DIRECT FINANCING LEASES AND OPERATING LEASES |
9 Months Ended | |||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||
Direct Financing Leases And Operating Leases | ||||||||||||||||||||||||||||||||||||
DIRECT FINANCING LEASES AND OPERATING LEASES | 4 – DIRECT FINANCING LEASES AND OPERATING LEASES
Information as Lessor Under ASC Topic 842
To generate positive cash flow, as a lessor, the Trust leases its facilities to tenants in exchange for payments. The Trust’s leases for its railroad, solar farms and greenhouse cultivation facilities have lease terms ranging between 5 and 99 years. Payments from the Trust’s leases are recognized on a straight-line basis over the terms of the respective leases based on an assessment that rent collection is probable. Collectability is assessed at quarter-end for each tenant receivable using various criteria including past collection issues, the current economic and business environment affecting the tenant and guarantees. If collectability of the contractual rent stream is not deemed probable, revenue will only be recognized upon receipt of cash from the tenant. Total revenue from its leases recognized for the nine months ended September 30, 2022 and September 30, 2021 is approximately $6,233,000 and $6,636,000, respectively.
During the nine months ended September 30, 2022 and 2021, the Trust wrote off a net amount of approximately $17,200 and $320,500, respectively, in straight-line rent receivable against rental income based on its current assessment of collecting all remaining contractual rent on nine greenhouse property leases located in Colorado, Nebraska and Oklahoma. The rent payments for these tenants will either be recorded as rental revenue on a cash basis or considered a lease in default.
Due to significant price compression in the wholesale cannabis market, many of our cannabis related tenants are currently experiencing financial challenges. The Trust has offered certain of its cannabis tenants’ relief by amending leases to several of its tenants whereby monthly cash payments are restructured over the course of the lease to lower rent payments during 2022 and increase rent payments in the future. These amendments were structured to not affect the total amount of rent from these leases. As of September 30, 2022, the Trust has executed ten of these lease amendments.
On January 1, 2022, PW CO CanRE Grail LLC (“PW Grail”), a wholly owned subsidiary entered into a new triple-net lease (the “Sandlot Lease”) with a new tenant, The Sandlot, LLC (“SL Tenant”). The term of the Sandlot Lease is 20 years and provides four options to extend for additional -year periods and the construction budget PW Grail agreed to fund was increased by $71,000. Power REIT’s total commitment to this project is approximately $2,432,000. On June 1, 2022, the lease was amended to restructure the timing of the rent payments but the total straight-line rent over the life of the lease is unchanged, and an additional guarantor was added to the lease. Revenue recognition for the Sandlot Lease is currently being handled on a cash-basis but no rental income is expected as the tenant has ceased operations at the property.
On January 1, 2022, the lease entered into with Walsenburg Cannabis LLC on May 21, 2021 (the “Walsenburg Lease”), was amended (“Walsenburg Lease Amendment”) to provide funding in the amount of $625,000 for the addition of processing space and equipment that is housed on another Power REIT property pursuant to a sublease. The term of the Walsenburg Lease Amendment is ten years with no renewal options. Revenue recognition for the Walsenburg Lease and its amendments is currently on a cash basis but no rental income is expected as the tenant has ceased operations at the property.
On March 1, 2022, the lease entered into with NorthEast Kind Assets, LLC on May 15, 2020 (the “Sweet Dirt Lease”) was amended (the “Sweet Dirt Lease Second Amendment”) to provide funding in the amount of $3,508,000 to add additional items to the property improvement budget for the construction of a Cogeneration / Absorption Chiller project to 505 Harold L Dow Highway. The term of the Sweet Dirt Lease Second Amendment is coterminous with the original lease and is structured to provide an annual straight-line rent of approximately $654,000. A portion of the property improvement, amounting to $2,205,000, will be supplied by IntelliGen Power Systems LLC which is owned by HBP, an affiliate of David Lesser, Power REIT’s Chairman and CEO. As of September 30, 2022, $1,102,500 has been paid to IntelliGen Power Systems LLC for equipment supplied. On July 15, 2022, the Sweet Dirt Lease was amended (the “Sweet Dirt Lease Third Amendment”) to restructure the timing of rent payments. The annual straight-line rent of the Sweet Dirt Lease did not change.
On March 31, 2022, Power REIT, through a newly formed wholly owned subsidiary, PW MillPro NE LLC, (“PW MillPro”), entered into a 10-year “triple-net” lease (the “MillPro Lease”) with Millennium Produce of Nebraska LLC (“MillPro”), a subsidiary of Millennium Sustainable Ventures Corp., of which David Lesser is CEO and Chairman. The term of the MillPro Lease is ten years with four, five-year renewal options. Revenue recognition for this lease was on a straight-line basis for Q2 2022 but for Q3 2022 has been adjusted to a cash-basis along with recognizing the security deposit as rental revenue. No further rental income is expected as the tenant has ceased operations at the property. Power REIT is exploring strategic alternatives for the property including seeking a replacement tenant.
On May 1, 2022, PW CO CanRE MF LLC (“CanRE MF”), a wholly owned subsidiary of the Trust, entered into a new triple-net lease (the “EB Lease”) with Elevate & Bloom, LLC (“EB Tenant”) for one of the two subdivided lots owned in Ordway CO and previously occupied by PSP Management LLC (“PSP”) which was evicted. The term of the EB Lease is 20 years and provides two options to extend for additional five-year periods. Power REIT’s total commitment to this project is approximately $1,282,000 and as of September 30, 2022, $543,800 has been funded. The EB Lease also has financial guarantees from affiliates of the EB Tenant. The EB Lease is structured to provide an annual straight-line rent of approximately $239,000.
On June 1, 2022, PW CO CanRE Apotheke LLC (“CanRE Apotheke”) amended its lease with its tenant (the “Apotheke Tenant”) to provide $364,650 for additional improvements to the property leased to the Apotheke Tenant as well as to restructure the timing of lease payments. The additional revenue on an annualized straight-line basis is approximately $62,000. However, based on the history of payments, revenue recognition for the Apotheke Tenant is currently being handled on a cash-basis due to rent arrearages. The Trust may commence straight-lining revenue recognition in the future based on an ongoing assessment of the ability of the Apotheke Tenant to pay rent.
Due to the uncertainty around timing for securing the necessary regulatory approvals for marijuana cultivation, the lease with Marengo Cannabis LLC (the “MarCann Tenant”) was amended on June 27, 2022 to restructure monthly rent payments over the course of the lease such that cash rent payment are scheduled to begin in January 2023. An adjustment to future rent was made such that the total amount of rent due under the lease did not change. Due to the uncertainty of the outcome of the litigation with Marengo Township, revenue recognition for the MarCann Tenant is currently being handled on a cash-basis and the terms of the lease will likely need to be amended based on the timing of finalizing the cannabis licensing. The Trust may commence straight-lining revenue recognition in the future based on an assessment of the ability of the MarCann Tenant to pay rent.
On September 7, 2022, 19977, LLC assigned its lease with PW CO CanRE JAB LLC (“PW JAB”) to Jackson Farms, LLC (the “Tam 18 Assignment”). Simultaneous with the assignment, the lease was amended to restructure the timing of the rent payments but the total straight-line rent over the life of the lease is unchanged, and two additional guarantors were added to the lease.
On September 8, 2022, Green Leaf Lane, LLC assigned its lease with PW CO CanRE Mav 5 LLC (“PW Mav 5”) to Jackson Farms, LLC (the “Mav 5 Assignment”). Simultaneous with the assignment, the lease was amended to restructure the timing of the rent payments but the total straight-line rent over the life of the lease is unchanged, and two additional guarantors were added to the lease.
Historically, the Trust’s revenue has been concentrated to a relatively limited number of investments, industries and lessees. As the Trust grows, its portfolio may remain concentrated in a limited number of investments. During the nine months ended September 30, 2022, Power REIT collected approximately 56% of its consolidated revenue from four properties. The tenants were NorthEast Kind Assets, LLC (“Sweet Dirt”), Fiore Management LLC (“Canndescent”), Norfolk Southern Railway, and Regulus Solar, LLC which represent 22%, 13%, 11% and 10% of consolidated revenue respectively. Comparatively, during the nine months ended September 30, 2021, Power REIT collected approximately 36% of its consolidated revenue from three properties. The tenants were NorthEast Kind Assets, LLC (“Sweet Dirt”), Fiore Management LLC (“Canndescent”) and Norfolk Southern Railway which represent 15%, 11% and 10% of consolidated revenue respectively.
The following table represents the aggregate annual cash rent from all leases related to the Trust’s portfolio as of September 30, 2022, and follows for the subsequent years ending on December 31. The rent amounts included in the schedule is for tenants who are not currently being treated on a cash basis for revenue recognition:
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