8-K: Zoned Properties Secures Arizona Property with Sunday Goods Lease, Projecting 12.7% Cap Rate

Zoned Properties has finalized a deal to acquire a property in Surprise, Arizona, leased to Sunday Goods for a cannabis dispensary, anticipating a 12.7% cap rate.

Summary

• Zoned Properties, Inc. has agreed to acquire a property in Surprise, Arizona, for approximately $1.75 million, including purchase price, closing costs, and seller improvements.
• The property will be leased to The Pharm, LLC (Sunday Goods) for a cannabis retail dispensary under a 15-year absolute net lease with four 5-year renewal options.
• Zoned Properties will provide a tenant improvement allowance of up to $1 million, with Sunday Goods expected to invest additional capital.
• The lease agreement includes a 3% annual increase in base rent, projecting approximately $372,000 in annual base rental revenue when straight-lined over the life of the lease.
• The deal is expected to produce a 12.7% cap rate when straight-lined over the lease term.
• The company has received final cannabis approvals from the City of Surprise for the retail dispensary.

Sentiment

Score: 8

Explanation: The document conveys a positive outlook with a strong cap rate, a reputable tenant, and a growing market. The risks are present but appear manageable, leading to a high sentiment score.

Positives

• The acquisition of the property is expected to significantly increase Zoned Properties' passive rental revenue.
• The long-term lease with Sunday Goods, a well-regarded cannabis brand, provides a stable income stream.
• The 12.7% cap rate is attractive and indicates a strong return on investment.
• The 3% annual rent increases provide a built-in growth component.
• The location in Surprise, Arizona, is in a growing market with strong cannabis sales.

Negatives

• The tenant improvement allowance of $1 million represents a significant upfront cost for Zoned Properties.
• Sunday Goods is expected to invest additional capital, which could indicate a higher overall cost for the project.
• The lease is contingent on the completion of certain on-site and off-site improvements by the seller.

Risks

• The cannabis industry is subject to regulatory changes, which could impact the operation of the dispensary.
• The success of the dispensary depends on the performance of Sunday Goods.
• There is a risk that the actual costs of the project could exceed the estimates.
• The lease is contingent on the completion of certain on-site and off-site improvements by the seller, which could be delayed.

Future Outlook

Zoned Properties expects to near $3 million in passive rental revenue annually following this acquisition and plans to continue growing its investment portfolio with best-in-class operators and direct-to-consumer assets.

Management Comments

• Bryan McLaren, Chief Executive Officer of Zoned Properties, stated that the company continues implementing its plan to grow its investment portfolio by adding best-in-class operators and direct-to-consumer assets with attractive cap rates.
• Bryan McLaren also commented that the lease with Sunday Goods further diversifies their tenant roster with a cannabis brand that will establish the property's highest and best use at this retail location.

Industry Context

This announcement aligns with the trend of increasing investment in the Arizona cannabis market, which is considered one of the strongest in the United States. The deal also reflects the growing interest in direct-to-consumer cannabis retail assets.

Comparison to Industry Standards

• The 12.7% cap rate is significantly higher than the average cap rates for commercial real estate, which typically range from 4% to 8%, reflecting the higher risk and potential returns associated with the cannabis industry.
• The lease structure, with a 3% annual increase in base rent, is common in commercial real estate leases, providing a hedge against inflation and a predictable income stream.
• The tenant improvement allowance of $1 million is a substantial investment, but it is not uncommon in the cannabis industry, where build-outs can be costly due to specific requirements.
• Comparable companies in the cannabis real estate sector, such as Innovative Industrial Properties (IIPR) and Power REIT (PW), also focus on long-term leases with cannabis operators, but their cap rates and lease terms may vary based on location and tenant quality.

Stakeholder Impact

• Shareholders of Zoned Properties will benefit from the increased passive rental revenue and potential for long-term growth.
• Employees of Zoned Properties will be involved in the management and development of the new property.
• Sunday Goods will gain a new retail location in a growing market.
• Customers in Surprise, Arizona, will have access to a new cannabis dispensary.

Next Steps

• Zoned Properties will complete the acquisition of the Surprise Property.
• Sunday Goods will begin construction of the retail dispensary.
• Zoned Properties will continue to seek additional investment opportunities in the cannabis real estate sector.

Key Dates

Keywords

cannabis, real estate, dispensary, lease, zoned properties, sunday goods, cap rate, arizona, investment property, absolute net lease