liability and competitive disadvantage, any of which could result in a material adverse effect on our financial condition, results of operations and the market price of our common stock.
The properties securing our loans may be subject to contingent or unknown liabilities that could adversely affect the value of these properties, and as a result, our loans.
Properties securing our loans may be subject to contingent, unknown or unquantifiable liabilities that may adversely affect the value of our loans. Unknown liabilities may include, but are not limited to, liabilities for cleanup of undisclosed environmental contamination, liabilities for failure to comply with the applicable cannabis-related laws, liabilities for failure to comply with fire, health, life-safety and similar regulations, claims by tenants, vendors or other persons against the former owners of the properties, liabilities incurred in the ordinary course of business and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties. We may in the future foreclose and acquire properties without any recourse, or with only limited recourse, against the prior property owner with respect
 
32

 
to contingent or unknown liabilities. As a result, if a liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle or contest it and may lose some or all of our invested capital in the property, as well as the loss of rental income from that property, which could materially and adversely affect us.
The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations, cash flows and financial condition.
Since being first reported in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The pandemic has led governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders. While operations in many areas have been allowed to fully or partially re-open, no assurance can be given that such closures or restrictions will not be reinstituted in the future.
The impact of the COVID-19 pandemic and measures to prevent its spread could materially and adversely affect our business in a number of ways. While many states have designated cannabis businesses as “essential” and allowed them to remain open, our borrowers’ sales may be adversely impacted by changes in consumer behavior resulting from the pandemic. Any negative impact on our borrowers’ sales could have a material and adverse impact on our borrowers’ ability to make interest payments on our loans to them. Additionally, because of the federal regulatory uncertainty related to the regulated cannabis industry, our borrowers may not be eligible for financial relief from federal and state governments available to other businesses. The deterioration of economic conditions as a result of the pandemic may ultimately materially decrease interest payment collections across our portfolio or result in defaults under our loans, which could adversely affect our financial condition, results of operations and cash available for distribution to our stockholders.
State, local and federal governments have increased, and, as a result of the financial impact of the pandemic, may in the future increase, property taxes or other taxes or fees, or may enact new taxes or fees, in order to increase revenue, which has in the past, and may in the future, increase our and our borrowers’ expenses. In addition, any development or redevelopment projects that we finance could be adversely affected, including as a result of disruptions in supply chains and government restrictions on the types of projects that may continue during the pandemic or as a result of delayed construction schedules due to social distancing efforts or occurrences of the virus at the property.
The COVID-19 pandemic also has caused, and may continue to cause, severe economic, market and other disruptions worldwide. Disruptions in the financial markets could adversely impact our access to equity and debt financing on favorable terms or at all, which could adversely affect our ability to fund loans and other investment opportunities.
The extent of the COVID-19 pandemic’s effect on our operational and financial performance will depend on future developments, including the duration and intensity of the pandemic, the emergence and characteristics of new variants, the timing and effectiveness of vaccines and treatments, and the duration or reinstatement of government measures to mitigate the pandemic or address its effects, all of which are uncertain and difficult to predict. Due to the speed with which the situation is developing, we are not able at this time to estimate the effect of these factors on our business, but the adverse impact on our business, results of operations, financial condition and cash flows could be material.
 
33

 
We may incur significant debt, which may subject us to restrictive covenants and increased risk of loss and may reduce cash available for distributions to our stockholders.
Although to date we have been unable to obtain debt financing on terms and conditions that we find acceptable, subject to market conditions and availability, we may incur significant debt through bank credit facilities (including term loans and revolving facilities), public and private debt issuances and derivative instruments, in addition to transaction-specific funding arrangements. The percentage of leverage we employ will vary depending on our available capital, our ability to obtain and access financing arrangements with lenders, debt restrictions contained in those financing arrangements and the lenders’ and rating agencies’ estimate of the stability of our investment portfolio’s cash flow. Our board of directors may significantly increase the amount of leverage we utilize at any time. Incurring substantial debt could subject us to many risks, including the following:

our cash flows from operations may be insufficient to make required payments of principal of and interest on the debt or we may fail to comply with all of the other covenants contained in the debt, which is likely to result in (i) acceleration of such debt (and any other debt containing a cross-default or cross-acceleration provision) that we may be unable to repay from internal funds or to refinance on favorable terms, or at all, (ii) our inability to borrow unused amounts under our financing arrangements, even if we are current in payments on borrowings under those arrangements and/or (iii) the loss of some or all of our assets to foreclosure or sale;

we may be unable to borrow additional funds as needed or on favorable terms, or at all;

to the extent we borrow debt that bears interest at variable rates, increases in interest rates could materially increase our interest expense;

our default under any loan with cross-default provisions could result in a default on other debt;

our debt may increase our vulnerability to adverse economic and industry conditions;

we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, future business opportunities, stockholder distributions (including distributions necessary to maintain our REIT qualification) and other purposes;

our flexibility in planning for or responding to changing business, industry or economic conditions may be reduced; and

we may not be able to refinance debt that matures prior to the loan it was used to finance on favorable terms, or at all.
If any one of these events were to occur, our financial condition, results of operations, cash flow and ability to make distributions to our stockholders could be materially and adversely affected.
Any future debt instruments may impose restrictive covenants.
Any debt instruments that we may enter into in the future may contain customary negative covenants and other financial and operating covenants that, among other things, may affect our ability to incur additional debt, make certain loans or other investments, reduce liquidity below certain levels, make distributions to our stockholders, redeem debt or equity securities and impact our flexibility to determine our operating policies and investment strategies. If we were to fail to meet or satisfy any such covenants, we would likely be in default under these agreements, and the lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their interests against existing collateral. We could also become subject to cross-default and acceleration rights and, with respect to collateralized debt, the posting of additional collateral and foreclosure rights upon default. Further, such restrictions could also make it difficult for us to satisfy the qualification requirements necessary to maintain our status as a REIT.
Interest rate fluctuations could increase our financing costs and reduce our ability to generate income on our investments, each of which could lead to a significant decrease in our results of operations, cash flows and the market value of our investments.
Our primary interest rate exposure will relate to the financing cost of any debt we may incur in the future. To the extent that our financing costs will be determined by reference to floating rates, such as
 
34

 
LIBOR, the Secured Overnight Financing Rate or a Treasury index, plus a margin, the amount of such costs will depend on a variety of factors, including, without limitation, (i) for collateralized debt, the value and liquidity of the collateral, and for non-collateralized debt, our credit, (ii) the level and movement of interest rates, and (iii) general market conditions and liquidity. In a period of rising interest rates, our interest expense on floating rate debt would increase, while any additional interest income we may earn on any floating-rate loans may not compensate for such increase in interest expense. At the same time, the interest income we earn on our fixed-rate loans would not change, the duration and weighted average life of our fixed-rate loans would increase and the market value of our fixed-rate loans would decrease. Similarly, in a period of declining interest rates, our interest income on any floating-rate loans would decrease, while any decrease in the interest we are charged on any floating-rate debt may not compensate for such decrease in interest income and interest we are charged on any fixed-rate debt would not change. Any such scenario could materially and adversely affect us.
Liability for uninsured losses could adversely affect our financial condition, results of operations and ability to make distributions to our stockholders.
Although we expect the terms of our loans with our borrowers will generally require property and casualty insurance, losses from disaster-type occurrences, such as earthquakes, hurricanes, floods and weather-related disasters, and other types of insurance, may be either uninsurable or not insurable on economically viable terms, due in part to the properties’ locations, construction types and involvement in the regulated cannabis industry. Under these circumstances, the insurance proceeds received with respect to a property relating one of our loans might not be adequate to restore our economic position with respect to our investment. Any uninsured loss could result in the loss of cash flow from, and the asset value of, the affected property and the value of our loan related to such property.
Liability relating to environmental matters may impact the value of properties that we may acquire upon foreclosure of the properties securing our loans.
To the extent we foreclose on properties securing our loans, we may be subject to environmental liabilities arising from such foreclosed properties. In particular, cannabis cultivation and manufacturing facilities may present environmental concerns of which we are not currently aware. Under various federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. Accordingly, if environmental contamination exists on properties we acquire or develop after acquisition, we could become subject to liability for the contamination.
The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of a property securing one of our loans becomes liable for removal costs, the ability of the owner to make payments to us may be reduced, which in turn may adversely affect the value of the relevant loan held by us and our ability to make distributions to our stockholders.
If we foreclose on any properties securing our loans, the presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs, thus harming our financial condition. The discovery of material environmental liabilities attached to any properties securing our loans could have a material adverse effect on our results of operations and financial condition and our ability to make distributions to our stockholders.
Risks Related to Regulation and Our Industry
Cannabis remains illegal under federal law and, therefore, strict enforcement of federal laws regarding cannabis would likely result in our inability and the inability of our borrowers to execute our respective business plans.
Cannabis, other than hemp, is a Schedule I controlled substance under the CSA. Even in those jurisdictions in which the manufacture and use of cannabis has been legalized at the state level, the possession, use and cultivation all remain violations of federal law that are punishable by imprisonment, substantial
 
35

 
fines and forfeiture. Moreover, individuals and entities (including investors in such entities) may violate federal law if they intentionally aid and abet another in violating these federal controlled substance laws, or conspire with another to violate them.
The U.S. Supreme Court has ruled in United States v. Oakland Cannabis Buyers’ Coop. and Gonzales v. Raich that it is the federal government that has the right to regulate and criminalize the sale, possession and use of cannabis, even for medical purposes, regardless of state laws. In January 2018, then acting U.S. Attorney General Jeff Sessions issued a memorandum for all U.S. Attorneys (the “Sessions Memo”) under the Trump administration, rescinding certain past U.S. Department of Justice (the “DOJ”) memoranda regarding cannabis law enforcement, including the DOJ memorandum by former Deputy Attorney General James Michael Cole (the “Cole Memo”) issued on August 29, 2013 under the Obama Administration, which had characterized the use of federal law enforcement resources to prosecute those complying with state regulatory systems allowing the use, manufacture and distribution of medical-use cannabis as an inefficient use of federal investigative and prosecutorial resources when state regulatory and enforcement efforts are effective with respect to enumerated federal enforcement priorities under the CSA. The Sessions Memo remains in effect. As part of the Session’s Memo’s rescindment of the Cole Memo, the Sessions Memo instructs DOJ prosecutors to enforce the laws enacted by Congress and to follow well-established principles that govern all federal prosecutions when deciding whether to pursue prosecutions related to cannabis activities. As a result, federal prosecutors could, and still can, use their prosecutorial discretion to decide to prosecute even state-legal cannabis activities. Although there have not been any identified prosecutions of state law compliant cannabis entities in the approximately three years following the issuance of the Sessions Memo, there can be no assurance that the federal government will not enforce federal laws against the regulated cannabis industry generally.
Congress previously enacted an omnibus spending bill that includes a provision prohibiting the DOJ (which includes the U.S. Drug Enforcement Administration) from using funds appropriated by that bill to prevent certain states from implementing their medical-use cannabis laws. This provision expires on December 3, 2021, and must be renewed by Congress. There can be no assurances that Congress will renew this provision as it has done since 2014. In USA v. McIntosh, the U.S. Court of Appeals for the Ninth Circuit held that this provision prohibits the DOJ from spending funds from relevant appropriations acts to prosecute individuals who engage in conduct permitted by state medical-use cannabis laws and who strictly comply with such laws. However, the Ninth Circuit’s opinion, which only applies to the states of Alaska, Arizona, California, Hawaii, and Idaho, also held that persons who do not strictly comply with all state laws and regulations regarding the distribution, possession and cultivation of medical-use cannabis have engaged in conduct that is unauthorized, and in such instances the DOJ may prosecute those individuals. The court also noted that, if the provision were not continued, prosecutors could enforce against conduct occurring during the statute of limitations even while the provision was previously in force. Furthermore, while properties where cannabis is cultivated or processed exclusively for medical use has received protection from Congress, properties where cannabis is cultivated for adult-use do not have the same protection. Consequently, our borrowers that cultivate, process or sell adult-use cannabis on their properties may be subject to greater or different federal legal and other risks as compared to properties where cannabis is cultivated, processed or sold exclusively for medical use, including not providing protection under the Congressional spending bill provision described above.
Additionally, financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, unlicensed money transmitter statutes and the Bank Secrecy Act of 1970, as amended, or the Bank Secrecy Act. The penalties for violation of these laws include imprisonment, substantial fines and forfeiture. Prior to the DOJ’s rescission of the Cole Memo, supplemental guidance from the DOJ issued under the Obama administration directed federal prosecutors to consider the federal enforcement priorities enumerated in the Cole Memo when determining whether to charge institutions or individuals with any of the financial crimes described above based upon cannabis-related activity. This supplemental guidance was followed by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network, or FinCEN, issued a memorandum on February 14, 2014, or the FinCEN Memorandum, outlining the pathways for financial institutions to bank state-sanctioned cannabis businesses in compliance with federal enforcement priorities. Under these guidelines, financial institutions must submit a Suspicious Activity Report, or SAR, in connection with all cannabis-related banking activities
 
36

 
by any client of such financial institution, in accordance with federal money laundering laws. These cannabis-related SARs are divided into three categories — cannabis limited, cannabis priority, and cannabis terminated — based on the financial institution’s belief that the business in question follows state law, is operating outside of compliance with state law, or where the banking relationship has been terminated, respectively. The FinCEN Memorandum states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. Although the Cole Memo has been rescinded, the FinCEN Memorandum technically remains intact; however, it is unclear whether the current administration will continue to follow the FinCEN Memorandum. Although the DOJ has not initiated the prosecution of financial crimes against state-law compliant cannabis companies or their vendors, the DOJ continues to have the right and power to prosecute crimes committed by banks and financial institutions, such as money laundering and violations of the Bank Secrecy Act, that occur in any state, including states that have in some form legalized the sale of cannabis. Further, the conduct of the DOJ’s enforcement priorities could change for any number of reasons. A change in the DOJ’s priorities could result in the DOJ’s prosecuting banks and financial institutions for crimes that were not previously prosecuted.
Given the Sessions Memo’s confirmation that federal prosecutors have significant prosecutorial discretion, no assurance can be given that the federal prosecutor in each judicial district where we make a loan will not choose to strictly enforce the federal laws governing the processing, sale or distribution of cannabis against our borrowers. Any change in the federal government’s enforcement posture with respect to state-licensed cultivation or sale of cannabis, including the enforcement postures of individual federal prosecutors in judicial districts where we make our loans, would adversely affect our borrowers and impede our ability to execute our business plan, and we would likely suffer significant losses with respect to our loans to cannabis industry participants in the United States, which could have a material and adverse impact on our financial condition, results of operations, cash flows, ability to make distributions to our stockholders and the market price of our common stock.
We have structured our business in a manner intended to comply with U.S. federal laws, rules, regulations, interpretations and enforcement priorities as they exist and are interpreted today, including the Controlled Substances Act, the Money Laundering Control Act, the Bank Secrecy Act, the conspiracy and aiding and abetting laws, and the Racketeer Influenced and Corrupt Organizations Act. There can be no assurances, however, that these laws, rules, regulations, interpretations and enforcement priorities will not change in the future, especially from one Presidential administration to another.
Certain of our borrowers may engage in operations for the adult-use cannabis industry, and as a result, our borrowers may be subject to additional risks associated with such adult-use cannabis operations.
The loans in our portfolio do not, and will not, prohibit our borrowers from engaging in the cannabis business for adult-use that is permissible under state and local laws where our borrowers are located, which may subject such borrowers to different and greater risks, including greater risk of prosecution for violations of the CSA and federal laws governing money laundering. For example, the prohibition in the current omnibus spending bill that prohibits the DOJ from using funds appropriated by Congress to prevent states from implementing their medical-use cannabis laws does not extend to adult-use cannabis laws. In addition, while we may originate loans for properties in states that only permit medical-use cannabis at the time of origination, such states may in the future authorize by state legislation or popular vote the legalization of adult-use cannabis, thus permitting our borrowers to engage in adult-use cannabis operations at the properties securing our loans.
Our ability to grow our business depends on state laws pertaining to the cannabis industry.
Continued development of the cannabis industry and our ability to grow depend upon continued legislative authorization of cannabis at the state level and any number of factors could slow or halt further progress in this area. While there may be ample public support for legislative action permitting the manufacture and use of cannabis, numerous factors impact the legislative process. For example, many states that voted to legalize adult- and/or medical-use cannabis have seen significant delays in drafting and implementing industry regulations and issuing licenses. In addition, burdensome regulation at the state level could slow or stop further development of the adult- and/or medical-use cannabis industry, such as limiting the number
 
37

 
of licenses issued to cannabis operators, limiting the medical conditions for which medical cannabis can be recommended by physicians for treatment, restricting the form in which adult- or medical-use cannabis can be consumed, imposing significant registration requirements on physicians and patients, limiting the types of strains that can be grown, limiting the products that may be sold, or imposing significant taxes on growing, processing and/or selling cannabis, which could have the impact of dampening growth of the cannabis industry and making it difficult for cannabis businesses, including our borrowers, to operate profitably in those states. Any of these factors, or the slowing or halting of additional legislative authorization of cannabis, would adversely affect our business and growth prospects.
FDA regulation of cannabis and the possible registration of properties where cannabis is grown could negatively affect the cannabis industry, which would directly affect our financial condition.
If the federal government legalized cannabis for adult- and/or medical-use, it is possible that the U.S. Food and Drug Administration, or the FDA, would seek to regulate it under the Food, Drug and Cosmetics Act of 1938. Although the FDA has not yet enforced against the state-regulated cannabis industry, it has sent numerous warning letters to sellers of CBD products making health claims, and the FDA could turn its attention to the cannabis industry. The FDA could issue regulations governing the manufacture and marketing of cannabis products, including requirements related to minimum national good manufacturing practice, product standards, registration and listing, and labeling information related to ingredients and directions for use. The FDA also could require approval of cannabis products, and clinical trials may then be needed to verify efficacy and safety of cannabis products. In the event that some or all of these regulations are imposed, we do not know what the impact would be on the cannabis industry, including what costs, requirements and possible prohibitions may be enforced. If we or our borrowers are unable to comply with the regulations or registration as prescribed by the FDA, we and/or our borrowers may be unable to continue to operate our and their businesses in their current forms or at all.
We and our borrowers may have difficulty accessing the service of banks, which could have a material adverse effect on our business and growth prospects.
Financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, unlicensed money transmitter statute and the Bank Secrecy Act. Prior to the DOJ’s announcement in January 2018 of the rescission of the Cole Memo and related memoranda, supplemental guidance from the DOJ directed federal prosecutors to consider the federal enforcement priorities enumerated in the Cole Memo when determining whether to charge institutions or individuals with any of the financial crimes described above based upon cannabis-related activity. This supplemental guidance was followed by FinCEN in the FinCEN Memorandum, which outlines the pathways for financial institutions to bank state-sanctioned cannabis businesses in compliance with federal enforcement priorities. Although the Cole Memo has been rescinded, the FinCEN Memorandum technically remains intact; however, it is unclear whether the current administration will continue to follow the FinCEN Memorandum. Although the DOJ has not initiated the prosecution of financial crimes against state-law compliant cannabis companies or their vendors, the DOJ continues to have the right and power to do so. The continued uncertainty surrounding financial transactions related to cannabis activities may result in financial institutions discontinuing services to the cannabis industry. Consequently, those businesses involved in the regulated adult- or medical-use cannabis industry continue to encounter difficulty establishing banking relationships. In addition, banks and other financial institutions may be reluctant to enter into lending transactions with us because we finance properties used in the adult- and medical-use cannabis industry. To date, we have been unable to obtain debt financing on terms and conditions that we find acceptable. If debt financing continues to be unavailable to us on acceptable terms, our growth may be limited and the market price of our common stock may be adversely impacted.
The terms of our loans require that our borrowers make payments on such loans via check or wire transfer. Only a small percentage of financial institutions in the United States currently provide banking services to licensed companies operating in the cannabis industry. The inability of our borrowers to open accounts and continue using the services of banks will limit their ability to enter into debt arrangements with us or may result in their default under our debt agreements, either of which could materially harm our business, operations, cash flow and financial condition.
 
38

 
Laws and regulations affecting the regulated cannabis industry are frequently changing, which could materially adversely affect our business, and we cannot predict the impact that future regulations may have on us or our borrowers.
Local, state and federal cannabis laws and regulations are broad in scope and subject to evolving interpretations, which could require us or our borrowers to incur substantial costs associated with compliance or alter our or their business plans. In addition, violations of these laws, or allegations of such violations, could disrupt our borrowers’ businesses and result in a material adverse effect on our borrowers’ operations. It is also possible that additional regulations may be enacted in the future that will be directly applicable to our business. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business. Accordingly, any change in these laws or regulations, changes in their interpretation, or newly enacted laws or regulations and any failure by us or our borrowers to comply with new laws or regulations, could require changes to certain of our or our borrowers’ business practices and cause us or our borrowers to incur additional costs, which could materially and adversely impact our business, results of operations, financial condition, cash flows and ability to make distributions to our stockholders.
Assets leased to cannabis businesses may be forfeited to the federal government.
Any assets used in conjunction with the violation of federal law are potentially subject to federal forfeiture, even in states where cannabis is legal. In July 2017, the DOJ issued a new policy directive regarding asset forfeiture, referred to as the “equitable sharing program.” Under this policy directive, federal authorities may adopt state and local forfeiture cases and prosecute them at the federal level, allowing for state and local agencies to keep up to 80% of any forfeiture revenue. This policy directive allows for forfeitures to proceed that are not in accord with the limitations imposed by state-specific forfeiture laws and may lead to increased use of asset forfeitures by local, state and federal enforcement agencies. If the federal government decides to initiate forfeiture proceedings against cannabis businesses, such as the cannabis facilities that are owned or utilized by our borrowers, we may not be able to recover the amounts due to us from those borrowers and would not have recourse to the properties, which would materially and adversely impact our business, results of operations, financial condition, cash flows and ability to make distributions to our stockholders.
We and our borrowers may have difficulty accessing bankruptcy courts.
Because the manufacture and distribution of cannabis is illegal under federal law, the federal bankruptcy courts may not provide relief for parties who engage in the cannabis industry or cannabis-related businesses. Recent bankruptcy rulings have denied bankruptcies for cannabis dispensaries upon the justification that businesses cannot violate federal law and then claim the benefits of federal bankruptcy for the same activity upon the justification that courts cannot ask a bankruptcy trustee to take possession of, and distribute, cannabis assets as such action would violate the CSA. Therefore, we or our borrowers may not be able to seek the protection of the bankruptcy courts and this could materially affect our business or our ability to obtain credit or collect amounts from borrowers in the event of their insolvency.
Our borrowers’ properties are, and will be, subject to extensive regulations, which may result in significant costs to them thereby increasing their likelihood of default, which could materially and adversely affect our business, financial condition, liquidity and results of operations.
Our loans are secured by properties that are subject to various local laws and regulatory requirements, and we would be subject to such requirements if such collateral was foreclosed upon. Local property regulations may restrict the use of properties, or our ability to foreclose on properties and may require our borrowers to obtain approval from local authorities with respect to their properties, including prior to acquiring the property or when developing or undertaking renovations. Among other things, these restrictions may relate to cultivation of cannabis, the use of water and the discharge of waste water, fire and safety, seismic conditions, asbestos-cleanup or hazardous material abatement requirements. We cannot assure you that existing regulatory policies will not materially and adversely affect our borrowers, or that additional regulations will not be adopted that would result in additional costs. These added costs, or the failure to
 
39

 
obtain such regulatory approvals, could make it more difficult, or impossible, for our borrowers to repay us, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Risks Related to Our Organization and Structure
An affiliate of Tilden Park Capital Management LP owns a significant percentage of our common stock and has the ability to exercise substantial influence over us.
As of the date of this prospectus, an affiliate of Tilden Park Capital Management LP, or Tilden Park, owns approximately 51.6% of the outstanding shares of our common stock, and upon completion of this offering, Tilden Park will own     % of the outstanding shares of our common stock. Pursuant to an investor rights agreement between us and Tilden Park, or the Investor Rights Agreement, for so long as Tilden Park owns at least 20% of the outstanding shares of our outstanding common stock, it is entitled to appoint a non-voting observer to our board of directors, and has the right to have such observer elected as a voting board member at Tilden Park’s discretion. The concentration of ownership by Tilden Park in us may influence the outcome of any matters submitted to our stockholders for approval, and it is possible that the interests of Tilden Park may in some circumstances conflict with our interests and the interests of our other stockholders.
The stock ownership limits imposed by the Code on REITs and our charter may restrict stock transfers or business combination opportunities, or both, particularly if our management and board of directors do not favor a combination proposal.
In order for us to qualify and maintain our qualification as a REIT under the Code, not more than 50% of the value of the outstanding shares of our capital stock may be owned, directly or indirectly, including through the application of certain attribution rules, by five or fewer individuals (as defined in the Code to include certain entities such as qualified pension plans) at any time during the last half of a taxable year. Our charter, with certain exceptions, authorizes our board of directors to take the actions that are necessary and desirable to allow us to qualify and preserve our qualification as a REIT. Unless exempted by our board of directors, no person or entity may actually or beneficially own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Code, more than 9.8% in value or in number, whichever is more restrictive, of the outstanding shares of our common stock, the outstanding shares of any class or series of our preferred stock or the aggregate outstanding shares of all classes and series of our capital stock, in each case excluding any shares of our capital stock that are not treated as outstanding for U.S. federal income tax purposes. Our board of directors may, in its sole discretion, grant an exemption to the stock ownership limits, subject to certain conditions and the receipt by our board of directors of certain representations and undertakings.
Our charter also prohibits any person from (1) beneficially or constructively owning shares of our capital stock that would result in our being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT or (2) transferring shares of our capital stock if such transfer would result in us being owned by fewer than 100 persons (determined without regard to any rules of attribution). The stock ownership limits contained in our charter key off the ownership at any time by any “person,” which term includes entities, and take into account direct and indirect ownership as determined under various ownership attribution rules in the Code. The stock ownership limits also might delay or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.
Certain provisions of Maryland law, as well as certain provisions in our charter and bylaws, could inhibit changes in control, which may discourage third parties from seeking change in control transactions that could involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
There are provisions in our charter and bylaws that may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:
 
40

 
Our charter authorizes our board of directors to amend our charter to increase or decrease the aggregate number of authorized shares of stock, to authorize us to issue additional shares of our common stock or preferred stock and to classify or reclassify unissued shares of our common stock or preferred stock and thereafter to authorize us to issue such classified or reclassified shares of stock. The additional classes or series, as well as the additional authorized shares of our common stock, will be available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although our board of directors does not currently intend to do so, it could authorize us to issue a class or series of stock that could, depending upon the terms of the particular class or series, delay, defer or prevent a transaction or a change in control of our company that might involve a premium price for holders of our common stock or that our common stockholders otherwise believe to be in their best interests.
In addition, certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:

“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” ​(defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or any affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder and thereafter impose fair price and/or supermajority voting requirements on these combinations; and

“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, except solely by virtue of a revocable proxy, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” ​(defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights with respect to their control shares except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
As permitted by the MGCL, our bylaws contain provisions exempting any business combination between us and any person from the business combination provisions of the MGCL and exempting any acquisition of our stock from the control share provisions of the MGCL. However, our board of directors may by amendment to our bylaws repeal the exemption from the business combination provisions of the MGCL or opt in to the control share provisions of the MGCL at any time in the future.
We have elected by a provision in our charter, at such time as we are eligible, to be subject to the provisions of Subtitle 8 relating to the filling of vacancies on our board of directors. We have not elected, however, to be subject to any of the other provisions of Subtitle 8, including the provisions that would permit us to classify our board of directors without stockholder approval. Our board of directors is not classified. Moreover, our charter provides that, without the affirmative vote of a majority of the votes cast on the matter by our stockholders entitled to vote generally in the election of directors, we may not elect to be subject to the classified board provisions of Subtitle 8. See “Certain Provisions of Maryland Law and of Our Charter and Bylaws.”
Such takeover defenses may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then-current market price. In addition, the provisions of our charter on the removal of directors and the advance notice provisions of our bylaws, among others, could delay, defer or prevent a transaction or a change in control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interest.
 
41

 
Each item discussed above may delay, deter or prevent a change in control of our company, even if a proposed transaction is at a premium over the then-current market price for our common stock. Further, these provisions may apply in instances where some stockholders consider a transaction beneficial to them. As a result, our stock price may be negatively affected by these provisions. See “Certain Provisions of Maryland Law and of Our Charter and Bylaws.”
We are a holding company with no direct operations and, as such, we will rely on funds received from our operating partnership to pay any distributions to our stockholders, and the interests of our stockholders will be structurally subordinated to all liabilities and obligations of our operating partnership and its subsidiaries.
We are a holding company and conduct substantially all of our operations through our operating partnership. Apart from interests in our operating partnership, we do not have any material assets. As a result, we will rely on cash distributions from our operating partnership to pay any distributions our board of directors may declare on shares of our common stock. We will also rely on distributions from our operating partnership to meet any of our obligations, including any tax liability on taxable income allocated to us from our operating partnership. In addition, because we are a holding company, your claims as a stockholder will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our operating partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our operating partnership and its subsidiaries will be available to satisfy the claims of our stockholders only after all of our and our operating partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.
Our board of directors may change our business, investment and financing strategies without stockholder approval and we may become highly leveraged, which may increase our risk of default under our debt obligations.
Our investment and financing policies are exclusively determined by our board of directors. Accordingly, our stockholders do not control these policies. As the market and regulatory environment evolves, we may change our business, investment and financing strategies without a vote of, or notice to, our stockholders, which could result in our making investments and engaging in business activities that are different from, and possibly riskier than, our investments and business activities to date. In particular, a change in our investment strategy, including the manner in which we allocate our resources across our investments or the types of assets in which we seek to invest, may increase our exposure to interest rate risk, real estate market fluctuations and liquidity risk. Furthermore, as the market and regulatory environment evolves, our board may determine, subject to compliance with applicable laws, to focus on the direct ownership, rather than the financing, of cannabis properties. In addition, our organizational documents do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. Our board of directors may alter or eliminate our current policy on borrowing at any time without stockholder approval. If this policy is changed, we may in the future become highly leveraged, which could result in an increase in our debt service. Higher leverage also increases the risk of default on our obligations. Changes to our strategies with regard to the foregoing could materially and adversely affect our business, financial condition, results of operations and ability to make distributions to our stockholders and the market price of our common stock.
Our operating partnership may issue OP units to third parties without the consent of our stockholders, which would reduce our ownership percentage in our operating partnership and would have a dilutive effect on the amount of distributions made to us by our operating partnership and, therefore, the amount of distributions we can make to our stockholders.
We are the sole member of the general partner of our operating partnership and currently own all of the outstanding OP units in our operating partnership. We may, in connection with our financing of properties, as compensation or otherwise, issue additional OP units. Such issuances would reduce our ownership percentage in our operating partnership and could affect the amount of distributions made to us by our operating partnership and, therefore, the amount of distributions we can make to our stockholders. Because you will not directly own OP units, you will not have any voting rights with respect to any such issuances or other partnership level activities of our operating partnership.
 
42

 
Conflicts of interest could arise between the interests of our stockholders and the interests of holders of OP units, which may impede business decisions that could benefit our stockholders.
If we issue OP units to third parties, conflicts of interest could arise as a result of the relationships between us, on the one hand, and our operating partnership or any limited partner thereof, on the other. Our directors and officers have duties to us and our stockholders under applicable Maryland law in connection with their management of our company. At the same time, we, as the sole member of the general partner of our operating partnership, have fiduciary duties and obligations to our operating partnership and its limited partners under Delaware law and the partnership agreement of our operating partnership in connection with the management of our operating partnership. Our duties as the sole member of the general partner to our operating partnership and its partners may come into conflict with the duties of our directors and officers to our company and our stockholders. These conflicts may be resolved in a manner that is not in the best interests of our stockholders.
If we issue OP units in connection with our financing of properties or in other transactions, the value placed on such OP units may not accurately reflect their market value, which may dilute your interest in us.
If we issue OP units in connection with our financing of properties or in other transactions, the per unit value attributable to such interests will be determined based on negotiations with the other party and, therefore, may not reflect the fair market value of such OP units if a public market for such OP units existed. If the value of such OP units is greater than the value of the interest acquired, your interest in us may be diluted.
Our rights and the rights of our stockholders to recover on claims against our directors and officers are limited, which could reduce your and our recovery against them if they negligently cause us to incur losses.
Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner that he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances.
Under the MGCL, directors are presumed to have acted in accordance with this standard of care. As permitted by Maryland law, our charter eliminates the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

actual receipt of an improper benefit or profit in money, property or services; or

active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.
Our charter and bylaws obligate us to indemnify each present and former director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. We also have entered into indemnification agreements with our executive officers and directors granting them express indemnification rights. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the current provisions in our charter, bylaws and indemnification agreements or that might exist for other public companies.
Our charter contains provisions that could make it difficult for our stockholders to effect changes to our management.
Our charter contains provisions that could make it difficult for our stockholders to effect changes to our management and may prevent a change in control of our company that is in the best interests of our stockholders. Our charter provides that a director may be removed with or without cause upon the affirmative vote of holders of a majority of all the votes entitled to be cast generally in the election of directors.
However, vacancies may be filled only by a majority of the remaining directors in office, even if less than a quorum, which may make it more difficult to change our management by replacing directors and may prevent a change in control of our company that is in the best interests of our stockholders.
 
43

 
We will incur new costs as a result of becoming a public company, and such costs may increase if and when we cease to be an “emerging growth company,” which could materially and adversely affect our results of operations.
As a public company, we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. As a result, our executive officers’ attention may be diverted from other business concerns, which could adversely affect our business and results of operations. In addition, the expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect compliance with these public reporting requirements and associated rules and regulations to increase expenses, particularly after we are no longer an emerging growth company. We could be an emerging growth company until December 31, 2026, although circumstances could cause us to lose that status earlier, which could result in our incurring additional costs applicable to public companies that are not emerging growth companies earlier than anticipated.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of our executive officers’ time and attention from revenue generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.
As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our executive officers and materially and adversely affect our business and results of operations.
As a result of becoming a public company, management will be required to report periodically on the effectiveness of our system of internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or our system of internal control over financial reporting may not be determined to be appropriately designed or operating effectively, which may materially and adversely affect investor confidence in our company and, as a result, the value of our common stock.
We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first full fiscal year after the completion of this offering. In addition, after we are no longer an emerging growth company under the JOBS Act and no longer a non-accelerated filer, Section 404 of the Sarbanes- Oxley Act will require our auditors to deliver an attestation report on the effectiveness of our internal control over financial reporting in conjunction with their opinion on our audited financial statements. Substantial work on our part is required to implement appropriate processes, document the system of internal control over key processes, assess their design, remediate any deficiencies identified and test their operation. This process is expected to be both costly and challenging. The existence of any material weakness would preclude a conclusion by management and our independent auditors that we maintained effective internal control over financial reporting. Our management may be required to devote significant time and expense to remediate any material weaknesses that may be discovered and may not be able to remediate any material weakness in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements,
 
44

 
cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, all of which could lead to a decline in the market price of our common stock.
Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain actions and proceedings that may be initiated by our stockholders, subject to certain exceptions, which may limit a stockholder’s ability to bring certain claims against us or our directors, officers or other employees in a judicial forum that the stockholder believes is favorable.
Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Northern Division, shall be the sole and exclusive forum for the following: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of any duty owed by us or by any of our directors, officers or other employees to us or our stockholders; (iii) any action asserting a claim against us or any of our directors, officers or other employees arising pursuant to any provision of the MGCL or our charter or bylaws; or (iv) any action asserting a claim against us or any of our directors, officers or other employees that is governed by the internal affairs doctrine. This choice of forum provision will not apply to claims arising under the Securities Act or the Exchange Act. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits with respect to such claims.
Maintenance of our exemption from registration under the 1940 Act imposes limits on our operations. Your investment return may be reduced if we are required to register as an investment company under the 1940 Act.
We intend to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the 1940 Act. We believe we will not be considered an investment company as defined in the 1940 Act because we will not engage primarily, propose to engage primarily, or hold ourselves out as being engaged primarily, in the business of investing, reinvesting or trading in securities. Further, we intend to conduct our business in a manner so that neither we nor our operating partnership, on an unconsolidated basis, own investment securities (as that term is defined in Section 3(a)(2) of the 1940 Act) in excess of 40% of the value of our or its respective total assets (exclusive of U.S. Government securities and cash items). For these purposes, investment securities may include securities issued by majority-owned subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, which may limit the types of businesses in which we engage through our subsidiaries.
If the value of our holdings in investment securities exceeds 40% of our total assets on an unconsolidated basis, or if we or our subsidiaries fail to maintain another exception or exemption from the 1940 Act (see below), we could, among other things, be required either to (a) substantially change the manner in which we conduct our operations to avoid being required to register as an investment company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (c) register as an investment company under the 1940 Act, any of which could negatively affect our business, the value of our common stock, the sustainability of our business model, and our ability to make distributions to our stockholders, which also could have an adverse effect on our business and the market price for our common stock. If we or any of our subsidiaries were required to register as an investment company under the 1940 Act, the registered entity would become subject to substantial regulation with respect to capital structure (including restrictions on the ability to use leverage), management, operations, prohibitions on transactions with affiliated persons (as defined in the 1940 Act), portfolio composition, including restrictions with respect to diversification and industry concentration, and compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.
Failure to meet an exception from the definition of “investment company” in the 1940 Act would require us to significantly restructure our investment strategy. For example, because affiliated transactions are generally prohibited under the 1940 Act, we would not be able to enter into transactions with any of our affiliates if we are required to register as an investment company, which could have a material adverse effect on our ability to operate our business and pay distributions. If we were required to register us as an investment company but failed to do so, we would be prohibited from engaging in our business, and
 
45

 
administrative enforcement or civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement.
We expect that certain current and future subsidiaries can rely upon the exception from the definition of “investment company” set forth in Section 3(c)(5)(C) of the 1940 Act, which applies to entities primarily engaged in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exception, as interpreted by the staff of the SEC, generally requires at least 55% of an entity’s assets to be comprised of mortgages and other liens on and interests in real estate (“qualifying interests”) and an additional 25% of the entity’s assets to be comprised of real estate-related assets (as that term has been interpreted by the staff of the SEC). The 25% threshold is subject to reduction to the extent that the entity invests more than 55% of its total assets in qualifying interests, and no more than 20% of such entity’s total assets are invested in miscellaneous investments. We expect each of our subsidiaries relying on Section 3(c)(5)(C) to rely on guidance published by the SEC staff and on our analyses of such guidance to determine which assets are qualifying interests and which are real estate-related assets. However, the SEC’s guidance was issued in accordance with factual situations that may be substantially different from the factual situations we may face, and much of the guidance was issued more than 20 years ago. No assurance can be given that the SEC staff will concur with our classification of our assets. In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify assets for purposes of qualifying for the exception contained in Section 3(c)(5)(C) of the 1940 Act. If we are required to re-classify our subsidiaries’ assets, they may no longer be in compliance with such exception. To the extent that the SEC staff publishes new or different guidance with respect to any assets we have determined to be qualifying interests or real estate-related assets, we may be required to adjust our strategy accordingly. In addition, we may be limited in our ability to make certain investments and these limitations could result in a subsidiary holding assets we might wish to sell or not acquiring or selling assets we might wish to hold.
We and/or our subsidiaries may also be able to rely upon other exclusions from the definition of “investment company” in the 1940 Act, including the exclusion provided by Section 3(c)(6) of the 1940 Act (which excludes, among other things, parent entities whose primary business is conducted through majority-owned subsidiaries relying upon the exclusion provided by Section 3(c)(5)(C), discussed above). The SEC staff has issued little interpretive guidance with respect to Section 3(c)(6) and any guidance published by the staff could require us to adjust our strategy accordingly.
In August 2011, the SEC solicited public comment on a wide range of issues relating to Section 3(c)(5)(C) of the 1940 Act, including the nature of the assets that are qualifying interests for purposes of the exemption and whether mortgage REITs should be regulated in a manner similar to investment companies. There can be no assurance that the laws and regulations governing the 1940 Act status of REITs, including the SEC or its staff providing more specific or different guidance regarding these exemptions, will not change in a manner that adversely affects our operations.
Termination of the employment agreements with our executive officers could be costly and prevent a change in our control.
The employment agreements with each of our executive officers provide that, if their employment with us terminates under certain circumstances (including upon a change in our control), we may be required to pay them significant amounts of severance compensation, including accelerated vesting of equity awards, thereby making it costly to terminate their employment. Furthermore, these provisions could delay or prevent a transaction or a change in our control that might involve a premium paid for our common stock or otherwise be in the best interests of our stockholders.
Our agreements with Freehold Fee Simple may not reflect terms that would have resulted from arm’s-length negotiations with unaffiliated third parties.
The agreements related to the Spin-Off, including the separation and distribution agreement, the administrative services agreement, the loan agreements, the option agreements and certain other agreements, were entered into in the context of the Spin-Off while Freehold Fee Simple was still controlled by us. As a result, they may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties.
 
46

 
The ownership of common stock of Freehold Fee Simple by our executive officers, directors and Tilden Park may create, or may create the appearance of, conflicts of interest.
The ownership of common stock of Freehold Fee Simple by our executive officers, directors and Tilden Park may create, or may create the appearance of, conflicts of interest when Tilden Park and our officers and directors are faced with decisions that could have different implications for Freehold Fee Simple than they do for us, including whether to enforce our rights under our agreements with Freehold Fee Simple or whether to renew, terminate or re-negotiate such agreements. Any material amendment or waiver related to our existing agreements with Freehold Fee Simple, as well as any new material agreements or arrangements with Freehold Fee Simple, will require the approval of a majority of our independent directors.
Risks Related to Our Taxation as a REIT
Failure to qualify as a REIT would cause us to be taxed as a regular corporation, which could adversely affect the value of our stock and substantially reduce funds available for distributions to stockholders.
We elected to be taxed as a REIT for U.S. federal income tax purposes. We believe that our organization and current and proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT. However, we cannot assure you that we will qualify as such. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Code for which there are limited judicial and administrative interpretations and which involve the determination of facts and circumstances not entirely within our control. Future legislation, new regulations, administrative interpretations or court decisions may significantly change the U.S. tax laws applicable to the qualification as a REIT for U.S. federal income tax purposes or the U.S. federal income tax consequences of such qualification.
If we fail to qualify as a REIT in any taxable year we will face serious tax consequences that could substantially reduce the funds available for distributions to our stockholders because:

we would not be allowed a deduction for distributions paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates;

we could be subject to increased state and local taxes; and

unless we are entitled to relief under statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.
In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions to remain qualified as a REIT for U.S. federal income tax purposes. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our stock.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.
Even if we qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, a 100% “prohibited transaction” tax (described below), tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. In addition, in order to meet the REIT qualification requirements or to avoid the imposition of the 100% prohibited transaction tax, we may hold certain assets through one or more TRSs that will be subject to corporate-level income tax at regular rates. Any of these taxes would decrease cash available for distribution to our stockholders.
We are subject to a 100% tax on our gain or income from “prohibited transactions,” and we may forego certain otherwise attractive transactions to avoid such tax.
A REIT’s net income from “prohibited transactions” is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold a significant amount of assets as inventory or primarily for sale to customers in the ordinary course of our business, the
 
47

 
characterization of an asset sale as a prohibited transaction depends on the particular facts and circumstances. The Code provides a safe harbor that, if met, allows a REIT to avoid being treated as engaged in a prohibited transaction. We may sell certain assets in transactions that do not meet all of the requirements of such safe harbor if we believe the transaction nevertheless would not be a prohibited transaction based on an analysis of all of the relevant facts and circumstances. If the IRS were to successfully argue such a sale was in fact a prohibited transaction, we would be subject to a 100% penalty tax with respect to such sale. In addition, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales, even though the sales might otherwise be beneficial to us. Alternatively, we may choose to structure such sales in a less tax efficient manner to avoid such tax, including through the use of a TRS that would be subject to regular corporate income tax on any income or gain from such sales.
REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds during unfavorable market conditions.
To qualify as a REIT, generally we must distribute to our stockholders at least 90% of our net taxable income each year, without regard to the deduction for dividends paid and excluding capital gains and certain non-cash income. In addition, we will be subject to corporate income tax to the extent we distribute less than 100% of our taxable income, including any net capital gain, and a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. We intend to make distributions to our stockholders to comply with the requirements of the Code for REITs and to minimize or eliminate our corporate income tax obligations to the extent consistent with our business objectives. However, our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for U.S. federal income tax purposes, the effect of non-deductible capital expenditures, the creation of reserves or required debt service or amortization payments, the possibility of non-deductible fines imposed on cannabis-related businesses and the application of various other income tax provisions of the Code, including Section 280E and Section 163(j), each of which are described below. In order to meet the REIT distribution requirement, we may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or sales. In addition, we may need to reserve cash (including proceeds from this offering) to satisfy our REIT distribution requirements, even though there are attractive investment opportunities that may be available. To address and/or mitigate some of these issues, we may make taxable distributions that are in part paid in cash and in part paid in our common stock. In such cases our stockholders may have tax liabilities from such distributions in excess of the cash they receive.
If we are subject to Section 280E of the Code because of the business activities of our borrowers, the resulting disallowance of income tax deductions could cause us to incur U.S. federal income tax and jeopardize our REIT status.
Section 280E of the Code provides that, with respect to any taxpayer, no deduction or credit is allowed for expenses incurred during a taxable year “in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the CSA) which is prohibited by federal law or the law of any State in which such trade or business is conducted.” Because cannabis is a Schedule I controlled substance under the CSA, Section 280E by its terms applies to the purchase and sale of cannabis products. Although we will not be engaged in the purchase, sale, cultivation, harvesting, or processing of cannabis products, we will make loans with respect to properties operated by parties who will engage in such activities. If the IRS asserted that, through our lending activities, we are primarily or vicariously liable under federal law for “trafficking” a Schedule I substance (cannabis) under Section 280E of the Code or for any other violations of the CSA, the IRS may seek to apply the provisions of Section 280E to us and disallow certain tax deductions, including for management fees, depreciation or interest expense. If such tax deductions are disallowed, we could be unable to meet the distribution requirements applicable to REITs under the Code, which could cause us to incur U.S. federal income tax and fail to qualify as a REIT. Because we will not be engaged in the purchase, sale, cultivation, harvesting or processing of a controlled substance, we do not believe that we will be subject to the disallowance provisions of Section 280E, and neither we nor our tax advisors are aware of any tax court cases or guidance from the IRS in which a taxpayer not engaged in such activities with respect
 
48

 
to a controlled substance was disallowed deductions under Section 280E. However, there is no assurance that the IRS will not take such a position either currently or in the future.
To the extent our business interest deductions, if any, are deferred or disallowed under Section 163(j) of the Code, our taxable income may exceed our cash available for distributions to stockholders.
Section 163(j) of the Code limits the deductibility of “business interest” for both individuals and corporations. Certain real property trades or businesses are permitted to elect out of this limitation, but we do not expect such election to be available to us. To the extent our interest deductions or those of our subsidiaries, if any, are deferred or disallowed under Section 163(j) of the Code or any other provision of law, our taxable income may exceed our cash available for distribution to our stockholders. In that event, we may need to borrow funds or take other actions to satisfy the REIT distribution requirements for the taxable year in which this “phantom income” is recognized.
Complying with the REIT requirements may cause us to forego otherwise attractive opportunities or to liquidate otherwise attractive investments.
To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets and the amounts we distribute to our stockholders. In order to meet these tests, we may be required to forego investments that we might otherwise make. In addition, we may be required to liquidate attractive investments that do not or no longer comply with the REIT income or asset requirements or for the purpose of generating cash to distribute to stockholders. Thus, compliance with the REIT requirements may hinder our performance by limiting our ability to make or maintain ownership of certain otherwise attractive investments.
Temporary investment of the net offering proceeds of this offering in short-term securities and income from such investment generally will allow us to satisfy various REIT income and asset requirements, but only during the one-year period beginning on the date we receive such net offering proceeds. If we are unable to invest a sufficient amount of the net proceeds of this offering in qualifying real estate assets within such one-year period, we could fail to satisfy one of the gross income tests or we could be limited to investing all or a portion of any remaining funds in cash or cash equivalents. If we fail to satisfy such requirements, unless we are entitled to relief under certain provisions of the Code, we could fail to qualify as a REIT.
Dividends payable by REITs generally do not qualify for reduced U.S. federal income tax rates applicable to qualified dividend income.
The maximum U.S. federal income tax rate for qualified dividends payable to individual U.S. stockholders is 20% plus, to the extent applicable, a 3.8% healthcare tax. Dividends payable by REITs generally are not qualified dividends and therefore are not eligible for taxation at the reduced rates. However, to the extent such dividends are attributable to certain dividends that we receive from a TRS or to income from a prior year that was retained by us and subject to corporate tax, such dividends generally will be eligible for the reduced rates that apply to qualified dividend income. The more favorable rates applicable to regular corporate dividends could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock. However, through the 2025 tax year, individual U.S. stockholders may be entitled to claim a deduction in determining their taxable income of 20% of ordinary REIT dividends (dividends other than capital gain dividends and dividends attributable to qualified dividend income received by us, if any), which temporarily reduces the effective income tax rate on these dividends to a maximum tax rate of 29.6% (excluding any applicable healthcare tax) for those years. If we fail to qualify as a REIT, such stockholders may not claim this deduction with respect to dividends paid by us. Stockholders are urged to consult tax advisers regarding the effect of this change on the effective tax rate with respect to REIT dividends.
Complying with the REIT requirements may limit our ability to hedge our operational risks effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge risks relating to our operations. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or
 
49

 
currency fluctuations with respect to real estate assets including mortgage loans and mortgage-backed securities, if properly identified under applicable Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of both of the gross income tests.
The Spin-Off could result in adverse tax consequences if a taxing authority challenged the value of our spun-off real estate portfolio.
The Spin-Off of Freehold Fee Simple was a taxable distribution to us and our stockholders, with the amount of such distribution based, in part, on the value of our spun-off real estate portfolio. As part of the Spin-Off, we will determine and report such value for income tax purposes. If a taxing authority challenges our determination of such valuation, we could be required to recognize additional gain and earnings from the Spin-Off, and our stockholders could be required to recognize additional income with respect to our dividends during the year in which the Spin-Off occurs.
Our contractual relationships with Freehold Fee Simple were not negotiated at arm’s length and could be scrutinized by a taxing authority, which could result in adverse tax consequences to us.
We and Freehold Fee Simple were under the control of the same stockholders at the time of the
Spin-Off. Based on that common control, a taxing authority could assert that the results of transactions between us and Freehold Fee Simple are not consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances (an arm’s-length result). If a taxing authority successfully made such a determination, a taxing authority could attempt to reapportion or reallocate gross income, deductions, credits or allowances between us and Freehold Fee Simple. Such apportionment or allocation could increase our taxable income and result in adverse tax consequences to us and our stockholders.
The U.S. federal income tax treatment of certain of our loans may be subject to uncertainty.
Certain of our loans that we intend to treat as “variable rate debt instruments” for U.S. income tax purposes have terms that subject such treatment to uncertainty. For example, it is possible that a taxing authority could assert that, due to the manner in which the interest rate on such loans adjusts over time, such loans should be treated as “contingent payment debt instruments,” or CPDIs, for U.S. income tax purposes. If CPDI treatment applied, we may be required to recognize interest income for U.S. income tax purposes earlier than we had anticipated. Such acceleration could cause adverse income tax consequences to us and our stockholders, including with respect to our ability to meet the distribution requirements under the REIT rules.
Legislative or regulatory tax changes related to REITs could materially and adversely affect our business.
At any time, the U.S. federal income tax laws or regulations promulgated by the U.S. Treasury Department (the “Treasury Regulations”) governing REITs, or the administrative interpretations of those laws or regulations, may be changed, possibly with retroactive effect. We cannot predict if or when any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective or whether any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.
Risks Related to This Offering and Ownership of Our Common Stock
There has been no public market for our common stock prior to this offering and an active trading market for our common stock may not develop and be sustained following this offering.
Prior to this offering, there has been no public market for our common stock, and there can be no assurance that an active trading market will develop or be sustained or that shares of our common stock will trade at or above the initial public offering price. The initial public offering price of our common stock
 
50

 
was determined by agreement among us and the representatives of the underwriters, but there can be no assurance that our common stock will not trade below the initial public offering price following the completion of this offering. See “Underwriting.” The market price of our common stock could be substantially affected by many factors, including general market conditions; the extent to which a secondary market develops for our common stock following the completion of this offering; the extent of institutional investor interest in us; the level of demand for securities issued by lenders to owners or operators of specialized industrial cultivation/processing and retail/dispensary cannabis properties; the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate-based companies); and our financial performance.
You will not have the opportunity to evaluate the investments to be funded with the net proceeds from this offering before we make them, and we may not be able to use the net proceeds from this offering to originate loans that meet our investment objectives in a timely manner, or at all, which would impede our growth and adversely affect our results of operations and ability to make distributions to our stockholders.
We have not yet identified any specific loans that we may make in the future and we will not provide you with information to evaluate our investments prior to making such loans, other than through our disclosures required by the rules of the SEC. As a result, our management team will have broad discretion to identify loans to originate with the proceeds from this offering and may make investments with which you may not agree. For a discussion of our business and growth strategies, see “Our Business — Our Business and Growth Strategies,” and for a discussion of our financing pipeline, see “Our Business — Our Financing Pipeline.” We have not entered into binding commitments with respect to any of the potential financing opportunities described in this prospectus, and we can provide no assurances that (i) we will be able to enter into definitive agreements to invest in any new loans that meet our investment objectives, (ii) we will be successful in consummating any loan opportunities we identify in a timely manner, or at all, or (iii) any of the loans we may make using the net proceeds from this offering will yield attractive risk-adjusted returns. Our inability to do any of the foregoing likely would materially and adversely affect our business and our ability to make distributions to our stockholders. See “— Risks Related to Our Business and Growth Strategy — Our growth will depend on our ability to finance cannabis real estate assets, and we may be unable to consummate financings on advantageous terms or at all.”
The trading volume and market price of our common stock may be volatile and could decline substantially following this offering.
Even if an active trading market develops and is sustained for our common stock, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above the price at which you purchase them in this offering. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future, including as a result of factors unrelated to our operating performance or prospects. In particular, the market price of our common stock could be subject to wide fluctuations in response to a number of factors, including, among others, the following:

actual or anticipated differences in our operating results, liquidity, or financial condition;

the passage of legislation or other regulatory developments that adversely affect us or our industry;

changes in the perception of our industry;

changes in our revenues or earnings estimates;

the impact of the ongoing COVID-19 pandemic and actions taken to reduce its spread;

publication of research reports about us, our investments or the overall real estate market;

increases in market interest rates that lead purchasers of our common stock to demand a higher yield;

additions and departures of key personnel;

the performance and market valuations of other similar companies;
 
51

 

adverse market reaction to any additional debt we incur in the future;

actions by institutional stockholders;

the realization of any of the other risk factors disclosed in this prospectus;

speculation in the press or investment community;

the extent of investor interest in our securities;

the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based companies;

our underlying asset value;

changes in accounting principles;

investor confidence in the capital markets generally;

future equity issuances;

failure to maintain our REIT qualification;

low trading volume of our stock;

terrorist acts; and

general market and economic conditions, including factors unrelated to our operating performance.
In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of their common stock. If the market price of our common stock is volatile and this type of litigation is brought against us, it could result in substantial costs and divert our management’s attention and resources, which could have a material adverse effect on us.
If you purchase common stock in this offering, you will experience immediate dilution.
As of September 30, 2021, our aggregate historical combined net tangible book value was approximately $36.1 million, or $8.34 per share of our common stock. As a result, the pro forma net tangible book value per share of our common stock after the completion of this will be less than the initial public offering price. The purchasers of shares of our common stock offered hereby will experience immediate and substantial dilution of $         per share in the pro forma net tangible book value per share of our common stock, based on the midpoint of the price range set forth on the front cover of this prospectus. See “Dilution.”
Common stock eligible for future sale could have an adverse effect on the market price of our common stock.
In connection with our prior private placements, we entered into a registration rights agreement requiring us to use commercially reasonable efforts to cause a resale shelf registration statement with respect to certain of the shares sold in our prior private placements to become effective under the Securities Act as soon as practicable after filing, and in any event, subject to certain exceptions, no later than May 31, 2022. As a result, holders of shares of our common stock acquired in our prior private placements have registration rights that obligate us to register their shares under the Securities Act. Once we register the shares, they can be freely sold in the public market, subject to any applicable lock-up agreements. See “Shares Eligible for Future Sale.” Future sales by these holders of our common stock, or the perception that such sales could occur in the future, could have a material adverse effect on the market price of our common stock. In particular, after the completion of this offering, Tilden Park will own     % of the outstanding shares of our common stock. If Tilden Park sells all or a substantial portion of its shares, it could have a material adverse impact on the market price of our common stock.
From time to time, we also intend to issue additional shares of common stock or OP units, which, at our option, may be redeemed for shares of our common stock, in connection with our financing of properties or in other transactions, as compensation or otherwise, and we may grant additional registration rights in connection with such issuances.
 
52

 
We cannot predict the effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the market price of the common stock. Sales of substantial amounts of our common stock, or the perception that such sales could occur, may adversely affect prevailing market price of our common stock.
We have not established a minimum dividend payment level and we cannot assure you of our ability to pay dividends in the future or the amount of any dividends.
We have not established a minimum distribution payment level, and our ability to make distributions to our stockholders may be adversely affected by the risk factors described in this prospectus. Until our portfolio of assets generates sufficient income and cash flow, we could be required to fund distributions from working capital, sell assets or borrow funds. To the extent that we are required to sell assets in adverse market conditions or borrow funds at unfavorable rates, our results of operations could be materially and adversely affected.
All distributions will be made at the discretion of our board of directors and will be based upon, among other factors, our historical and projected results of operations, financial condition, cash flows and liquidity, maintenance of our REIT qualification and other tax considerations, capital expenditure and other expense obligations, debt covenants, contractual prohibitions or other limitations and applicable law and such other matters as our board of directors may deem relevant from time to time. We may not be able to make distributions in the future, and our inability to make distributions, or to make distributions at expected levels, could result in a decrease in the market price of our common stock.
Future sales of our common stock, other securities convertible into our common stock or preferred stock could cause the market price of our common stock to decline and could result in dilution of your shares.
Our board of directors is authorized, without your approval, to cause us to issue additional shares of our common stock or to raise capital through the creation and issuance of preferred stock, other debt securities convertible into common stock, options, warrants and other rights, on terms and for consideration as our board of directors in its sole discretion may determine. Sales of substantial amounts of our common stock or of preferred stock could cause the valuation of our common stock to decrease significantly. We cannot predict the effect, if any, of future sales of our common stock, or the availability of our common stock for future sales, on the market price of our common stock. Sales of substantial amounts of our common stock by any large stockholder, or the perception that such sales could occur, may adversely affect the valuation of our common stock.
Future issuances of debt securities or preferred stock, which would rank senior to our common stock upon liquidation, or future issuances of equity securities (including OP units), which would dilute our existing stockholders and may be senior to our common stock for purposes of making distributions, may materially and adversely affect the market price of our common stock.
In the future, we may issue debt or equity securities or incur other borrowings. Upon our liquidation, holders of our debt securities and other loans and preferred stock will receive a distribution of our available assets before common stockholders. If we incur debt in the future, our future interest costs could increase and adversely affect our liquidity and results of operations. We are not required to offer any additional equity securities to existing common stockholders on a preemptive basis. Therefore, additional common stock issuances, directly or through convertible or exchangeable securities (including OP units), warrants or options, will dilute the holdings of our existing common stockholders and such issuances or the perception of such issuances may reduce the market price of our common stock. Our preferred stock, if issued, would likely have a preference on distribution payments, periodically or upon liquidation, which could eliminate or otherwise limit our ability to make distributions to common stockholders. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or success of our future capital raising efforts. Thus, common stockholders bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings will negatively affect the market price of our common stock.
 
53

 
An increase in market interest rates may have an adverse effect on the market price of our common stock.
One of the factors that investors may consider in deciding whether to buy or sell our common stock is our distribution yield, which is our distribution rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher distribution yield on our common stock or may seek securities paying higher dividends or interest. The market price of our common stock likely will be based primarily on the earnings that we derive from interest income with respect to our loans and our related distributions to stockholders. As a result, interest rate fluctuations and capital market conditions are likely to affect the market price of our common stock, and such effects could be significant. For instance, if interest rates rise without an increase in our distribution rate, the market price of our common stock could decrease because potential investors may require a higher distribution yield on our common stock as market rates on interest-bearing securities, such as bonds, rise.
 
54

 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. This prospectus also contains forward-looking statements by third parties relating to market and industry data and forecasts; forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and uncertainties as the other forward-looking statements contained in this prospectus. These forward-looking statements include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations, our strategic plans and objectives, cost management, potential financing opportunities, access to capital, our ability to make cash distributions to our stockholders in the future and other matters. Words such as “expects,” “anticipates,” “intends,” “plans,” “likely,” “will,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.
The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:

general economic conditions;

our limited operating history;

our ability to consummate financings of cannabis real estate assets on favorable terms or at all;

availability of suitable financing opportunities in the adult- and medical-use cannabis industry that meet our underwriting and investment criteria;

unfavorable changes in adult- and medical-use cannabis markets and economic conditions;

the failure of our borrowers to perform as expected or to meet their obligations to us;

our ability to access sufficient capital from third parties in order to execute our business strategy;

concentration of our loan portfolio in a limited number of borrowers;

our failure to succeed in new markets;

competitive factors that may limit our ability to finance industrial cultivation/processing and retail/dispensary properties on favorable terms or at all;

insufficient cash flow that could affect our debt financing and create refinancing risk;

failure to generate sufficient revenue, which could impair our distributions to stockholders;

actions and initiatives of the U.S. or state governments and changes to government policies and the execution and impact of these actions, initiatives and policies;

shifts in public opinion regarding adult- and medical-use cannabis;

our possible failure to maintain our qualification as a REIT and the risk of changes in laws governing REITs;

our dependence upon key personnel whose continued service is not guaranteed;

the impact of the COVID-19 pandemic and measures intended to prevent its spread or address its effects;

risks from extraordinary losses for which we may not have insurance or adequate reserves;

risks from cybersecurity breaches of our information technology systems and the information technology systems of our third party vendors and other third parties;

uninsured losses due to insurance deductibles, self-insurance retention, uninsured claims or casualties, or losses in excess of applicable coverage;

changing interest rates, which could increase interest costs and affect the market price of our securities;
 
55

 

the imposition of federal taxes if we fail to qualify as a REIT under the Code in any taxable year;

failure to meet an exception from the definition of “investment company” in the 1940 Act would require us to significantly restructure our investment strategy;

our internal control over financial reporting may not be considered effective, which could result in a loss of investor confidence in our financial reports, and in turn have an adverse effect on our stock price; and

changes in real estate laws, tax laws, state cannabis laws or other laws affecting our business.
A discussion of these and other factors affecting our business and prospects is set forth in “Risk Factors.”
Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this prospectus may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.
Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this prospectus, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.
 
56

 
USE OF PROCEEDS
We estimate that the net proceeds that we receive from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $      million (or $      million if the underwriters exercise their option to purchase additional shares in full).
We will contribute the net proceeds from this offering to our operating partnership in exchange for OP units. Our operating partnership intends to use the net proceeds as follows:

approximately $      million to fund the origination of mortgage loans as described under “Our Business — Our Financing Pipeline;”

approximately $0.1 million to redeem our 12.5% Series A Redeemable Cumulative Preferred Stock, or our Series A Preferred Stock; and

the remaining net proceeds, if any, to finance cannabis properties in accordance with our investment strategy and for working capital and general corporate purposes.
Prior to the full investment of the net proceeds as described above, we intend to invest the net proceeds in interest-bearing, short-term investment-grade securities, money market accounts or other investments that are consistent with our intention to elect and qualify to be taxed as a REIT. Such investments may include, for example, government and government agency certificates, government bonds, certificates of deposit, interest-bearing bank deposits, and money market accounts. These initial investments are expected to provide a lower net return than we will seek to achieve from originating mortgage loans.
 
57

 
DISTRIBUTION POLICY
We intend to make regular quarterly distributions to holders of shares of our common stock.
Our ability to make distributions in the future at our initial distribution rate will depend upon our actual results of operations and earnings, economic conditions and other factors that could differ materially from our current expectations. Our actual results of operations will be affected by a number of factors, including the revenue we receive from our loans, our operating expenses, interest expense, the ability of our borrowers to meet their obligations to us and unanticipated expenditures. For more information regarding risk factors that could materially adversely affect our actual results of operations, see “Risk Factors.” Distributions declared by us will be authorized by our board of directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under applicable law, the capital requirements of our company and the distribution requirements necessary to qualify and maintain our qualification as a REIT. We may be required to fund distributions from working capital or with a portion of the net proceeds from this offering or borrow to provide funds for such distributions, or we may choose to make a portion of the required distributions in the form of a taxable stock dividend to preserve our cash balance or reduce our distribution. However, we currently have no intention to use the net proceeds from this offering to make distributions nor do we currently intend to make distributions using shares of our common stock.
In order to qualify as a REIT, we must distribute to our stockholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, we will be subject to U.S. federal income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income (including net capital gains) and will be subject to a 4% nondeductible excise tax on the amount by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. We intend to distribute our net income to our stockholders in a manner intended to satisfy the REIT 90% distribution requirement and to avoid U.S. federal income tax liability on our income and the 4% nondeductible excise tax. We anticipate that our estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs. However, under some circumstances, we may be required to use cash reserves, incur debt or liquidate assets at rates or times that we regard as unfavorable or make a taxable distribution of our shares in order to satisfy the REIT 90% distribution requirement and to avoid U.S. federal income tax and the 4% nondeductible excise tax in that year. For more information, see “Material U.S. Federal Income Tax Considerations.”
Furthermore, we anticipate that, at least initially, our distributions will exceed our then-current and then accumulated earnings and profits for the relevant taxable year, as determined for U.S. federal income tax purposes, due to non-cash expenses, primarily depreciation and amortization charges that we expect to incur. Therefore, all or a portion of these distributions may represent a return of capital for U.S. federal income tax purposes. The extent to which our distributions exceed our current and accumulated earnings and profits may vary substantially from year to year. To the extent that a distribution is treated as a return of capital for U.S. federal income tax purposes, it will reduce a holder’s adjusted tax basis in the holder’s shares, and to the extent that it exceeds the holder’s adjusted tax basis will be treated as gain resulting from a sale or exchange of such shares. As a result, the gain (or loss) recognized on the sale of that common stock or upon our liquidation will be decreased (or increased) accordingly. For a more complete discussion of the tax treatment of distributions to holders of our common stock, see “Material U.S. Federal Income Tax Considerations.”
 
58

 
CAPITALIZATION
The following table sets forth:

our actual capitalization as of September 30, 2021; and

our as adjusted capitalization as of September 30, 2021, giving effect to the Spin-Off, this offering and the application of the net proceeds therefrom as described in “Use of Proceeds”.
You should read this table in conjunction with “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated balance sheet and related notes included elsewhere in this prospectus.
As of September 30, 2021
Actual(1)
As Adjusted(1)(2)
(unaudited, amounts in
thousands, except share and per
share amounts)
Cash
$2,240
$
Stockholders’ equity:
Common stock, par value $0.0001 per share, 450,000,000 shares authorized; 5,333,355 shares issued and outstanding, actual, and      shares issued and outstanding, as adjusted
    1
Preferred stock, par value $0.0001 per share, 50,000,000 shares authorized; 125 shares issued and outstanding, actual and no shares issued and outstanding, as adjusted
 —
Additional paid-in capital
43,405
Accumulated deficit
(5,066)
Dividends declared
(24)
Total stockholders’ equity
$38,316
$
(1)
Includes an aggregate of 569,248 restricted shares of our common stock outstanding as of September 30, 2021, which are held by our executive officers, non-employee directors and certain other employees. Excludes (i) 234,400 performance-vesting restricted stock units and (ii) 1,675,356 shares of our common stock reserved for future issuance under our Equity Incentive Plan as of September 30, 2021.
(2)
Includes           restricted shares of our common stock expected to be granted to our executive officers, certain other employees and Mr. Mueller upon completion of this offering. Excludes an aggregate of            performance-vesting restricted stock units expected to be granted to our executive officers, certain other employees and Mr. Mueller upon the completion of this offering. See “Management — Executive Compensation — IPO Equity Grants.”
 
59

 
DILUTION
Dilution is the amount by which the offering price paid by the purchasers of the shares of our common stock sold in this offering exceeds the net tangible book value per share of our common stock after completion of this offering. Net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding at that date.
At September 30, 2021, our net tangible book value was $36.1 million, or $8.34 per share of our common stock. After giving effect to the sale of the shares of our common stock in this offering, including the use of proceeds as described under “Use of Proceeds,” and the deduction of underwriting discounts and estimated offering expenses, our as adjusted net tangible book value as of September 30, 2021 would have been $      million, or $      per share. This represents an immediate increase in net tangible book value of $      per share to existing investors and an immediate dilution in net tangible book value of $      per share to new investors purchasing shares of our common stock in this offering. The following table illustrates this per share dilution to new investors.
Assumed initial public offering price per share
$     
Net tangible book value per share at September 30, 2021
$     
Net increase in net tangible book value per share attributable to this offering
$     
As adjusted net tangible book value per share after this offering
$     
Dilution per share to new investors
$     
If the underwriters exercise their option to purchase additional shares in full, the as adjusted net tangible book value after this offering would be $      per share, the increase in the net tangible book value to existing investors would be $      per share and the dilution in net tangible book value per share to new investors purchasing shares of our common stock in this offering would be $      per share.
The following table summarizes, as of September 30, 2021:

the total number of shares of our common stock issued to existing investors and the number of shares of our common stock purchased from us by new investors in this offering;

the total consideration paid to us by existing investors and by new investors purchasing shares in this offering, assuming an initial public offering price of $      per share (the midpoint of the price range set forth on the front cover of this prospectus), before deducting the estimated underwriting discount and estimated offering expenses payable by us in connection with this offering; and

the average price per share paid by existing investors and by new investors purchasing shares in this offering.
Shares Purchased
Total Consideration
Average Price
per Share
Number
Percent
Amount
Percent
Restricted shares of common stock previously granted to
officers and directors
% $ % $     
Existing stockholders
New investors
$     
Total
100.0% $ 100.0% N/A
 
60

 
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following tables set forth selected financial and operating data based on (i) our historical consolidated balance sheets as of September 30, 2021 and December 31, 2020, (ii) our unaudited pro forma consolidated balance sheet as of September 30, 2021, (iii) our historical consolidated statements of operations for the nine months ended September 30, 2021 and the year ended December 31, 2020 and (iv) our unaudited pro forma consolidated statement of operations for the nine months ended September 30, 2021 and the year ended December 31, 2020.
The unaudited pro forma financial and operating data have been derived from our historical consolidated financial statements. The unaudited pro forma consolidated balance sheet as of September 30, 2021 is presented to reflect adjustments to our historical balance sheet as if this offering, the Spin-Off and certain other transactions described herein were completed on September 30, 2021. The unaudited pro forma consolidated statement of operations for the nine months ended September 30, 2021 and the year ended December 31, 2020 are presented as if this offering, the Spin-Off and certain other transactions described herein were completed on January 1, 2020.
You should read the following summary selected financial and operating data in conjunction with: (i) our historical consolidated balance sheets as of September 30, 2021 and December 31, 2020 and our historical consolidated statements of operations for the nine months ended September 30, 2021 and the year ended December 31, 2020; (ii) our unaudited pro forma consolidated financial statements; and (iii) the “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this prospectus. We have based the unaudited pro forma adjustments on available information and assumptions that we believe are reasonable. The following unaudited pro forma financial and operating data are presented for informational purposes only and are not necessarily indicative of what our actual financial position would have been as of September 30, 2021 assuming this offering, the Spin-Off and certain other transactions described herein had been completed on September 30, 2021, what our actual results of operations would have been for the nine months ended September 30, 2021 and the year ended December 31, 2020 assuming this offering, the Spin-Off and certain other transactions described herein were completed on January 1, 2020 and are not, and should not be viewed as, indicative of our future results of operations or financial condition.
Consolidated Balance Sheet Data
(In thousands)
As of September 30, 2021
As of
December 31,
2020
Pro Forma
Historical
(unaudited)
(unaudited)
Assets
Total real estate, net
$       $ 30,550 $ 32,144
Notes receivable
5,399 5,399
Total Assets
$ $ 40,680 $ 40,668
Liabilities and Stockholders’ Equity
Total Liabilities
2,364 1,526
Total Stockholders’ Equity
38,316 39,142
Total Liabilities and Stockholders’ Equity
$ $ 40,680 $ 40,668
 
61

 
Consolidated Statement of Operations Data
(In thousands, except per share data)
Nine Months ended
September 30, 2021
Year ended
December 31, 2020
Pro Forma
(unaudited)
Historical
(unaudited)
Pro Forma
(unaudited)
Historical
Revenues
Rental income
$ 2,734 $ $ 3,532
Interest income
345
Total revenues
2,734 3,877
Expenses
General and administrative
2,731 3,291
Depreciation and amortization
1,600 2,091
Litigation settlement
 — 435
Transaction costs
60 374
Total operating expenses
4,391 6,191
Other income (expense)
Impairment if real estate assets
(123)
Net loss
$ (1,657) $ $ (2,437)
Less: preferred stock dividends
(8) (15)
Net loss attributable to common stockholders
$ (1,665) $       (2,452)
Net loss per common share
Basic and diluted
$ (0.35) $ (0.52)
Weighted average common shares outstanding
Basic and diluted
4,751 4,733
Other Data
(In thousands, unaudited)
Nine Months ended
September 30, 2021
Year ended
December 31, 2020
Pro Forma
Historical
Pro Forma
Historical
FFO attributable to common stockholders(1)
$ (71) $       $ (245)
AFFO attributable to common stockholders(1)
774 1,016
(1)
For definitions and reconciliations of net loss attributable to common stockholders to FFO and AFFO, as well as a statement disclosing the reasons why our management believes that FFO and AFFO provide useful information to investors and, to the extent material, any additional purposes for which our management uses FFO and AFFO, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures.”
 
62

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We were incorporated on June 24, 2019 to act as a holding company for our operating partnership, which was formed on April 23, 2019, and we did not commence revenue generating operations until August 28, 2019. Therefore, we do not have any historical operations to discuss other than for the period from April 23, 2019 (inception) to December 31, 2019, the year ended December 31, 2020, and the nine months ended September 30, 2021 and 2020. You should read the following discussion in conjunction with the sections of this prospectus entitled “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and “Our Business” and our historical and pro forma consolidated financial statements and the related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this prospectus.
Overview and Background
We are an internally managed real estate investment trust focused on financing specialized industrial cultivation/processing and retail/dispensary cannabis properties, with contingent purchase options that are exercisable only upon the legalization of cannabis under U.S. federal law or certain other events. As of the date of this prospectus, our portfolio is comprised of six mortgage notes receivable and one note receivable, with an aggregate gross investment of $38.7 million.
We conduct our business through an umbrella partnership REIT, or UPREIT, structure, consisting of our operating partnership and subsidiaries of our operating partnership. Our wholly owned limited liability company, Freehold OP GP, LLC, is the sole general partner of our operating partnership, and we presently own all of the outstanding OP units. In the future, we may issue OP units to third parties in connection with financings , as compensation or otherwise. As the sole owner of the general partner of our operating partnership, we have the exclusive power to manage and conduct our operating partnership’s business.
We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our short taxable year ended December 31, 2019. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to our stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles, or GAAP).
Spin-Off of Property Portfolio
Our board of directors determined that it is in the best interests of the Company and our stockholders to focus on the financing, rather than ownership, of cannabis properties and to spin off our real estate portfolio, which will be completed immediately prior to the effectiveness of the registration statement of which this prospectus forms a part. Prior to the Spin-Off, our assets included six operating cannabis properties that were leased to subsidiaries of Curaleaf pursuant to triple-net leases that expire in August 2029 and were guaranteed by Curaleaf. Due to the timing of the Spin-Off, our historical results of operations presented below include rental income from these six properties. See “Structure and Formation of Our Company” for additional information.
Factors That May Influence Future Results of Operations Following the Spin-Off
The Company’s revenues are derived from interest earned under notes receivable entered into with borrowers. Our borrowers operate in the cannabis industry. The capacity of our borrowers to pay interest payments is dependent upon their ability to conduct their operations at profitable levels. We believe that the business environment of the industry segments in which our borrowers operate is generally positive for efficient operators. However, our borrowers’ operations are subject to economic, regulatory and market conditions that may affect their profitability, including as a result of the COVID-19 pandemic, which could impact our results of operations and cash flows. Accordingly, the Company actively monitors certain key
 
63

 
factors, including changes in those factors that we believe may provide early indications of conditions that may affect the level of risk in our loan portfolio.
For key factors that the Company considers in underwriting prospective borrowers and guarantors and in monitoring the performance of existing borrowers and guarantors, see “Our Business —  Underwriting and Investment Process — Underwriting.”
The Company also actively monitors the financial and operational performance of its borrowers, guarantors and the specific facilities securing its loans through a variety of methods, such as reviewing periodic financial reporting and operating data and regular meetings with the facility management teams . Through these means, we are able to monitor the credit quality of our borrowers and guarantors. We intend to service any future mortgage and mezzanine loans in-house and will monitor both the credit quality of the borrower as well as the value of our collateral on an ongoing basis. If we originate construction loans, we may retain third parties to monitor the progress of developments and to service the loans.
Certain business factors, in addition to those described above that directly affect our borrowers and guarantors, will likely materially influence our future results of operations, including the following:

the financial and operational performance of our borrowers and guarantors, particularly those that we expect to account for a significant portion of the income generated by our portfolio ;

trends in the cost and availability of capital, including market interest rates, that our prospective borrowers may use for financing their real estate assets;

competition from other financing sources;

the regulatory environment of the cannabis industry both nationally and in the states in which we operate;

the economic conditions in our key markets; and

the geographic concentration of our loan portfolio.
Results of Operations
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 (dollars in thousands)
Three months
ended September 30,
2021
Three months
ended September 30,
2020
Change
$
%
(unaudited)
(unaudited)
Revenues
Rental income
$ 917 $ 891 $ 26 3%
Total revenues
917 891 26 3%
Expenses
General and administrative
996 1,039 (43) (4%)
Depreciation and amortization
534 533 1
Transaction costs
2 (2) (100%)
Total operating expenses
1,530 1,574 (44) (3%)
Other Income (Expense)
Impairment of real estate assets
(123) 123 100%
Net loss
$ (613) $ (806) $ 193 24%
Less: preferred stock dividends
Net loss attributable to common stockholders
$ (613) $ (806) $ 193 24%
 
64

 
Revenues totaled $917,000 for the three months ended September 30, 2021, an increase of $26,000, or 3%, from the prior year period. These revenues were generated from the Company’s $34.7 million gross investment in real estate investments and $5.4 million gross investment in a note receivable as of September 30, 2021.
Operating expenses totaled $1,530,000 for the three months ended September 30, 2021, a decrease of $44,000, or 3%, from the prior year period, and were comprised of the following:

General and administrative expenses decreased by $43,000 to $996,000, which included:

$775,000 of salary and benefits-related costs during the three months ended September 30, 2021, including $325,000 of noncash stock-based compensation, compared to $829,000 of salary and benefits-related costs in the prior year period, which included $303,000 of noncash stock-based compensation and $169,000 of accrued bonus compensation; and

$221,000 of corporate operating expenses during the three months ended September 30, 2021 compared to $210,000 in the prior year period.

Depreciation and amortization expense increased by $1,000 to $534,000 due to additional investments in corporate property subsequent to September 30, 2020.

No transaction costs compared to $2,000 in the prior year period which consisted of legal fees related to transactions within our existing portfolio.
Impairment of real estate assets totaled $123,000 for the three months ended September 30, 2020, primarily related to transaction costs when a tenant exercised a purchase option in July 2020.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 (dollars in thousands)
Nine months ended
September 30, 2021
Nine months ended
September 30, 2020
Change
$
%
(unaudited)
(unaudited)
Revenues
Rental income
$ 2,734 $ 2,624 $ 110 4%
Interest income
345 (345) (100%)
Total revenues
2,734 2,969 (235) (8%)
Expenses
General and administrative
2,731 3,126 (395) (13%)
Depreciation and amortization
1,600 1,557 43 3%
Transaction costs
60 274 (214) (78%)
Total operating expenses
4,391 4,957 (566) (11%)
Other Income (Expense)
Impairment of real estate assets
(123) 123 100%
Net loss
$ (1,657) $ (2,111) $ 454 22%
Less: preferred stock dividends
(8) (7) (1) (14%)
Net loss attributable to common stockholders
$ (1,665) $ (2,118) $ 453 21%
Revenues totaled $2,734,000 for the nine months ended September 30, 2021, a decrease of $235,000, or 8%, from the prior year period primarily due to no interest income in 2021. These revenues were generated from the Company’s $34.7 million gross investment in real estate investments and $5.4 million gross investment in a note receivable as of September 30, 2021.
Operating expenses totaled $4,391,000 for the nine months ended September 30, 2021, a decrease of $566,000, or 11%, from the prior year period, and were comprised of the following:
 
65

 

General and administrative expenses decreased by $395,000 to $2,731,000, which included:

$2,138,000 of salary and benefits-related costs during the nine months ended September 30, 2021, including $839,000 of noncash stock-based compensation, compared to $2,348,000 in the prior year period, which included $762,000 of noncash stock-based compensation and $506,000 of accrued bonus compensation; and

$593,000 of corporate operating expenses during the nine months ended September 30, 2021 compared to $778,000 in the prior year period.

Depreciation and amortization expense increased by $43,000 to $1,600,000 due to additional investments in real estate assets in July 2020.

Transaction costs decreased by $214,000 to $60,000, which consisted of $60,000 in legal fees related to transactions within our existing portfolio, while the prior year period included $107,000 in legal fees related to transactions within our existing portfolio and $167,000 of costs related to real estate acquisitions the Company ultimately decided not to pursue.
Impairment of real estate assets totaled $123,000 for the nine months ended September 30, 2020, primarily related to transaction costs when a tenant exercised a purchase option in July 2020.
Year Ended December 31, 2020 Compared to the Period from April 23, 2019 (inception) through December 31, 2019 (dollars in thousands)
Year ended
December 31, 2020
Period from
April 23, 2019
(inception) through
December 31, 2019
Change
$
%
Revenues
Rental income
$ 3,532 $ 1,115 $ 2,417 217%
Interest income
345 90 255 283%
Total revenues
3,877 1,205 2,672 222%
Expenses
General and administrative
3,291 1,455 1,836 126%
Depreciation and amortization
2,091 663 1,428 215%
Litigation settlement
435 435 %
Transaction costs
374 59 315 534%
Total operating expenses
6,191