INNOVATIVE INDUSTRIAL PROPERTIES INCIIPR
INNOVATIVE INDUSTRIAL PROPERTIES INC Fair Value Disclosure
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Accounting guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Includes other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or no market activities, therefore requiring an entity to develop its own assumptions.
Financial Instruments Measured at Fair Value on a Nonrecurring Basis
On September 30, 2025, the Company completed its initial purchase of IQHQ Preferred Stock and funded the investment under the IQHQ Credit Facility, as described in Note 7. The investments in the IQHQ Preferred Stock and IQHQ Credit Facility were evaluated together, along with the related financial instruments, and were initially measured based on relative fair value. Utilizing a third-party valuation specialist, the fair values were determined as summarized in the following table (in thousands):
| Financial Instruments | Relative Fair Value at September 30, 2025 | |||||||
IQHQ Preferred Stock(1) | $ | 4,912 | ||||||
IQHQ Warrant(2) | $ | 532 | ||||||
Forward contract for the purchase of IQHQ Preferred Stock(3) | $ | 4,868 | ||||||
IQHQ Credit Facility(4) | $ | 95,930 | ||||||
________________________________________________________
(1)The Company estimated the fair value of the IQHQ Preferred Stock using a discounted cash flow method with a risk adjusted discount rate of 20.0% and term to an IQHQ entity level exit of five years. Because this methodology includes unobservable inputs that reflect our own internal assumptions and calculations, the measurement of estimated fair value is categorized as Level 3 of the fair value hierarchy.
(2)The Company estimated the fair value of the IQHQ Warrant using an option pricing model. Because this methodology includes unobservable inputs, including a discount for lack of marketability of 41.0%, a risk free rate of 3.7%, equity volatility of 35.0%, and term to an IQHQ entity level exit of five years, the fair value measurement is categorized as Level 3 of the fair value hierarchy.
(3)The Company estimated the fair value of the forward contract for the purchase of IQHQ Preferred Stock using a standard forward contract model. Because this methodology includes unobservable inputs, including the expected timing and amounts of future fundings as well as the estimated fair value of the underlying IQHQ Preferred Stock estimated using an approach consistent with as described above, the measurement of estimated fair value is categorized as Level 3 of the fair value hierarchy.
(4)The Company estimated the fair value of the IQHQ Credit Facility by using a discounted cash flow method with a risk adjusted discount rate of 16.1%. Because this methodology includes unobservable inputs that reflect our own internal assumptions and calculations, the measurement of estimated fair value is categorized as Level 3 of the fair value hierarchy.
Financial Instruments Not Measured at Fair Value
The following table presents the carrying value and approximate fair value of financial instruments not measured at fair value at December 31, 2025 and 2024 (in thousands):
| At December 31, 2025 | At December 31, 2024 | ||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||
Life science investments(1) | $ | 96,908 | $ | 96,908 | $ | — | $ | — | |||||||||||||||
Construction loan(2) | $ | 22,800 | $ | 22,997 | $ | 22,800 | $ | 28,245 | |||||||||||||||
Investments as cash equivalents(3) | $ | 158 | $ | 158 | $ | 45,714 | $ | 45,714 | |||||||||||||||
Notes receivable(4) | $ | 16,786 | $ | 16,786 | $ | 16,786 | $ | 16,786 | |||||||||||||||
Investments(5) | $ | — | $ | — | $ | 5,000 | $ | 5,000 | |||||||||||||||
Notes due 2026(6) | $ | 290,602 | $ | 288,644 | $ | 297,865 | $ | 289,077 | |||||||||||||||
Revolving credit facility(7) | $ | 27,500 | $ | 27,500 | $ | — | $ | — | |||||||||||||||
Life science credit facility(8) | $ | 75,000 | $ | 75,000 | $ | — | $ | — | |||||||||||||||
________________________________________________________
(1)Excludes $52.8 million of investments in the IQHQ Preferred Stock and IQHQ Warrant which are carried at cost under the measurement alternative of ASC 321, Investments - Equity Securities. The investment in the IQHQ Credit Facility is categorized as Level 3 and was valued using a yield analysis, which is typically performed for non-credit impaired loans. To determine fair value using a yield analysis, a current price is imputed for the loan based upon an assessment of the expected market yield for a similarly structured loan with a similar level of risk. In the yield analysis, the Company considers the current contractual interest rate, the maturity and other terms of the loan relative to risk of the company and the specific loan. At December 31, 2025, the expected market yield used to determine fair value was 16.8%. Changes in market yields may change the fair value of the investment in the revolving credit facility. Generally, an increase in market yields may result in a decrease in the fair value of the investment in the revolving credit facility. Due to the inherent uncertainty of determining the fair value of a loan that does not have a readily available market value, the fair value of the investment in the revolving credit facility may fluctuate from period to period. Additionally, the fair value of the investment in the revolving credit facility may differ significantly from the value that would have been used had a readily available market existed for such loan and may differ materially from the value that the Company may ultimately realize.
(2)The construction loan receivable is categorized as Level 3 and was valued using a yield analysis, which is typically performed for non-credit impaired loans. To determine fair value using a yield analysis, a current price is imputed for the loan based upon an assessment of the expected market yield for a similarly structured loan with a similar level of risk. In the yield analysis, the Company considers the current contractual interest rate, the maturity and other terms of the loan relative to risk of the company and the specific loan. At each of December 31, 2025 and December 31, 2024, the expected market yield used to determine fair value was 16.25%. Changes in market yields may change the fair value of the construction loan. Generally, an increase in market yields may result in a decrease in the fair value of the construction loan. Due to the inherent uncertainty of determining the fair value of a loan that does not have a readily available market value, the fair value of the construction loan may fluctuate from period to period. Additionally, the fair value of the construction loan may differ significantly from the value that would have been used had a readily available market existed for such loan and may differ materially from the value that the Company may ultimately realize.
(3)Investments as cash equivalents include investments of obligations of the U.S. government with an original maturity at the time of purchase of 90 days or less are classified as held-to-maturity, stated at amortized cost and valued using Level 1 inputs. Investments as cash equivalents also include investments in a money market fund that invests 100% in U.S. government securities, which is stated at cost and valued using Level 1 inputs.
(4)Notes receivable relate to certain acquisitions of real estate which did not satisfy the requirements for sale-leaseback accounting (see Note 2 “Acquisition of Real Estate Properties” to our consolidated financial statements for more information). The notes receivable
are categorized as Level 3 and were valued using a yield analysis. At December 31, 2025 and 2024, the weighted average expected market yields used to determine fair values were 26.5% and 20.6%, respectively.
(5)At December 31, 2024 , investments consisting of short-term certificates of deposit with an original maturity at the time of purchase of greater than 90 days and less than one year are classified as held-to-maturity, stated at cost which approximates fair value using Level 2 inputs.
(6)The fair value is determined based upon Level 2 inputs as the Notes due 2026 were not traded in an active market.
(7)The Revolving Credit Facility is categorized as Level 2 and was valued using a discounted cash flow analysis based on significant other observable inputs such as available market information on discount and borrowing rates with similar terms, maturities, and credit ratings. Changes in discount and borrowing rates may change the fair value of the Revolving Credit Facility. Additionally, the use of different market assumptions or estimation methods may have a material effect on the estimated fair value.
(8)The Life Science Credit Facility is categorized as Level 2 and was valued using a discounted cash flow analysis based on significant other observable inputs such as available market information on discount and borrowing rates with similar terms, maturities, and credit ratings. Changes in discount and borrowing rates may change the fair value of the Life Science Credit Facility. Additionally, the use of different market assumptions or estimation methods may have a material effect on the estimated fair value.
The carrying amounts of cash equivalents, interest receivable, accounts payable, accrued expenses and other liabilities approximate fair values.Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 24, 2026 | Showing above |
| 2024 | Feb 21, 2025 | |
| 2023 | Feb 27, 2024 | |
| 2022 | Feb 28, 2023 | |
| 2021 | Feb 24, 2022 | |
| 2020 | Feb 26, 2021 | |
| 2019 | Mar 2, 2020 | |
| 2018 | Mar 14, 2019 | |
| 2017 | Mar 29, 2018 | |
| 2016 | Mar 23, 2017 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.