Item
8.01. Other Events –
Update Regarding Marengo Township, Michigan Greenhouse Cultivation Facility
As
previously disclosed, on September 8, 2021, Power REIT, through a wholly owned subsidiary (collectively “PW Marengo”), acquired
a 522,530 square foot greenhouse cultivation facility in Marengo Township, Michigan for $18.5 million. Power REIT believes that once
operational, this would be the largest cannabis cultivation facility in Michigan and one of the largest greenhouse cannabis cultivation
facilities in the United States.
Prior
to the acquisition, Power REIT received assurances from Marengo Township that the facility was approved for cannabis cultivation including
providing a zoning map showing the property zoned Agricultural with a Marijuana Overlay. After closing, Marengo Township required several
additional approval processes which were all completed and Marengo Township issued cannabis licenses for the property. Unfortunately,
these processes caused unexpected delays in proceeding to secure licensing from the Michigan Cannabis Regulatory Agency (“CRA”).
One requirement of the CRA process is a Certificate of Occupancy (“CO”) for the facility where such documentation is required
by the municipality, or “alternative documentation” also known as a “CO equivalent,” when a CO is not applicable.
The
Marengo Township Ordinance establishes that properties that are zoned Agricultural and have structures that are used for agricultural
purposes are exempt from requiring building permits and as a result, a Certificate of Occupancy. The Michigan Building Code also provides
a separate classification for agricultural properties as exempt from requiring a Certificate of Occupancy. This greenhouse property was
built in 2015 and operated until 2019 and never applied for a building permit and never sought or obtained a CO. Based on this, PW Marengo
sought an affirmation from Marengo Township that the greenhouse property is exempt from requiring a CO in the form of a two-sentence
letter that that CRA had pre-approved. Unfortunately, Marengo Township resisted providing the requested letter.
In
an effort to secure a path forward, PW Marengo provided Marengo Township with a letter from a licensed engineer in the state of Michigan
supporting the position that the greenhouse is exempt from requiring a Certificate of Occupancy. In addition, the engineer explained
an alternative dispute resolution process whereby securing an opinion from a Building Official from an adjacent township can be used.
PW Marengo ultimately submitted opinions from three Building Officials representing a total of 12 adjacent townships stating that the
greenhouse property was exempt from requiring a Certificate of Occupancy. After agreeing that this dispute resolution mechanism was common,
Marengo Township continued to refuse to provide the documentation required by CRA.
Based
on the inability to make progress securing what was needed for CRA from Marengo Township, as previously disclosed, on April 1, 2022,
PW Marengo commenced a litigation against Marengo Township in the United States District Court for the Western District of Michigan -
Case No. 1:22-cv-00321 (the “Federal Action”). The Complaint is an action for equitable, declaratory and injunctive relief
arising out of Township’s false promises, constitutional violations by the Township’s deprivation of Plaintiffs’ civil
rights through its refusal and failure to comply with its own ordinances and state law as well as a common dispute resolution mechanism.
In
an effort to pursue an additional path forward, on June 10, 2022, PW Marengo filed an application to the Marengo Township Zoning Board
of Appeals (“ZBA”) to secure an affirmation that, because the greenhouse property is zoned Agricultural, it is exempt from
requirements of seeking building permits and a Certificate of Occupancy. We believe, this would provide the necessary documentation to
the CRA so that the licensing could proceed. To date, the Township has refused to schedule such a meeting and on June 24, 2022, two representatives
of the Township separately indicated that they were rejecting the application to the ZBA because the property is zoned Agricultural and
therefore there is nothing to appeal. Unfortunately, when pressed, the representatives were unwilling to put this in writing which we
believe would have been sufficient to resolve the requirements of the CRA.
On
June 30, 2022, PW Marengo, filed a Verified Complaint in Calhoun County Michigan, (the “Calhoun
Complaint”) with a Case Number of 22-1760-AW. The Complaint is an action to compel the Township to allow PW Marengo to appear before
the ZBA.
The
foregoing descriptions of the litigation does not purport to be complete and are qualified in its entirety by reference to the Complaint
along with its exhibits, a copy of which is attached hereto as Exhibit 10.1 and is incorporated into this Current Report on Form 8-K
by reference.
Lease
Amendment
Due
to the licensing delays and the inability of the tenant to generate revenue as anticipated, PW Marengo has agreed to enter into an amendment
of its lease with its tenant to push out the start date of cash rent to January 1, 2023, a copy of which is attached hereto as Exhibit
10.1. The lease amendment was constructed to maintain the same overall economics of the lease to PW Marengo other than a change in the
timing of the initial cash flow. The lease amendment will have no impact on near-term revenue recognition from this lease since, effective
Q4 2021, income from this lease is being treated on a cash basis.
The
information in this item 8.01, and Exhibits 99.1 – 99.2 to this Current Report on Form 8-K, shall not be deemed “filed”
for the purposes of or otherwise subject to the liabilities under Section 18 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), nor shall it be deemed incorporated by reference in any filing of the Company under the Securities Act of
1933 or the Exchange Act, except as expressly set forth by the specific reference in such a filing.
