Company: IIPR
Filing Date: 2025-08-07
Form Type: 10-Q
Source: 0001628280-25-038972
Chunk: 138

Company: INNOVATIVE INDUSTRIAL PROPERTIES INC
Filing Date: 2025-08-07
Form: 10-Q
Item: Part I, Item 8
Chunk 138
---
 any new leases or leases that were modified during the six months ended June 30, 2025.

Acquisition of Rental Property, Depreciation and Impairment

All of our acquisitions of rental properties to date were accounted for as asset acquisitions and not business combinations because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings, and related intangible assets). The accounting model for asset acquisitions requires that the acquisition consideration (including acquisition costs) be allocated to the individual assets acquired and liabilities assumed on a relative fair value basis. 

We exercise judgment to determine key assumptions used in each valuation technique (cost, income, and sales approach). For example, we are required to use judgment and make a number of assumptions, including those related to projected growth in rental rates and operating expenses, anticipated trends and market/economic conditions. The use of different assumptions can affect the amount of consideration allocated to the acquired depreciable/amortizable asset, which in turn can impact our net income due to the recognition of the related depreciation/amortization expense in our consolidated statements of income.

We depreciate buildings and improvements where we are considered the owner for accounting purposes based on our evaluation of the estimated useful life of each specific asset, not to exceed 40 years. Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment. 

The determination of whether we are or the tenant is the owner of improvements for accounting purposes is subject to significant judgment. In making that determination, we consider numerous factors and perform a detailed evaluation of each individual lease. No one factor is determinative in reaching a conclusion. The factors we evaluate include but are not limited to the following:

•whether the lease agreement requires landlord approval of how the improvement allowance is spent prior to installation of the improvements;

•whether the lease agreement requires the tenant to provide evidence to the landlord supporting the cost and what the improvement allowance was spent on prior to payment by the landlord for such improvements;

•whether the improvements are unique to the tenant or reusable by other tenants;

•whether the tenant is permitted to alter or remove the improvements without the consent of the landlord or without compensating the landlord for any lost utility or diminution in fair value; and

•whether the ownership of the improvements remains with the landlord or remains with the tenant at the end of the lease term.

40

When we conclude that we are the owner of improvements for accounting purposes using the factors discussed above,