Exhibit 10.4


 


SEVERANCE
AND CHANGE OF CONTROL AGREEMENT


 


THIS AGREEMENT, effective
as of the 18th day of January, 2017, is by and between Innovative Industrial Properties, Inc., a Maryland corporation (the “Company”),
IIP Operating Partnership, LP, a Delaware limited partnership (the “Partnership”), and Robert Sistek (the “Employee”).


 


WHEREAS, to induce
the Employee to remain as an executive officer of the Company and a key employee of the Partnership, the Company, the Partnership
and the Employee desire to enter into this Severance and Change Of Control Agreement (the “Agreement”); and


 


WHEREAS, the parties
agree that the restrictive covenants underlying certain of the Employee’s obligations under this Agreement are necessary
to protect the goodwill or other business interests of the Innovative Industrial Entities (as defined below) and that such restrictive
covenants do not impose a greater restraint than is necessary to protect such goodwill or other business interests.


 


NOW, THEREFORE, in
consideration of the premises and other good and valuable consideration, including the Employee’s agreement to continue as
an executive officer of the Company and as an employee of the Partnership, the Employee’s agreement to provide consulting
services following termination of employment pursuant to the terms hereof, and the restrictive covenants contained herein, the
Employee, the Company, and the Partnership agree as follows:


 


1.          Definitions.
The following words, when capitalized in this Agreement, shall have the meanings ascribed below and shall supersede the meanings
given to any such terms in any other award agreement or related plan document in effect prior to the date of this Agreement, including
but not limited to the definitions of “Cause,” “Change of Control,” or “Good Reason”:


 


(a)          “Affiliate”
shall have the meaning given to such term in Rule 12b-2 of the General Rules and Regulations of the Exchange Act.


 


(b)          “Average
Annual Cash Bonus” means the average of the annual cash bonus, if any, paid or payable to the Employee with respect to
the three (3) most recently completed calendar years prior to termination of employment (or the period of the Employee’s
employment, if shorter).


 


(c)          “Base
Performance Share Value” means the fair market value as of the date of the Change of Control of the number of unvested
shares underlying the Employee’s outstanding performance share awards that would have been earned pursuant to the terms of
the award if the performance period for each such award ended immediately prior to the Change of Control. For such purposes, the
level of achievement of the performance goals established for each such award will be determined on the date immediately prior
to the Change of Control as follows: (X) if the goal is a market-based goal, such as total stockholder return or stock price, then
the actual performance to date shall be used, and (Y) if the goal is not a market-based goal, then the annualized forecasted number
for such goal as most recently prepared by the Company prior to the date of the Change of Control shall be used and treated as
if it were actual performance.


 




     


     


    

 


(d)          “Base
Restricted Share Value” means the fair market value as of the date of the Change of Control of the shares underlying
all of the Employee’s unvested time-vesting restricted stock awards, restricted stock units or stock rights awards outstanding
immediately prior to the Change of Control.


 


(e)          “Board”
means the Board of Directors of the Company.


 


(f)          “Cause”
means the termination of the Employee’s employment with all Innovative Industrial Entities by action of the Board or its
delegate for one or more of the following reasons:


 


(i)          The
Employee’s willful and continued failure substantially to perform his duties with the Innovative Industrial Entities (other
than any such failure resulting from the Employee’s incapacity due to physical or mental illness), after a written demand
for substantial performance is delivered to the Employee by the Board, which demand specifically identifies the manner in which
the Board believes that the Employee has not substantially performed his duties;


 


(ii)         The
Employee’s willful commission of an act of fraud or dishonesty resulting in economic or financial damage to the Innovative
Industrial Entities;


 


(iii)        The
Employee’s conviction of, or entry by the Employee of a guilty or no contest plea to, the commission of a felony or a crime
involving moral turpitude;


 


(iv)        A
willful breach by the Employee of his fiduciary duty to the Company which results in economic or other damage to the Innovative
Industrial Entities; or


 


(v)         The
Employee’s willful and material breach of the Employee’s covenants set forth in this Section 16 of this Agreement.


 


(g)          “Change
of Control” means the occurrence of an event or series of events which qualify as a change in control event for purposes
of Code Section 409A and Treasury Regulation §1.409A-3(i)(5), including:


 


(i)          A
change in the ownership of the Company, which shall occur on the date that any one Person, or more than one Person Acting as a
Group (as defined below), other than Excluded Person(s) (as defined below), acquires ownership of the stock of the Company that,
together with the stock then held by such Person or group, constitutes more than fifty percent (50%) of the total fair market value
of the stock of the Company. However, if any one Person or more than one Person Acting as a Group is considered to own more than
fifty (50%) of the total fair market value of the stock of the Company, the acquisition of additional stock by the same Person
or Persons is not considered to cause a Change of Control.


 




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(ii)         A
change in the effective control of the Company, which shall occur on the date that:


 


(1)         Any
one Person, or more than one Person Acting as a Group, other than Excluded Person(s), acquires (or has acquired during the twelve
(12) month period ending on the date of the most recent acquisition by such Person or Persons) ownership of stock of the Company
possessing thirty percent (30%) or more of the total voting power of the stock of the Company. However, if any one Person or more
than one Person Acting as a Group is considered to own more than thirty percent (30%) of the total voting power of the stock of
the Company, the acquisition of additional voting stock by the same Person or Persons is not considered to cause a Change of Control;
or


 


(2)         A
majority of the members of the Board is replaced during any twelve (12) month period by directors whose appointment or election
is not endorsed by a majority of the members of the Board prior to the date of the appointment or election.


 


(iii)        A
change in the ownership of a substantial portion of the Company’s assets, which shall occur on the date that any one Person,
or more than one Person Acting as a Group, other than Excluded Person(s), acquires (or has acquired during the twelve (12) month
period ending on the date of the most recent acquisition by such Person or Persons) assets from the Company that have a total Gross
Fair Market Value (as defined below) equal to more than fifty percent (50%) of the total Gross Fair Market Value of all the assets
of the Company immediately prior to such acquisition or acquisitions, other than an Excluded Transaction (as defined below).


 


For purposes of this Subsection (g):


 


“Gross Fair
Market Value” means the value of the assets of the Company, or the value of the assets being disposed of, as applicable,
determined without regard to any liabilities associated with such assets.


 


Persons will not be
considered to be “Acting as a Group” solely because they purchase or own stock of the Company at the same time,
or as a result of the same public offering, or solely because they purchase assets of the Company at the same time, or as a result
of the same public offering, as the case may be. However, Persons will be considered to be Acting as a Group if they (i) are owners
of an entity that enters into a merger, consolidation, purchase or acquisition of assets, or similar business transaction with
the Company, or (ii) do so within the meaning of Section 13(d) of the Exchange Act, including any group acting for the purpose
of acquiring, holding or disposing of securities (within the meaning of Rule 13d-5(b)(1) under the Exchange Act).


 




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The term “Excluded Transaction”
means any transaction in which assets are transferred to: (A) a stockholder of the Company (determined immediately before the asset
transfer) in exchange for or with respect to its stock; (B) an entity, fifty percent (50%) or more of the total value or voting
power of which is owned, directly or indirectly, by the Company (determined after the asset transfer); (C) a Person, or more than
one Person Acting as a Group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power
of all the outstanding stock of the Company (determined after the asset transfer); or (D) an entity at least fifty percent (50%)
of the total value or voting power of which is owned, directly or indirectly, by a Person described in clause (C) (determined after
the asset transfer).


 


The term “Excluded Person(s)”
means (A) the Company or any Innovative Industrial Entity; (B) a trustee or other fiduciary holding securities under an employee
benefit plan of the Company or any Innovative Industrial Entity; (C) an underwriter temporarily holding securities pursuant to
an offering of such securities; or (D) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially
the same proportions as their ownership of stock in the Company.


 


The term “Change
of Control” as defined above shall be construed in accordance with Code Section 409A and the regulations promulgated
thereunder. In no event shall a transaction described above constitute a “Change of Control” for purposes of this Agreement
unless such transaction also satisfies the requirement to be a change in the ownership or effective control of a corporation, or
a change in the ownership of a substantial portion of the assets of a corporation, as each of those terms are defined under Code
Section 409A and the regulations promulgated thereunder.


 


(h)          “Code”
means the Internal Revenue Code of 1986, as amended.


 


(i)          “Exchange
Act” means the Securities Exchange Act of 1934, as amended.


 


(j)          “General
Release” means (i) a release of the Innovative Industrial Entities, in such form as the Partnership may reasonably request,
of all claims against the Innovative Industrial Entities relating to the Employee’s employment and termination thereof, and
(ii) an agreement to continue to comply with, and be bound by, the provisions of Section 16 hereof.


 


(k)          “Good
Reason” means any one or more of the following conditions:


 


(i)          any
material diminution of the Employee’s authority, duties or responsibilities;


 


(ii)         a
material diminution of the Employee’s annual base salary;


 


(iii)        a
material change in the geographic location at which the Employee must perform the Employee’s duties and responsibilities;
or


 


(iv)        any
other action or inaction by the Company or the Partnership that constitutes a material breach of this Agreement or any other agreement
pursuant to which the Employee provides services to the Company or the Partnership.


 




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A termination of the Employee’s employment
for Good Reason shall be effective only if (X) such condition was not consented to by the Employee in advance or subsequently ratified
by the Employee in writing, (Y) such condition remains in effect thirty (30) days after the Employee gives written notice to the
Board of the Employee’s intention to terminate his employment for Good Reason, which notice specifically identifies such
condition, and (Z) the Employee gives the notice referred to in (Y) above within ninety (90) days of the initial existence of such
condition. If the Company or the Partnership, as applicable, does not cure the condition within the thirty (30) day cure period
described in (Y) above, then the Employee’s termination will occur on the day immediately following the end of the cure period.
If the Company or the Partnership, as applicable, cures the condition within such thirty (30) day cure period, then the Employee
will be deemed to have withdrawn his notice of termination effective as of the date the cure is effected.


 


(l)          “Innovative
Industrial Entity” or “Innovative Industrial Entities” means the Company, the Partnership, any of
their Affiliates, and any other entities that along with the Company or the Partnership is considered a single employer pursuant
to Code Section 414(b) or (c) and the Treasury regulations promulgated thereunder, determined by applying the phrase “at
least 50 percent” in place of the phrase “at least 80 percent” each place it appears in such Treasury regulations
or Code Section 1563(a).


 


(m)          “Medical
Benefits” shall mean the monthly fair market value of benefits provided to the Employee and the Employee’s dependents
under the major medical, dental and vision benefit plans sponsored and maintained by the Partnership, at the level of coverage
in effect for such persons immediately prior to the Employee’s termination of employment date. The “monthly fair market
value” of such benefits shall be equal to the monthly cost (including any applicable administrative fee) to the Employee
as if the Employee elected COBRA continuation coverage at the level of coverage in effect at such time for the Employee and the
Employee’s dependents at their own expense.


 


(n)          “Person”
means a “person” as used in Sections 3(a)(9) and 13(d) of the Exchange Act or any group of Persons acting in concert
that would be considered “persons acting as a group” within the meaning of Treasury Regulation §1.409A-3(i)(5).


 


(o)          “Prime
Rate” means an annual rate, compounding annually, equal to the prime rate, as reported in The Wall Street Journal on
the date of the Change of Control, or if not reported on that date, the last preceding date on which so reported, which rate shall
be adjusted on each January 1 to the prime rate then in effect and shall remain in effect for the year.


 


(p)          “Qualifying
Retirement” means the Employee’s voluntary termination of employment after the Employee has (i) attained (X) age
sixty-five (65), (Y) age fifty-five (55) with ten (10) Years of Service as a full-time employee of the Partnership or any of its
Affiliates, or (Z) an age which, when added to such Years of Service of the Employee equals at least seventy-five (75), and (ii)
previously delivered a written notice of retirement to the Partnership and on the date of retirement the Employee has satisfied
the minimum applicable advance written notice requirement set forth below:


 




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         Age at

        Voluntary Termination
	 	
        Number of Years of

        Advance Notice

	 	 	 
	
        58 or younger

        59

        60 or older
	 	
        3 years

        2 years

        1 year



 


By way of illustration, and without limiting
the foregoing, if (i) the Employee is eligible to retire at age fifty-nine (59) after ten (10) Years of Service, (ii) the Employee
gives two (2) years notice at age fifty-eight (58) that the Employee intends to retire at age sixty (60), and (iii) the Employee
later terminates employment at age fifty-nine (59), then the Employee’s retirement at age fifty-nine (59) would not constitute
a Qualifying Retirement. However, if (i) the Employee is eligible to retire at age fifty-nine (59) after ten (10) Years of Service,
(ii) the Employee gives two (2) years notice at age fifty-eight (58) that the Employee intends to retire at age sixty (60), and
(iii) the Employee terminates employment upon reaching age sixty (60), then the Employee’s retirement at age sixty (60) would
constitute a Qualifying Retirement.


 


(q)          
“Separation from Service” means the termination of the Employee’s employment with all Innovative Industrial
Entities, provided that, notwithstanding such termination of the employment relationship between the Employee and all Innovative
Industrial Entities, the Employee shall not be deemed to have had a Separation from Service where it is reasonably anticipated
that the level of bona fide services that the Employee will perform (whether as an employee or independent contractor) following
such termination from the Partnership and all Innovative Industrial Entities would be twenty percent (20%) or more of the average
level of bona fide services performed by the Employee (whether as an employee or independent contractor) for the Innovative Industrial
Entities over the immediately preceding thirty-six (36) month period (or such lesser period of actual service). In such event,
Separation from Service shall mean the permanent reduction of the level of bona fide services to be performed by the Employee (whether
as an employee or independent contractor) to a level that is less than twenty percent (20%) of the average level of bona fide services
performed by the Employee (whether as an employee or independent contractor) during the thirty-six (36) month period (or such lesser
period of actual service) immediately prior to the termination of the Employee’s employment relationship. A Separation from
Service shall not be deemed to have occurred if the Employee is absent from active employment due to military leave, sick leave,
or other bona fide leave of absence if the period of such leave does not exceed the greater of (i) six (6) months or (ii) the period
during which the Employee’s right to reemployment by any Innovative Industrial Entity is provided either by statute or contract.


 


(r)          “Specified
Employee” means an employee of any Innovative Industrial Entity who is a “specified employee” as defined
in Code Section 409A(a)(2)(b)(i) and Treasury Regulation §1.409A-1(i). If the Employee is a key employee as of the applicable
identification date, the Employee shall be treated as a Specified Employee for the twelve (12) month period beginning on the first
day of the fourth month following such identification date. The applicable identification date for purposes of this Agreement shall
be September 30 of each year.


 


(s)          “Unvested
Equity Award” has the meaning given to such term in Section 6(a).


 




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(t)          “Years
of Service” means the Employee’s total complete years of employment with an Innovative Industrial Entity, including
years of employment with an entity that is acquired by an Innovative Industrial Entity prior to such acquisition. For this purpose,
a “complete year of employment” shall begin on the Employee’s date of hire and end on each subsequent anniversary
of such date.


 


2.          Term
of the Agreement. The term of this Agreement shall begin on the date hereof and end at 11:59 p.m. on December 31, 2019 and
thereafter shall automatically renew for successive three (3) year terms unless either party delivers written notice of non-renewal
to the other party at least ninety (90) days prior to the end of the then current term; provided, however, that if a Change of
Control has occurred during the original or any extended term (including any extension resulting from a prior Change of Control),
the term of the Agreement shall end no earlier than twenty-four (24) calendar months after the end of the calendar month in which
the Change of Control occurs.


 


3.          No
Change of Control – Severance. Except in circumstances in which the Employee would be entitled to payments and benefits
in connection with a Change of Control as provided in Section 4 below, in the event that during the term of this Agreement the
Employee has a Separation from Service as a result of the Innovative Industrial Entities terminating the Employee’s employment
without Cause or the Employee terminating the Employee’s employment for Good Reason, subject to Sections 11, 15 and 16 below:


 


(a)          The
Partnership shall pay to the Employee an amount equal to (i) two (2) times the sum of (A) the Employee’s annual base salary
in effect on the date the Employee’s employment terminates, plus (B) the Employee’s Average Annual Cash Bonus, plus
(ii) eighteen (18) months of the Employee’s Medical Benefits. Payment shall be made in a lump sum on the first business day
after sixty (60) days following the Employee’s Separation from Service;


 


(b)          All
of the Employee’s outstanding unvested stock options, restricted stock awards, restricted stock units and stock rights awards
that vest solely on the basis of time shall become vested on a pro-rated basis, based on the portion of the vesting period that
has elapsed as of the date of the Employee’s Separation from Service; and


 


(c)          All
of the Employee’s outstanding performance share awards shall be earned as of the date of Separation from Service based on
the level of achievement of the performance goals established for such awards as of such date, but then pro-rated based on the
portion of the performance period that has elapsed as of the date of the Employee’s Separation from Service. For purposes
hereof, the level of achievement of the performance goals established for each such award will be determined on the date immediately
prior to the Separation from Service as follows: (i) if the goal is a market-based goal, such as total stockholder return or stock
price, then the actual performance to date shall be used, and (ii) if the goal is not a market-based goal, then the level of achievement
of such goal shall be (X) based on the most recently reported number(s) by the Company in its reports filed with the Securities
and Exchange Commission or (Y) if such numbers are not so filed, based on the numbers as prepared internally by the Company for
the quarter ending prior to the date of the Separation from Service.


 




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Any shares issuable under
awards that vest or are earned pursuant to subsections (b) and (c) shall be issued on the same date as the cash severance payment
is made pursuant to subsection (a).


 


Notwithstanding anything
in this Agreement to the contrary, if a Separation of Service that would otherwise entitle the Employee to benefits under Sections
3(a), (b) and (c) above occurs during a transition period through December 31, 2019, and solely as it applies to (x) payments of
the amounts to the Employee pursuant to Section 3(a) above (and not, for purposes of clarification, for payments made pursuant
to Section 4(a) below) and (y) the number of equity awards that vest pursuant to Sections 3(b) and 3(c) above (and not, for purposes
of clarification, for equity awards that vest pursuant to Sections 4(b) and 4(c) below), (i) the Partnership shall be obligated
to pay to the Employee only a percentage of the amount calculated pursuant to Section 3(a) and (ii) only a percentage of the outstanding
equity awards under Sections 3(b) and 3(c) shall vest, based on the date of the Employee's Separation of Service, as follows:


 


	Date of Separation of Service	Percentage Payout of Amount Calculated 

Under Section 3(a) and Equity Vesting

 Under Sections 3(b) and 3(c)
	Before 3/31/17	0.0%
	From 4/1/17 through 6/30/17	8.3%
	From 7/1/17 through 9/30/17	16.7%
	From 10/1/17 through 12/31/17	25.0%
	From 1/1/18 through 3/31/18	33.3%
	From 4/1/18 through 6/30/18	41.7%
	From 7/1/18 through 9/30/18	50.0%
	From 10/1/18 through 12/31/18	58.3%
	From 1/1/19 through 3/31/19	66.7%
	From 4/1/19 through 6/30/19	75.0%
	From 7/1/19 through 9/30/19	83.3%
	From 10/1/19 through 12/31/19	91.7%
	From 1/1/20	100.0%


 


For the avoidance of
doubt, nothing in the preceding paragraph shall affect the time of payment of any amount under this Agreement.


 


4.          Change
of Control – Severance. In the event that during the term of this Agreement the Innovative Industrial Entities terminate
the Employee’s employment without Cause or the Employee terminates the Employee’s employment for Good Reason, in each
case within two (2) years following a Change of Control, the following provisions shall apply:


 


(a)          The
Partnership shall pay to the Employee the amount set forth in Section 3(a);


 


(b)          All
outstanding unvested stock options, restricted stock, restricted stock units, stock rights awards and performance share awards
then held by the Employee will vest (at the greater of actual performance to-date or target, for any awards subject to performance
goals), and all outstanding equity awards that have not vested at the time of the Change of Control or been converted to the right
to receive a cash payment pursuant to Section 6(c) will vest on the date the General Release in Section 15 becomes effective, and,
if applicable, will be paid on the tenth (10th) business day following such time. Notwithstanding the foregoing, all such awards
which are subject to Code Section 409A will be paid on the first (1st) business day after sixty (60) days following the Employee’s
Separation from Service, provided the General Release in Section 15 has become effective; and


 




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(c)          With
respect to those Unvested Equity Awards that have been exchanged pursuant to Sections 6(b) and 6(c) for the right to receive a
contingent cash payment, subject to Section 11 below, the Employee shall receive a cash payment made in a lump sum on the first
business day after sixty (60) days following the Employee’s Separation from Service equal to any portion of the unpaid Base
Performance Share Value and Base Restricted Share Value that has not been paid pursuant to Sections 6(b) and 6(c), together with
accrued but unpaid interest at the Prime Rate on such unpaid amount from the date of the Change of Control to the date of payment.


 


5.          Entitlement
to Severance.


 


(a)          If
the Employee becomes entitled to receive any severance payments or benefits described in Section 3 or Section 4 after the Employee
has delivered written notice of what would otherwise have been a Qualifying Retirement to the Partnership had the Employee continued
to be employed by the Partnership through the date of retirement set forth in the notice, then the amount of such payments and
benefits shall be limited to (i) those that the Employee would have otherwise received had such employment continued through such
date of retirement, and (ii) those provided by Section 9, if any.


 


(b)          If
the Employee dies after receiving notice from the Company that the Employee is being terminated without Cause, or after providing
notice of termination for Good Reason, but prior to the date the Employee receives the payments and benefits described in Section
3 or Section 4, as the case may be, then the Employee’s estate, heirs and beneficiaries shall be entitled to the payments
and benefits described in Section 3 or Section 4, as the case may be, at the same time such payments and benefits would have been
paid or provided to the Employee had the Employee lived.


 


6.          Change
of Control – Effect on Stock Rights.


 


(a)          Except
as otherwise provided in Sections 6(b) and 6(c) below (or in Sections 4(b) or 4(c), if applicable), the occurrence of a Change
of Control shall not impact any existing unvested stock options, restricted stock awards, restricted stock units, stock rights
awards or performance share awards (collectively, “Unvested Equity Awards”) unless such rights are cashed out
pursuant to the terms of the applicable merger agreement or other agreement(s) pursuant to which such Change of Control is effected.


 


(b)          With
respect to Unvested Equity Awards that are performance share awards (“Performance Awards”), notwithstanding
anything to the contrary contained in the related plan or award agreement, all of the Employee’s outstanding unvested Performance
Awards shall be cancelled and, in consideration for the cancellation of such awards, the Employee shall receive a deferred contingent
cash payment with respect to each such cancelled award equal to (X) the Base Performance Share Value determined for such cancelled
award, plus (Y) interest on such unpaid Base Performance Share Value from the date of the Change of Control to the date of payment
at the Prime Rate, such cash payment to be made on the last day of the applicable performance period for such award, provided that
the Employee remains employed by the Partnership, an Affiliate, or one of their successors through the last day of the applicable
performance period.


 




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(c)          With
respect to Unvested Equity Awards that are not Performance Awards, if the stock underlying such awards is not readily tradable
on an established securities market immediately after the Change of Control (after giving effect to any conversion, exchange or
replacement pursuant to the applicable plan or award agreement of the stock underlying Unvested Equity Awards as a result of a
reorganization, merger, consolidation, combination or other similar corporate transaction or event), then notwithstanding anything
to the contrary contained in the related plan or award agreement, all of the Employee’s outstanding Unvested Equity Awards
shall be cancelled and, in consideration for the cancellation of such awards, the Employee shall receive:


 


(i)          a
cash payment equal to (X) the fair market value of the shares underlying all of the Employee’s unvested stock options as
of the date of the Change of Control, less (Y) the aggregate exercise price of such stock options, such cash payment to be made
within thirty (30) days after the Change of Control; and


 


(ii)         a
deferred contingent cash payment equal to (X) the Base Restricted Share Value, plus (Y) interest on the unpaid Base Restricted
Share Value from the date of the Change of Control to the date of payment at the Prime Rate, such cash payment of the Base Restricted
Share Value to be made in installments on the applicable vesting dates with respect to the number of shares that would have been
issued on that vesting date, plus all accrued but unpaid interest on the unpaid Base Restricted Share Value through such vesting
date, provided that the Employee remains employed by the Partnership, an Affiliate, or one of their successors through the applicable
date of vesting.


 


7.          Change
of Control – Excise Tax.


 


(a)          If
in the opinion of Tax Counsel (as defined in Section 7(b)) the Employee will be subject to an excise tax under Code Section 4999
with respect to all or any portion of the payments and benefits to be made by the Company or any of its Affiliates to the Employee,
whether upon a Change of Control or following a termination of the Employee’s employment, under this Agreement or otherwise
(in the aggregate, “Total Payments”), then such parties agree that the Total Payments shall either be (i) delivered
in full, or (ii) reduced to two (2) times the Employee’s “base amount” for purposes of Code Section 280G, less
$1.00 (“Scaled Back Amount”), whichever of the foregoing results in the receipt by the Employee of the greatest
benefit on an after-tax basis (taking into account the applicable federal, state and local income taxes and the excise tax). If
the Employee is entitled to the Scaled Back Amount, then such payments and benefits shall be reduced or eliminated by applying
the following principles, in order: (1) the payment or benefit with the higher ratio of the parachute payment value to present
economic value (determined using reasonable actuarial assumptions) shall be reduced or eliminated before a payment or benefit with
a lower ratio; (2) the payment or benefit with the later possible payment date shall be reduced or eliminated before a payment
or benefit with an earlier payment date; and (3) cash payments shall be reduced prior to non-cash benefits; provided that if the
foregoing order of reduction or elimination would violate Code Section 409A, then the reduction shall be made pro rata among the
payments or benefits to be received by the Employee (on the basis of the relative present value of the parachute payments).


 




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(b)          For
purposes of this Section 7, within forty (40) days after delivery of a written notice of termination by the Employee or by the
Company pursuant to this Agreement within two (2) years of a Change of Control with respect to the Company (or, if an event other
than termination of employment results in payment of parachute payments under Code Section 280G and it is reasonably possible that
such parachute payments could result in an excise tax, within forty (40) days after such other event), the Company shall obtain,
at its expense, the opinion (which need not be unqualified) of nationally recognized tax counsel (“Tax Counsel”)
selected by the Compensation Committee of the Board, which sets forth (i) the “base amount” within the meaning of Code
Section 280G; (ii) the aggregate present value of the payments in the nature of compensation to the Employee as prescribed in Code
Section 280G(b)(2)(A)(ii); (iii) the amount and present value of any “excess parachute payment” within the meaning
of Code Section 280G(b)(1); and (iv) as applicable, (X) the net after-tax proceeds to the Employee, taking into account the tax
imposed by Code Section 4999 if the Total Payments were delivered in full, and (Y) the amount and nature of the parachute payments
to be reduced or forfeited according to Section 7(a) in order for the total payments and benefits to equal the Scaled Back Amount.
For purposes of such opinion, the value of any non-cash benefits or any deferred payment or benefit shall be determined by the
Company’s independent auditors in accordance with the principles of Code Section 280G and regulations thereunder, which determination
shall be evidenced in a certificate of such auditors addressed to the Company and the Employee. Such opinion shall be addressed
to the Company and the Employee and shall be binding upon the Company, its Affiliates, and the Employee.


 


8.          Plan
of Liquidation. If the stockholders of the Company approve a complete plan of liquidation or dissolution of the Company (“Approved
Liquidation Plan”), all Unvested Equity Awards that are not Performance Awards will fully vest on the date of such approval
and all such awards that are Performance Awards shall vest to the extent the performance goals established under such awards have
been achieved on such date (as if the Employee had satisfied all employment conditions required to vest), with the corresponding
performance period for such award(s) deemed completed as of the date immediately preceding the date of such approval. Shares of
common stock that so vest will be deemed outstanding as of the close of business on the date of such approval, and certificates
representing such shares shall be delivered to the Employee as promptly as practicable thereafter. Any Performance Awards not vesting
on the date of such approval shall be immediately cancelled without consideration therefor. In addition, unless the Approved Liquidation
Plan shall have been rescinded, if the Partnership terminates the Employee’s employment without Cause or the Employee terminates
the Employee’s employment for Good Reason in each case following stockholder approval of the Approved Liquidation Plan, then
the Employee shall receive the benefits provided in Sections 4(a), 4(b) and 4(c), as applicable.


 




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9.          Retirement
and Performance Shares. If the Employee’s termination of employment constitutes a Qualifying Retirement, then the Employee’s
unvested stock options, restricted stock, restricted stock units and stock rights awards (other than performance shares) will vest
on the date of retirement set forth in the notice thereof, and if the Qualifying Retirement occurs on or after a Change of Control,
then the provision of Section 4(c) shall also apply. Notwithstanding anything to the contrary in any related plan or award agreement,
the Employee shall be entitled to exercise all vested stock options until the earlier of (a) three (3) years after the date of
Qualifying Retirement, and (b) the original terms of the options. Unless an award agreement provides for more favorable treatment,
upon a Qualifying Retirement, the Employee shall continue to have the right to earn unvested performance shares upon the achievement
of the applicable performance goals over any remaining performance period, as if the Employee’s employment had not been terminated.


 


10.         Death
and Disability. In no event shall a termination of the Employee’s employment due to death or Disability constitute a
termination by the Partnership without Cause or a termination by the Employee for Good Reason; however, upon termination of employment
due to the Employee’s death or Disability, the Employee’s estate or the Employee, as applicable, shall receive the
benefits provided in Section 4(b) or 4(c) with respect to unvested stock options, restricted stock, restricted stock units and
stock rights awards (other than performance shares), and the Employee’s estate or the Employee, as applicable, shall continue
to have the right to earn unvested performance shares upon the achievement of the applicable performance goals over any remaining
performance period, as if the Employee’s employment had not been terminated. Notwithstanding anything to the contrary in
any related plan or award agreement, (a) the Employee’s estate shall be entitled to exercise all vested stock options until
the earlier of (i) three (3) years after termination of employment due to death, and (ii) the original term of the option, and
(b) the Employee shall be entitled to exercise all vested stock options until the earlier of (i) one (1) year after termination
of employment due to Disability, and (ii) the original term of the option. For purposes of this Agreement, “Disability”
shall mean the absence of the Employee from the Employee’s duties with the Innovative
Industrial Entities on a full-time basis for ninety (90) consecutive days or on a total of one hundred eighty (180) days
in any twelve (12) month period, in either case as a result of incapacity due to mental or physical illness which is determined
to be total and permanent by a physician selected by the Company and reasonably acceptable to the Employee or the Employee’s
legal representative.


 


11.         Payments
to Specified Employees. Notwithstanding any other Section of this Agreement, if the Employee is a Specified Employee at the
time of the Employee’s Separation from Service, payments or distribution of property to the Employee provided under this
Agreement, to the extent considered amounts deferred under a non-qualified deferred compensation plan (as defined in Code Section
409A) shall be deferred until the six (6) month anniversary of such Separation from Service to the extent required in order to
comply with Code Section 409A and Treasury Regulation 1.409A-3(i)(2).


 


12.         Reductions
in Base Salary. For purposes of this Agreement, in the event there is a reduction in the Employee’s base salary that
would constitute the basis for a termination for Good Reason, the base salary used for purposes of calculating the severance payable
pursuant to Sections 3 or 4(a), as the case may be, shall be the amounts in effect immediately prior to such reduction.


 




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13.         Other
Payments and Benefits. On any termination of employment, including, without limitation, termination due to the Employee’s
death or Disability (as defined in Section 10) or for Cause, the Employee shall receive any accrued but unpaid salary, reimbursement
of any business or other expenses incurred prior to termination of employment but for which the Employee had not received reimbursement
(provided that such expenses have been previously approved in writing or comply with the terms of any expense reimbursement policy
then in effect), and any other rights, compensation and/or benefits as may be due the Employee in accordance with the terms and
provisions of any agreements, plans or programs of the Company or the Partnership (but in no event shall the Employee be entitled
to duplicative rights, compensation and/or benefits).


 


14.         Set
Off; Mitigation. The obligation of the Company or the Partnership to pay or provide the Employee the amounts or benefits under
this Agreement shall be subject to set-off, counterclaim or recoupment of amounts owed by the Employee to the Company or the Partnership.
In addition, except as provided in Section 7 with respect to the Scaled Back Amount, if applicable, the Employee shall not be required
to mitigate the amount of any payments or benefits provided to the Employee hereunder by securing other employment or otherwise,
nor will such payments and/or benefits be reduced by reason of the Employee securing other employment or for any other reason.


 


15.         Release.
Notwithstanding any provision herein to the contrary, none of the Innovative Industrial Entities shall have any obligation to pay
any amount or provide any benefit (other than those amounts set forth in Section 13), as the case may be, under this Agreement,
unless the Employee executes, delivers to the Partnership, and does not revoke (to the extent the Employee is allowed to do so
as set forth in the General Release), a General Release within sixty (60) days of the Employee’s termination of employment.


 


16.         Restrictive
Covenants and Consulting Arrangement.


 


(a)          The
Employee will hold in a fiduciary capacity all secret or confidential information, knowledge or data relating to any Innovative
Industrial Entity, and each of their respective businesses (the “Confidential Information”), except in furtherance
of the business of the Innovative Industrial Entities or except as may be required by law. Additionally, and without limiting the
foregoing, the Employee agrees not to participate in or facilitate the dissemination to the media or any other third party (i)
of the Confidential Information, or (ii) of any damaging or defamatory information concerning any Innovative Industrial Entity
or the Employee’s experiences as an employee of any Innovative Industrial Entity, without the Company’s prior written
consent, except as may be required by law. Notwithstanding the foregoing, this Section 16(a) does not apply to information which
is already in the public domain other than pursuant to acts of the Employee or representatives of the Employee in violation of
this Agreement.


 


(b)          During
the Employee’s employment and during the one (1) year period after the date that the Employee ceases to be employed by any
of the Innovative Industrial Entities for any reason (the “Termination Date”), the Employee agrees that the
Employee shall not directly or knowingly and intentionally through another party recruit, induce, solicit or assist any other Person
in recruiting, inducing or soliciting (A) any other employee of any Innovative Industrial Entity to leave such employment or (B)
any other Person with which any Innovative Industrial Entity was actively conducting negotiations for employment on the Termination
Date.


 




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(c)          For
a six (6) month period following any termination of employment, the Employee agrees to make himself available and, upon and as
requested by the Company or the Partnership from time to time, to provide consulting services with respect to any projects the
Employee was involved in prior to such termination and/or to provide such other consulting services as the Company or the Partnership
may reasonably request. The Employee will be reimbursed for reasonable travel and miscellaneous expenses incurred in connection
with the provision of requested consulting services hereunder. The Company or the Partnership will provide the Employee reasonable
advance notice of any request to provide consulting services, and will make all reasonable accommodations necessary to prevent
the Employee’s commitment hereunder from materially interfering with the Employee’s employment obligations, if any.
In no event will the Employee be required to provide more than twenty (20) hours of consulting services in any one month to the
Company and the Partnership pursuant to this provision.


 


(d)          The
parties agree that any breach of this Section 16 will result in irreparable harm to the non-breaching party which cannot be fully
compensated by monetary damages and accordingly, in the event of any breach or threatened breach of this Section 16, the non-breaching
party shall be entitled to injunctive relief. Should any provision of this Section 16 be determined by a court of law or equity
to be unreasonable or unenforceable, the parties agree that to the extent it is valid and enforceable, they shall be bound by the
same, the intention of the parties being that the parties be given the broadest protection allowed by law or equity with respect
to such provision.


 


17.         Survival.
The provisions of Sections 3 through 22 shall survive the termination of this Agreement to the extent necessary to enforce the
rights and obligations described therein.


 


18.         Compliance
with Code Section 409A. For purposes of applying the provisions of Code Section 409A to this Agreement, each separately identified
amount to which the Employee is entitled under this Agreement shall be treated as a separate payment. In addition, to the extent
permissible under Code Section 409A, any series of installment payments under this Agreement shall be treated as a right to a series
of separate payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days, the
actual date of payment within the specified period shall be within the sole discretion of the Company or the Partnership, as the
case may be.


 


19.         Withholding.
The Company or the Partnership shall be entitled to withhold from all payments to the Employee hereunder all amounts required to
be withheld under applicable local, state or federal income and employment tax laws.


 


20.         Clawbacks.
All incentive-based compensation paid to the Employee hereunder will be subject to the policies of the Company and the Partnership
regarding clawbacks of erroneously awarded incentive-based compensation triggered by an accounting restatement, as required by
law and approved by the Board in the case of the Company.


 




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21.         Dispute
Resolution. Any dispute, controversy or claim between the Company or the Partnership and the Employee or other Person arising
out of or relating to this Agreement shall be settled by arbitration conducted in San Diego, California, in accordance with the
National Rules for the Resolution of Employment Disputes of the American Arbitration Association then in force and California law
within thirty (30) days after written notice from one party to the other requesting that the matter be submitted to arbitration;
provided that this Section 21 shall not apply to, and the Company and the Partnership shall be free to seek, injunctive or other
equitable relief with respect to any actual or threatened violation by the Employee of his or her obligations under Section 16
hereof in any court of competent jurisdiction. The arbitration decision or award shall be binding and final upon the parties. The
arbitration award shall be in writing and shall set forth the basis thereof. The parties hereto shall abide by all awards rendered
in such arbitration proceedings, and all such awards may be enforced and executed upon in any court having jurisdiction over the
party against whom enforcement of such award is sought. Each party shall be responsible for its own costs and expenses in any dispute
or proceeding regarding the enforcement of this Agreement.


 


22.         Miscellaneous.
This Agreement shall be construed and enforced in accordance with the laws of the State of California (exclusive of conflict of
law principles). In the event that any provision of this Agreement shall be invalid, illegal or unenforceable, the remainder shall
not be affected thereby. This Agreement supersedes and terminates any prior employment agreement, severance agreement, change of
control agreement or non-competition agreement between the Company or the Partnership and the Employee. It is intended that the
payments and benefits provided under this Agreement are in lieu of, and not in addition to, termination, severance or change of
control payments and benefits provided under the other termination or severance plans, policies or agreements, if any, of the Company
or the Partnership. This Agreement shall be binding upon and inure to the benefit of the Employee and the Employee’s heirs
and personal representatives, the Company and the Partnership, and their successors, assigns and legal representatives. Headings
herein are inserted for convenience and shall not affect the interpretation of any provision of the Agreement. References to sections
of the Exchange Act or the Code, or rules or regulations related thereto, shall be deemed to refer to any successor provisions,
as applicable. The Company and the Partnership will require any successors thereto (whether direct or indirect, by purchase, merger,
consolidation, or otherwise) to expressly assume and agree to perform under this Agreement in the same manner and to the same extent
that the Company and the Partnership would be required to perform if no such succession had taken place. This Agreement may not
be terminated, amended, or modified except by a written agreement executed by the parties hereto or their respective successors
and legal representatives.


 


23.         Counterparts.
This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.


 


(Signature
pages to follow)


 




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IN WITNESS WHEREOF,
the parties hereto have executed this Agreement as of the day and year first above written.


 


	 	INNOVATIVE INDUSTRIAL PROPERTIES, INC.
	 	 
	 	By:	/s/ Paul Smithers
	 	 	Paul Smithers
	 	 	President and Chief Executive Officer
	 	 
	 	IIP OPERATING PARTNERSHIP, LP
	 	 
	 	By:	INNOVATIVE INDUSTRIAL PROPERTIES, INC.
	 	 	Its General Partner
	 	 
	 	By:	/s/ Paul Smithers
	 	 	Paul Smithers
	 	 	President and Chief Executive Officer
	 	 
	 	EMPLOYEE
	 	 
	 	/s/ Robert Sistek
	 	Robert Sistek