As filed with the Securities and Exchange Commission on August 6, 2010

 

Registration No. 333-      

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form S-11

FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

GLADSTONE LAND CORPORATION

(Exact Name of Registrant as Specified in its Governing Instruments)

1521 Westbranch Drive, Second Floor
McLean, Virginia 22102
(703) 287-5800
(Address, Including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

David Gladstone
Chairman and Chief Executive Officer
Gladstone Land Corporation
1521 Westbranch Drive, Second Floor

McLean, Virginia 22102
(703) 287-5800
(703) 287-5801 (facsimile)
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

 

 

Copies to:

 

 

Thomas R. Salley, Esq.
Cooley LLP
777 6^th Street, NW
Washington, D.C. 20004
(202) 842-7800
(202) 842-7899 (facsimile)

 

 

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement.

 

If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

CALCULATION OF REGISTRATION FEE

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

 

 

SUBJECT TO COMPLETION DATED AUGUST 6, 2010

 

12,100,000 Shares of Common Stock

 

This is an initial public offering of shares of common stock of Gladstone Land Corporation, or Gladstone Land. We are a Delaware corporation that owns farmland in California. We intend to acquire more farmland, which we will lease to farmers until such time as the land may be converted to urban or suburban uses. We also intend to lend to farmers for the purchase of farmland. We may also acquire and invest in mortgages for properties related to farming, such as coolers, processing plants, packing buildings and distribution centers. We intend to elect and qualify to be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2011.

 

Gladstone Land is offering 11,350,000 of the shares to be sold in the offering. The selling stockholder identified in this prospectus is offering an additional 750,000 shares. Gladstone Land will not receive any of the proceeds from the sale of the shares being sold by the selling stockholder.

 

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $14.00 and $16.00. We intend to apply to have our common stock listed on The NASDAQ Global Market under the symbol “LAND.”

 

See “Risk Factors” on page 12 to read about factors you should consider before buying shares of the common stock. Some risks include:

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

 

 

 

 

 

To the extent that the underwriters sell more than 12,100,000 shares of common stock, the underwriters have the option to purchase up to an additional 1,815,000 shares of common stock from us at the initial public offering price, less the underwriting discount, within 30 days from the date of this prospectus, solely to cover over-allotments.

 

The underwriters expect to deliver the shares of common stock on [          ], 2010.

 

 

 

 

[Underwriters]

 

 

 

 

 

The date of this prospectus is          , 2010.

 

GLADSTONE LAND CORPORATION

 

TABLE OF CONTENTS

 

 

PROSPECTUS SUMMARY

	•	Inflation drives up food costs and therefore the cost of agricultural commodities. As a result, the underlying land that supports agricultural production will increase with significant correlation to inflation.

	•	Farmland provides investors with another asset class to increase portfolio diversification. Historically, farmland values have not been significantly impacted by major swings in the stock and bond markets.
	•	Large acreage farmland has minimal vacancy loss and limited capital expense requirements, which results in relatively stable and predictable operating income.

	•	Owning Farms and Farm-Related Real Estate.  We intend to acquire farmland and lease it to independent farmers. In addition to farmland, we may also seek to buy operations that are related to farmland, such as vegetable and fruit coolers and freezers, packing houses, storage sheds and distribution centers that could generate rental income. We expect to sell some of our real estate assets from time to time when doing so would be advantageous to us and our stockholders. We also expect many of the properties we purchase to eventually be converted to urban or suburban uses, which could result in their long-term appreciation in value.
	•	Owning Mortgages on Farms and Farm-Related Real Estate.  In circumstances where our purchase of farms and farm-related properties is not feasible, we will seek to provide the purchaser of the property with a mortgage loan secured by the property, often with an option to sell the property to us in the future. Currently, there are few lenders who provide financing for the purchase of farm and farm-related properties, and those loans that can be obtained are at relatively lower amounts to the value of the real estate. This “loan to value” ratio has fallen substantially since the recent economic recession in the United States. We are also aware of shorter term mortgages that were made by banks and other lending institutions that will come due in the near term, and the absence of significant numbers of mortgage providers to make replacement mortgages. We hope to take advantage of this opportunity and provide mortgage loans to owners of farmland and farm-related real estate. We anticipate that these mortgage loans will be at rates and on terms that, in the early years of the loans, will provide us with more income than we would receive from owning and renting farmland in those years. We believe that these attractive terms will be available to us because lending by banks and other financial institutions is currently at a relatively low point. By providing a mortgage loan on the farmland, we believe we will also be in a good position to purchase the farmland should the owner wish to sell the land.
	•	Owning Ground Leases.  Sometimes an agricultural real estate owner will enter into a long-term lease for the land alone and the tenant will build a building on the site. At the end of the lease the landlord often owns the building. Some of these ground leases are as short as 20 years but many are longer. We believe that there is an opportunity to buy land that is leased under long-term ground leases.
	•	Expanding Our Operations Beyond California.  The United States is one of the largest farming countries in the world, and we believe this provides us with a great deal of expansion opportunities. While we will begin our farm acquisition operations in California, we expect that we will establish other operations in other farming locations. The southern part of the United States, such as Georgia and Florida, offers additional attractive areas. We also expect to seek farmland acquisitions in the Midwest and Mid-Atlantic. In addition, there are other farming communities throughout the United States and Canada that have similar characteristics, and we may seek to own farmland in those locations as well.
	•	Using Leverage.  Our strategy includes the use of leverage so that we may make more investments than would otherwise be possible in order to maximize potential returns to stockholders. We intend to borrow through mortgage loans secured by our properties and, in such cases, will attempt to limit our loss exposure on any property to the amount of equity invested in that property. We may also borrow funds on a short-term basis or incur other indebtedness. Some of our investments may be made through joint ventures that will permit us to own interests in large properties without restricting the diversity of our portfolio.

	•	Our Adviser may realize substantial compensation on account of its activities on our behalf;
	•	Our agreements with our Adviser are not arm’s-length agreements;
	•	We may experience competition with our affiliates for financing transactions; and
	•	Our Adviser and other affiliates could compete for the time and services of our officers and directors.

	•	We may not be able to successfully operate our agricultural properties to be leased for annual crops.

	•	We have identified           specific properties to purchase with the net proceeds we will receive from this offering and are reviewing others, although we have not yet entered into letters of intent or binding agreements to acquire these properties, and there is no guarantee that we will be able to acquire any of them.
	•	There is no assurance that we will be able to purchase the properties under review. As a result, investors will be unable to evaluate the manner in which the net proceeds are invested and the economic merits of projects prior to investment.
	•	Because our properties will be devoted to agricultural uses pending their potential future conversion to urban uses, we will be subject to risks associated with agriculture, which may result in an adverse impact on the price of our common stock.
	•	Conflicts of interest exist between us, our Adviser, its officers and directors and their affiliates, which could result in decisions that are not in the best interests of our stockholders.
	•	We cannot guarantee when or if our properties will ever be converted to urban or suburban uses. If we are unable to sell our agricultural real estate for urban or suburban development, our operating results may be materially adversely affected.
	•	We intend to set a distribution rate at     % of the public offering price in this offering, which may have an adverse impact on the market price for our common stock.
	•	Highly leveraged tenants may be unable to make lease payments, which could adversely affect our cash available for distribution to our stockholders.
	•	Our real estate investments will include farms that may be difficult to sell or re-lease upon tenant defaults or early lease terminations.
	•	The inability of a tenant to make lease payments will reduce our revenues.
	•	We have not identified any properties on which we will make mortgage loans. As a result, investors will be unable to evaluate the economic merits of the mortgage lending aspect of our plan.
	•	The inability of a borrower to make interest and principal amortization payments will reduce our revenues.
	•	Our business strategy relies on external financing, which may expose us to risks associated with leverage such as restrictions on additional borrowing and payment of distributions, risks associated with balloon payments and risk of loss of our equity upon foreclosure.
	•	We are subject to certain risks associated with the ownership of agricultural real estate which could reduce the value of our investments.
	•	We may not qualify as a REIT for federal income tax purposes, which would subject us to federal income tax on our taxable income at regular corporate rates, thereby reducing the amount of funds available for paying distributions to stockholders.
	•	Our success will depend on the performance of our Adviser. If our Adviser makes inadvisable investment or management decisions, our operations could be materially adversely impacted.

 

The Offering

Common stock offered by us(1)(2)		11,350,000 shares
Common stock offered by the selling stockholder(3)		750,000 shares
Common stock retained by the selling stockholder		2,000,000 shares
Common stock to be outstanding after this offering(1)		14,100,000 shares
Use of proceeds		To purchase agricultural real estate to be leased for farming and to make mortgages on similar agricultural real estate.
Proposed NASDAQ Listing Symbol		LAND
Distribution Policy		Consistent with our objective of qualifying as a REIT, we expect to pay monthly distributions and distribute at least 90% of our REIT taxable income. We expect to commence monthly distributions upon the completion of this offering. Our Board of Directors will determine the amount of distributions we will pay, and our initial distribution rate will be     % of the public offering price in this offering. We also intend to distribute sufficient earnings and profits, to stockholders of record after the completion of this offering, before December 31, 2011 to eliminate any non-REIT earnings and profits (which we are required to do to qualify as a REIT). These distributions will be in addition to distributions we are required to make to satisfy the 90% distribution test.
Our Adviser		Pursuant to the terms of an advisory agreement, our Adviser will administer our day-to-day operations, and select our real estate investments.

(1)		Excludes 1,815,000 shares of our common stock issuable pursuant to the over-allotment option granted to the underwriters.
(2)		Up to           shares of our common stock will be reserved for sale by the underwriters to our directors, officers and employees and certain associated persons at the public offering price net of the underwriting discount. For more information, see “Underwriting — Directed Shares.”
(3)		Mr. Gladstone intends to sell these shares in the offering in order for us to meet one of the REIT qualification requirements.

	•	effect to 27,500-for-1 stock split prior to the completion of the offering;
	•	no exercise by the underwriters of their over-allotment option to purchase up to 1,815,000 additional shares of our common stock in this offering;
	•	an initial public offering price of $15.00, which is the midpoint of the range listed on the cover page of this prospectus; and
	•	the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering.

		For the Six Months Ended
		June 30,								For the Years Ended December 31,
		2010				2009				2009				2008				2007
		(Unaudited)				(Unaudited)
Rental Income		$	1,196,634			$	1,196,634			$	2,418,111			$	2,418,111			$	2,418,111
Net Income			275,313				303,725				654,761				760,253				857,384
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)(1)			1,036,956				1,043,171				2,119,977				2,345,583				2,536,017
FFO available to common stockholders(2)			432,237				460,649				968,608				1,075,798				1,173,048
Assets			20,655,379				21,128,789				20,096,184				21,051,214				24,737,513
Liabilities			12,392,956				12,492,714				12,109,074				12,718,865				12,921,494
Stockholder’s Equity			8,262,423				8,636,075				7,987,110				8,332,349				11,816,019

(1)		EBITDA is a key financial measure that our management uses to evaluate our operating performance but should not be construed as an alternative to operating income, cash flows from operating activities or net income (loss), as determined in accordance with accounting principles generally accepted in the United States of America, or GAAP. EBITDA is not a measure defined in accordance with GAAP. We believe that EBITDA is a standard performance measure commonly reported and widely used by analysts and investors in our industry. A reconciliation of net income (loss) to EBITDA is set forth in the table below.
		EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
		• EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
		• EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
		• EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
		• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for these replacements; and
		• Other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.
		Because of these limitations, EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results of operations and using EBITDA only supplementally.

		A reconciliation of net income (loss) to EBITDA is as follows:

		For the Six Months Ended
		June 30,								For the Years Ended December 31,
		2010				2009				2009				2008				2007
		(Unaudited)				(Unaudited)
Net Income		$	275,313			$	303,725			$	654,761			$	760,253			$	857,384
Add:
Interest Expense			352,101				369,048				727,249				793,477				812,023
Income Taxes			252,618				213,474				424,120				476,308				550,946
Depreciation Expense			156,924				156,924				313,847				315,545				315,664
EBITDA		$	1,036,956			$	1,043,171			$	2,119,977			$	2,345,583			$	2,536,017

(2)		Funds From Operations, or FFO, is a term approved by the National Association of Real Estate Investment Trusts, or NAREIT.
		FFO was developed by the NAREIT, as a relative non-GAAP supplemental measure of operating performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO, as defined by NAREIT, is net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash flows from operating activities in accordance with GAAP and should not be considered an alternative to either net income (loss) as an indication of our performance or cash flow from operations as a measure of liquidity or ability to make distributions. Comparison of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.
		Basic funds from operations per share, or Basic FFO per share, and diluted funds from operations per share, or Diluted FFO per share, are FFO divided by weighted average common shares outstanding and FFO divided by weighted average common shares outstanding on a diluted basis, respectively, during a period. We believe that FFO, Basic FFO per share and Diluted FFO per share are useful to investors because they provide investors with a further context for evaluating our FFO results in the same manner that investors use net income and earnings per share, or EPS, in evaluating net income available to common stockholders. In addition, since most REITs provide FFO, Basic FFO and Diluted FFO per share information to the investment community, we believe these are useful supplemental measures for comparing us to other REITs. We believe that net income is the most directly comparable GAAP measure to FFO, basic EPS is the most directly comparable GAAP measure to Basic FFO per share, and diluted EPS is the most directly comparable GAAP measure to Diluted FFO per share.
		The following table provides a reconciliation of our FFO to the most directly comparable GAAP measure, net income, and a computation of Basic and Diluted FFO per weighted average common share and basic and diluted net income per weighted average common share:

		For the Six Months Ended
		June 30,								For the Years Ended December 31,
		2010				2009				2009				2008				2007
		(Unaudited)				(Unaudited)
Net income		$	275,313			$	303,725			$	654,761			$	760,253			$	857,384
Add: Real estate depreciation and amortization			156,924				156,924				313,847				315,545				315,664
FFO available to common stockholders		$	432,237			$	460,649			$	968,608			$	1,075,798			$	1,173,048
Weighted average shares outstanding — basic & diluted			100				100				100				100				100
Basic & Diluted net income per weighted average common share		$	2,753			$	3,037			$	6,548			$	7,603			$	8,574
Basic & Diluted FFO per weighted average common share		$	4,322			$	4,606			$	9,686			$	10,758			$	11,730

 

Before you invest in our securities, you should be aware that your investment is subject to various risks, including those described below. You should carefully consider these risk factors together with all of the other information included in this prospectus before you decide to purchase our securities.

 

Risks Relating To Our Business

 

We may not be successful in identifying and consummating suitable acquisitions that meet our investment criteria, which may impede our growth and negatively affect our results of operations.

 

In 2004, we reoriented our operations and began to implement a strategy of land acquisition to lease for the farming of annual crops, primarily strawberries, while continuing to own and operate our traditional operating farms business. We own two large farm properties in the State of California which we lease to Dole Fresh Vegetables, Inc., or Dole Fresh. We intend to use the net proceeds of this offering to invest in and own more net leased farmland. We expect that most of our future tenants will be small and medium-sized farming operations. Because of the reorientation of our business focus, we are subject to many of the business risks and uncertainties associated with any new business enterprise. Our failure to operate successfully or profitably or accomplish our investment objectives could have a material adverse effect on our ability to generate cash flow to make distributions to our stockholders, and the value of an investment in our common stock may decline substantially or be reduced to zero.

 

Although we have identified           specific properties to purchase with a portion of the net proceeds from this offering, there can be no assurance that we will be close on these           properties. Therefore, investors will be unable to evaluate the manner in which the net proceeds are invested and the economic merits of projects prior to investment.

 

At the time of this offering, we have identified           specific properties to purchase with a portion of the net proceeds we will receive from this offering. See “Properties Under Consideration.” However, we have not yet completed our due diligence investigations of any of these properties, nor have we entered into letters of intent or definitive agreements to purchase any of these properties. As a result, there can be no assurance that we will be successful in purchasing any of these properties. Factors that could cause us not to purchase one or more of these properties include our potential inability to agree to definitive purchase terms for the properties with the prospective sellers, and our discovery of problems with the properties in our due diligence investigations. Additionally, besides these initial           properties, we have not yet identified any other properties to purchase. As a result, investors in the offering will be unable to evaluate the manner in which the net proceeds are invested and the economic merits of projects prior to investment. Additionally, our Adviser will have broad authority to make acquisitions of properties that it may identify in the future. There can be no assurance that our Adviser will be able to identify or negotiate acceptable terms for the acquisition of properties that meet our investment criteria, or that we will be able to acquire such properties. We cannot assure you that acquisitions made using the net proceeds of this offering will produce a return on our investment. Any significant delay in investing the net proceeds of this offering would have a material adverse effect on our ability to generate cash flow and make distributions to our stockholders.

 

Our distribution rate may have an adverse effect on the market price of our common stock.

 

We intend to set an initial distribution rate at     % of the public offering price in this offering. However, because we only own two properties, we currently do not expect to generate sufficient cash flows from operations to pay distribution at this level. Our failure to rapidly invest the net proceeds of this offering or make investments at acceptable rates of return could result in us using a significant portion of the proceeds of this offering for the purpose of making these distributions or result in our fixing a distribution rate that is not competitive with alternative investments, which could adversely affect the market price for our common stock.

Highly leveraged tenants may be unable to pay rent, which could adversely affect our cash available to make distributions to our stockholders.

 

Some of our tenants may have been recently restructured using leverage acquired in a leveraged transaction or may otherwise be subject to significant debt obligations. Tenants that are subject to significant debt obligations may be unable to make their rent payments if there are adverse changes to their businesses or economic conditions. Tenants that have experienced leveraged restructurings or acquisitions will generally have substantially greater debt and substantially lower net worth than they had prior to the leveraged transaction. In addition, the payment of rent and debt service may reduce the working capital available to leveraged entities and prevent them from devoting the resources necessary to remain competitive in their industries. In situations where management of the tenant will change after a transaction, it may be difficult for our Adviser to determine with certainty the likelihood of the tenant’s business success and of it being able to pay rent throughout the lease term. These companies are more vulnerable to adverse conditions in their businesses or industries, economic conditions generally and increase in interest rates.

 

Leveraged tenants are more susceptible to bankruptcy than unleveraged tenants. Bankruptcy of a tenant could cause:

 

 

Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has the option of continuing or terminating any unexpired lease. If a bankrupt tenant terminates a lease with us, any claim we might have for breach of the lease (excluding a claim against collateral securing the claim) will be treated as a general unsecured claim. Our claim would likely be capped at the amount the tenant owed us for unpaid rent prior to the bankruptcy unrelated to the termination, plus the greater of one year’s lease payments or 15% of the remaining lease payments payable under the lease (but no more than three years’ lease payments). In addition, a bankruptcy court could recharacterize a net lease transaction as a secured lending transaction. If that were to occur, we would not be treated as the owner of the property, but might have additional rights as a secured creditor. This would mean our claim in bankruptcy court would only be for the amount we paid for the property, which could adversely impact our financial condition.

 

Our real estate investments will consist of agricultural properties that may be difficult to sell or re-lease upon tenant defaults or early lease terminations.

 

We intend to focus our investments on agricultural properties. These types of properties are relatively illiquid compared to other types of real estate and financial assets. This illiquidity will limit our ability to quickly change our portfolio in response to changes in economic or other conditions. With these properties, if the current lease is terminated or not renewed, we may be required to renovate the property to the extent we have buildings on the property, or to make rent concessions in order to lease the property to another tenant or sell the property. In addition, in the event we are forced to sell the property, we may have difficulty finding qualified purchasers who are willing to buy the property. These and other limitations may affect our ability to sell or re-lease properties without adversely affecting returns to our stockholders.

 

Our current properties are leased to the same tenant, Dole Fresh, and Dole Fresh may no longer be able to make rental payments or may chose to terminate its leases.

 

Both of our current farm leases are with Dole Fresh. If Dole Fresh fails to make rental payments or elects to terminate its leases and the land cannot be re-leased on satisfactory terms, it would have a material adverse effect on our financial performance and our ability to make dividend payments to our stockholders.

The inability of a tenant to pay rent will reduce our revenues.

 

We expect that a single tenant will occupy each of our properties and, therefore, the success of our investments will be materially dependent on the financial stability of these tenants. Lease payment defaults by these tenants could adversely affect our cash flows and cause us to reduce the amount of distributions to stockholders. In the event of a default by a tenant, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing our property. If a lease is terminated, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss.

 

Our business strategy relies heavily on external financing, which may expose us to risks associated with leverage such as restrictions on additional borrowing and payment of distributions, risks associated with balloon payments, and risk of loss of our equity upon foreclosure.

 

Our acquisition strategy contemplates the use of leverage so that we may make more investments than would otherwise be possible in order to maximize potential returns to stockholders. If the income generated by our properties and other assets fails to cover our debt service, we could be forced to reduce or eliminate distributions to our stockholders and may experience losses. We may borrow on a secured or unsecured basis. Neither our certificate of incorporation nor our bylaws impose any limitation on borrowing on us. However, our Board of Directors has adopted a policy that our aggregate borrowing will not result in a total debt to total equity ratio greater than two-to-one. This coverage ratio means that, for each dollar of equity we have, we can incur up to two dollars of debt. Our Board of Directors may change this policy at any time.

 

We currently have a line of credit from a bank that permits us to borrow up to $3,250,000 secured by the Watsonville farm. To date, we have not used this line of credit beyond the minimum draw requirements. In the future, we expect to use it for working capital. As of June 30, 2010, we currently have a $11.5 million mortgage loan from a life insurance company that is secured by the Oxnard farm. The current interest rate on the Oxnard farm loan is 6%. The loan is being amortized over 17 years, of which 12 years are remaining.

 

Our ability to achieve our investment objectives will be affected by our ability to borrow money in sufficient amounts and on favorable terms. We expect that we will borrow money that will be secured by our properties and that these financing arrangements will contain customary covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable property or to discontinue insurance coverage. In addition, any credit facility we might enter into is likely to contain certain customary restrictions, requirements and other limitations on our ability to incur indebtedness, and will specify debt ratios that we will be required to maintain. Accordingly, we may be unable to obtain the degree of leverage that we believe to be optimal, which may cause us to have less cash for distribution to stockholders than we would have with an optimal amount of leverage. Our use of leverage could also make us more vulnerable to a downturn in our business or the economy generally. There is also a risk that a significant increase in the ratio of our indebtedness to the measures of asset value used by financial analysts may have an adverse effect on the market price of our common stock.

 

Some of our debt financing arrangements may require us to make lump-sum or “balloon” payments at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or to sell the financed property. At the time the balloon payment is due, we may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment, which could adversely affect the amount of our distributions to stockholders.

 

Once the net proceeds of this offering have been substantially fully invested, we intend to acquire additional properties by borrowing all or a portion of the purchase price and securing the loan with a mortgage on some or all of our real property. If we are unable to make our debt payments as required, a lender could foreclose on the property securing its loan. This could cause us to lose part or all of our investment in such property which in turn could cause the value of our common stock or the amount of distributions to our stockholders to be reduced.

We are subject to certain risks associated with real estate ownership which could reduce the value of our investments.

 

Our investments will include net leased agricultural real estate. Our performance, and the value of our investments, is subject to risks incident to the ownership and operation of these types of properties, including:

 

 

If one or more of these events transpires, our results of operations and financial condition may be materially adversely impacted, resulting in the reduction in the value of our assets and our common stock.

 

Competition for the acquisition of agricultural real estate may impede our ability to make acquisitions or increase the cost of these acquisitions, which could adversely affect our operating results and financial condition.

 

We will compete for the acquisition of properties with many other entities engaged in agricultural and real estate investment activities, including corporate agriculture companies, financial institutions, institutional pension funds, other real estate investment trusts, or REITs, other public and private real estate companies and private real estate investors. These competitors may prevent us from acquiring desirable properties or may cause an increase in the price we must pay for real estate. Our competitors may have greater resources than we do, and may be willing to pay more for certain assets or may have a more compatible operating philosophy with our acquisition targets. In particular, larger REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Our competitors may also adopt transaction structures similar to ours, which would decrease our competitive advantage in offering flexible transaction terms. In addition, the number of entities and the amount of funds competing for suitable investment properties may increase, resulting in increased demand and increased prices paid for these properties. If we pay higher prices for properties, our profitability may decrease, and you may experience a lower return on your investment. Increased competition for properties may also preclude us from acquiring those properties that would generate attractive returns to us.

 

We expect to lease our properties to small and medium-sized farms and agricultural businesses, which will expose us to additional risks unique to these entities.

 

Leasing real property to small and medium-sized farms and agricultural businesses will expose us to a number of unique risks related to these entities, including the following:

 

 

 

Because we expect ultimately to sell our agricultural real estate to developers in connection with the conversion of such properties to urban or suburban uses, we are subject to risks associated with expansion of urban and suburban land use.

 

Our business plan is based upon purchasing agricultural real property in California and other locations that we believe is located in the path of urban and suburban growth and ultimately will increase in value as a result. Pending the sale of such real property to developers for conversion to urban, suburban and other more intensive uses, such as residential or commercial development, we intend to lease the property for agricultural uses, particularly farming annual crops. Urban and suburban development is subject to a number of uncertainties, including land zoning and environmental issues, infrastructure development and demand. As a result, there can be no guarantee that the increased development that we expect will actually occur and that we will be able to sell any of the properties that we own or acquire in the future for such conversion. Our inability to sell these properties in the future for conversion to urban or suburban uses could result in a reduced return on investment and could materially adversely impact our results of operations.

 

Because we must distribute a substantial portion of our net income to qualify as a REIT, we will be largely dependent on third-party sources of capital to fund our future capital needs.

 

To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our taxable income each year, excluding capital gains. Because of this distribution requirement, it is not likely that we will be able to fund a significant portion of our future capital needs, including property acquisitions, from retained earnings. Therefore, we will likely rely on public and private debt and equity capital to fund our business. This capital may not be available on favorable terms or at all. Our access to additional capital depends on a number of things, including the market’s perception of our growth potential and our current and potential future earnings. Moreover, additional debt financings may substantially increase our leverage, exposing us to greater risk of default and potentially reducing cash available for distributions to stockholders.

 

Our real estate portfolio will be concentrated in a limited number of properties, which subjects us to an increased risk of significant loss if any property declines in value or if we are unable to lease a property.

 

Based on the anticipated net proceeds to be received from this offering, the expected investment size and our Adviser’s experience in the marketplace, we estimate that we will purchase approximately 10 to 15 properties with the net proceeds of this offering. To the extent we are able to leverage such investments, we will acquire additional properties with the net proceeds of borrowings, subject to our debt policy. A consequence of a limited number of investments is that the aggregate returns we realize may be substantially adversely affected by the unfavorable performance of a small number of leases or a significant decline in the value of any property. In addition, while we do not intend to invest 20% or more of our total assets in a particular property at the time of investment, it is possible that, as the values of our properties change, one property may comprise in excess of 20% of the value of our total assets. Lack of diversification will increase the potential that a single under-performing investment could have a material adverse effect on our cash flow and the price we could realize from the sale of our properties.

 

Liability for uninsured losses could adversely affect our financial condition.

 

Losses from disaster-type occurrences, such as wars, earthquakes and weather-related disasters, may be either uninsurable or not insurable on economically viable terms. Should an uninsured loss occur, we could lose our capital investment or anticipated profits and cash flow from one or more properties.

 

Potential liability for environmental matters could adversely affect our financial condition.

 

We intend to purchase agricultural properties and will be subject to the risk of liabilities under federal, state and local environmental laws. Some of these laws could subject us to:

 

 

 

We will generally include provisions in our leases making tenants responsible for all environmental liabilities and for compliance with environmental regulations, and requiring tenants to reimburse us for damages or costs for which we have been found liable. However, these provisions will not eliminate our statutory liability or preclude third party claims against us. Even if we were to have a legal claim against a tenant to enable us to recover any amounts we are required to pay, there are no assurances that we would be able to collect any money from the tenant. Our costs of investigation, remediation or removal of hazardous substances may be substantial. In addition, the presence of hazardous substances on one of our properties, or the failure to properly remediate a contaminated property, could adversely affect our ability to sell or lease the property or to borrow using the property as collateral. If we are unable to lease or sell the property, there will be less income to pay out as distributions to shareholders.

 

Our potential participation in joint ventures creates additional risk.

 

We may participate in joint ventures or purchase properties jointly with other unaffiliated entities. There are additional risks involved in these types of transactions. These risks include the potential of our joint venture partner becoming bankrupt or our economic or business interests diverging. These diverging interests could, among other things, expose us to liabilities of the joint venture in excess of our proportionate share of these liabilities. The partition rights of each owner in a jointly owned property could reduce the value of each portion of the divided property.

 

Failure to hedge effectively against interest rate changes may adversely affect our results of operations.

 

We may experience interest rate volatility in connection with mortgage loans on our properties or other variable-rate debt that we may obtain from time to time. We may seek to mitigate our exposure to changing interest rates by using interest rate hedging arrangements such as interest rate swaps and caps. These derivative instruments involve risk and may not be effective in reducing our exposure to interest rate changes. Risks inherent in derivative instruments include the risk that counter-parties to derivative contracts may be unable to perform their obligations, the risk that interest rates move in a direction contrary to, or move slower than the period contemplated by, the direction or time period that the derivative instrument is designed to cover, and the risk that the terms of such instrument will not be legally enforceable. While we intend to design our hedging strategies to protect against movements in interest rates, derivative instruments that we are likely to use may also involve immediate costs, which could reduce our cash available for distribution to our stockholders. Likewise, ineffective hedges, as well as the occurrence of any of the risks inherent in derivatives, could adversely affect our reported operating results or reduce your overall investment returns. Our Adviser and our Board of Directors will review each of our derivative contracts and periodically evaluate their effectiveness against their stated purposes.

 

In addition, the REIT provisions of the Code substantially limit our ability to hedge. Our aggregate gross income from non-qualifying hedges, fees, and certain other non-qualifying sources cannot exceed 5% of our annual gross income. As a result, we might have to limit our use of advantageous hedging techniques or implement those hedges through a TRS. Any hedging income earned by a TRS would be subject to federal, state and local income tax at regular corporate rates. This could increase the cost of our hedging activities or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.

 

Risks Associated With Our Use of an Adviser to Manage Our Business

 

Our success will depend on the performance of our Adviser and if our Adviser makes inadvisable investment or management decisions, our operations could be materially adversely impacted.

 

Our ability to achieve our investment objectives and to pay distributions to our stockholders is dependent upon the performance of our Adviser in evaluating potential investments, selecting and negotiating property purchases and dispositions, selecting tenants, setting lease terms and determining financing arrangements. You will have no

opportunity to evaluate the terms of transactions or other economic or financial data concerning our investments. You must rely entirely on the analytical and management abilities of our Adviser and the oversight of our Board of Directors. If our Adviser or our Board of Directors makes inadvisable investment or management decisions, our operations could be materially adversely impacted.

 

We may have conflicts of interest with our Adviser and other affiliates.

 

Our Adviser will manage our real estate business and will locate, evaluate, recommend and negotiate the acquisition of our real estate investments. At the same time, our advisory agreement permits our Adviser to conduct other commercial activities and provide management and advisory services to other entities, including Gladstone Commercial, Gladstone Capital and Gladstone Investment entities affiliated with our officers and directors. Moreover, most of our officers and directors are also officers and directors of Gladstone Capital and Gladstone Investment, which actively make loans to and invest in small and medium-sized companies and Gladstone Commercial, which actively makes real estate investments. As a result, we may from time to time have conflicts of interest with our Adviser in its management of our business and with Gladstone Commercial, Gladstone Investment or Gladstone Capital, which may arise primarily from the involvement of our Adviser, Gladstone Capital, Gladstone Commercial, Gladstone Investment and their affiliates in other activities that may conflict with our business. Examples of these potential conflicts include:

 

 

These and other conflicts of interest between us and our Adviser could have a material adverse effect on the operation of our business and the selection or management of our real estate investments.

 

Our financial condition and results of operations will depend on our Adviser’s ability to effectively manage our future growth.

 

Our ability to achieve our investment objectives will depend on our ability to sustain continued growth, which will, in turn, depend on our Adviser’s ability to find, select and negotiate property purchases and net leases that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of our Adviser’s marketing capabilities, management of the investment process, ability to provide competent, attentive and efficient services and our access to financing sources on acceptable terms. As we grow, our Adviser may be required to hire, train, supervise and manage new employees. Our Adviser’s failure to effectively manage our future growth could have a material adverse effect on our business, financial condition and results of operations.

 

We may be obligated to pay our Adviser incentive compensation even if we incur a loss.

 

The Advisory Agreement we will enter into in connection with this offering will entitle our Adviser to incentive compensation based on our FFO, which will reward our Adviser if our quarterly FFO (before giving effect to any incentive fee) exceeds 1.75% (7% annualized) of our total stockholders’ equity (less the recorded value of any preferred stock). Our pre-incentive fee FFO for incentive compensation purposes will exclude the effect of any unrealized gains, losses or other items that do not affect realized net income that we may incur in the fiscal quarter, even if such losses result in a net loss on our statement of operations for that quarter. Thus, we may be required to pay our Adviser incentive compensation for a fiscal quarter even if we incur a net loss for that quarter.

We are dependent upon our key management personnel for our future success, particularly David Gladstone, Terry Lee Brubaker and George Stelljes III.

 

We are dependent on our senior management and other key management members to carry out our business and investment strategies. Our future success depends to a significant extent on the continued service and coordination of our senior management team, particularly David Gladstone, our chairman and chief executive officer, George Stelljes III, our president and chief operating officer, Terry Lee Brubaker, our vice chairman. The departure of any of our executive officers or key personnel of our Adviser could have a material adverse effect on our ability to implement our business strategy and to achieve our investment objectives.

 

Risks Associated With Our Organizational Structure

 

The limit on the number of shares of common stock a person may own may discourage a takeover.

 

Our certificate of incorporation prohibits ownership of more than 7.5% of the outstanding shares of our common stock by one person except our chairman and chief executive officer, David Gladstone, who will own approximately 15% of our stock after this offering. This restriction may discourage a change of control and may deter individuals or entities from making tender offers for our common stock, which offers might otherwise be financially attractive to our stockholders or which might cause a change in our management. See “Certain Provisions of Delaware Law and of our Certificate of Incorporation and Bylaws — Restrictions on Ownership of Shares.”

 

Certain provisions of Delaware law could restrict a change in control.

 

We are subject to provisions of the Delaware General Corporation Law, or DGCL, that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years unless the holder’s acquisition of our stock was either approved in advance by our Board of Directors or ratified by the Board of Directors and stockholders owning two-thirds of our outstanding stock not owned by the acquiring holder. Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our Board of Directors, they would apply even if the offer may be considered beneficial by some stockholders. As a result, this statute could reduce the likelihood of a transaction that might otherwise be in the best interests of our stockholders.

 

Our staggered director terms could deter takeover attempts and adversely impact the price of our common stock.

 

Our directors will be divided into three classes, with the term of the directors in each class expiring every third year. At each annual meeting of stockholders, the successors to the class of directors whose term expires at such meeting will be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. After election, a director may only be removed by our stockholders for cause. Election of directors for staggered terms with limited rights to remove directors makes it more difficult for a hostile bidder to acquire control of us. The existence of this provision may negatively impact the price of our common stock and may discourage third-party bids to acquire our common stock. This provision may reduce any premiums paid to you for your shares of common stock in a change in control transaction.

 

Tax Risks

 

We may not qualify as a REIT for federal income tax purposes, which would subject us to federal income tax on our taxable income at regular corporate rates, thereby reducing the amount of funds available for paying distributions to stockholders.

 

We currently intend to operate in a manner that will allow us to qualify as a REIT for federal income tax purposes beginning with our taxable year ending December 31, 2011. Before January 1, 2011, we will be subject to regular corporate income taxation. Our qualification as a REIT beginning with our taxable year ending December 31, 2011 will depend on our ability to meet various requirements set forth in the Code concerning, among other things, the ownership of our outstanding common stock, the nature of our assets, the sources of our

income and the amount of our distributions to our stockholders. The REIT qualification requirements are extremely complex, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Accordingly, we cannot be certain that we will be successful in operating so as to qualify as a REIT. At any time new laws, interpretations or court decisions may change the federal tax laws relating to, or the federal income tax consequences of, qualification as a REIT. It is possible that future economic, market, legal, tax or other considerations may cause our Board of Directors to revoke our REIT election, which it may do without stockholder approval.

 

If we fail to qualify, or lose or revoke our REIT status, we will face serious tax consequences that will substantially reduce the funds available for distribution to you because:

 

 

In addition, all distributions to stockholders made before January 1, 2011, and all distributions thereafter, if we fail to qualify as a REIT, will be subject to tax to the extent of our current and accumulated earnings and profits, provided that the U.S. federal rate of income tax on the taxable portion of such distributions is limited to 15% through 2010 under certain circumstances for stockholders who are individuals. If we do fail to qualify as a REIT, we will not be required to make distributions to stockholders and distributions to stockholders that are U.S. corporations might be eligible for the dividends received deduction.

 

As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and would adversely affect the value of our common stock.

 

We will not seek to obtain a ruling from the Internal Revenue Service, or IRS, that we qualify as a REIT for federal income tax purposes.

 

As described herein, we intend to operate so as to qualify as a REIT for federal income tax purposes beginning with our taxable year ending December 31, 2011. Although we have not requested, and do not expect to request, a ruling from the IRS that we qualify as a REIT, we have received an opinion of our counsel that, based on certain assumptions and representations, we will so qualify beginning with our taxable year ending December 31, 2011. You should be aware, however, that opinions of counsel are not binding on the IRS or any court. The REIT qualification opinion only represents the view of our counsel based on its review and analysis of existing law, which includes no controlling precedent, and therefore could be subject to modification or withdrawal based on future legislative, judicial or administrative changes to the federal income tax laws, any of which could be applied retroactively. The validity of the opinion of our counsel and of our qualification as a REIT will depend on our continuing ability to meet the various REIT requirements described herein. An IRS determination that we do not qualify as a REIT would deprive our stockholders of the tax benefits of our REIT status only if the IRS determination is upheld in court or otherwise becomes final. To the extent that we challenge an IRS determination that we do not qualify as a REIT, we may incur legal expenses that would reduce our funds available for distribution to stockholders.

 

Failure to make required distributions would subject us to tax.

 

In order to qualify as a REIT beginning with our taxable year ending December 31, 2011, each year we must distribute to our stockholders at least 90% of our taxable income, other than any net capital gains. To the extent that we satisfy the distribution requirement but distribute less than 100% of our taxable income, we will be subject to

federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any year are less than the sum of:

 

 

We intend to pay out our income to our stockholders in a manner intended to satisfy the distribution requirement applicable to REITs and to avoid corporate income tax and the 4% excise tax. Differences in timing between the recognition of income and the related cash receipts or the effect of required debt amortization payments could require us to borrow money or sell assets to pay out enough of our taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. In the future, we may borrow funds to pay distributions to our stockholders and the limited partners of our Operating Partnership. Any funds that we borrow would subject us to interest rate and other market risks.

 

In addition, to qualify as a REIT, we are required to distribute our non-REIT earnings and profits accumulated before the effective date of our REIT election, which is expected to be January 1, 2011. As of the date of this prospectus, we estimate our non-REIT earnings and profits to be approximately $10.6 million. We intend to distribute sufficient earnings and profits, to stockholders of record after the completion of this offering, before December 31, 2011 to eliminate any non-REIT earnings and profits. If we were unable to fully distribute our pre-REIT earnings and profits, we would fail to qualify as a REIT.

 

The IRS may treat sale-leaseback transactions as loans, which could jeopardize our REIT status.

 

The IRS may take the position that specific sale-leaseback transactions we may treat as true leases are not true leases for federal income tax purposes but are, instead, financing arrangements or loans. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the asset or income tests required for REIT qualification and consequently lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated which could cause us to fail the distribution test for REIT qualification. See “Federal Income Tax Consequences of our Status as a REIT — Sale-Leaseback Transactions.”

 

There are special considerations for pension or profit-sharing trusts, Keogh Plans or individual retirement accounts, or IRAs, whose assets are being invested in our common stock.

 

If you are investing the assets of a pension, profit sharing, 401(k), Keogh or other retirement plan, IRA or benefit plan in us, you should consider:

 

 

We do not believe that under current ERISA law and regulations that our assets would be treated as “plan assets” for purposes of ERISA. However, if our assets were considered to be plan assets, our assets would be subject to ERISA and/or Section 4975 of the Code, and some of the transactions we have entered into with our Adviser and its affiliates could be considered “prohibited transactions” which could cause us, our Adviser and its affiliates to be subject to liabilities and excise taxes. In addition, our officers and directors, our Adviser and its affiliates could be deemed to be fiduciaries under ERISA and subject to other conditions, restrictions and prohibitions under Part 4 of Title I of ERISA. Even if our assets are not considered to be plan assets, a prohibited transaction could occur if we or any of our affiliates is a fiduciary (within the meaning of ERISA) with respect to a purchase by a benefit plan and, therefore, unless an administrative or statutory exemption applies in the event such persons are fiduciaries (within the meaning of ERISA) with respect to your purchase, you should not purchase shares in this offering.

If our Operating Partnership fails to maintain its status as a partnership for federal income tax purposes, its income may be subject to taxation.

 

We intend to maintain the status of the Operating Partnership as a partnership for federal income tax purposes. However, if the IRS were to successfully challenge the status of the Operating Partnership as a partnership, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that the Operating Partnership could make to us. This would also result in our losing REIT status and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to pay distributions and the return on your investment. In addition, if any of the entities through which the Operating Partnership owns its properties, in whole or in part, loses its characterization as a partnership for federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the Operating Partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain REIT status.

 

Complying with REIT requirements may cause us to forego or liquidate otherwise attractive investments.

 

To qualify as a REIT for federal income tax purposes beginning with our taxable year ending December 31, 2011, we must continually satisfy various tests regarding the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our investment performance. In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities (other than government securities, securities of TRSs and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, securities of TRSs and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter beginning with our taxable year ending December 31, 2011, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to dispose of otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

 

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

 

The maximum tax rate applicable to income from “qualified dividends” payable to domestic stockholders of regular corporations taxed at individual income tax rates is reduced by legislation to 15% through the end of 2010. Dividends payable by REITs, however, generally are not eligible for the reduced rates. Although this legislation does not adversely affect the taxation of REITs or dividends payable by REITs, more favorable rates applicable to regular corporate qualified dividends may cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends. If these favorable rates for regular corporate qualified dividends extend beyond the end of 2010 into taxable years in which we intend to qualify as a REIT, this could adversely affect the value of our common stock and our other equity securities.

 

Our ownership of and relationship with TRSs will be limited and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.

 

We currently own one TRS, Gladstone Land Advisers, Inc., and may form other TRSs as part of our overall business strategy. A TRS may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. A TRS will pay federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to

assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s length basis.

 

Our TRSs will pay federal, state and local income tax on their taxable income, and their after-tax net income will be available for distribution to us but is not required to be distributed to us. We anticipate that the aggregate value of any TRS stock and securities owned by us will be less than 25% of the value of our total assets (including the TRS stock and securities). We will scrutinize all of our transactions with any TRSs that we form for the purpose of ensuring that they are entered into on arm’s-length terms in order to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 25% limitation discussed above or to avoid application of the 100% excise tax discussed above.

 

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our securities.

 

At any time, the federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be amended. We cannot predict when or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. We and our security holders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.

 

We will have corporate income tax liability for taxes attributable to taxable years prior to our REIT election.

 

We will be subject to regular corporate income taxation for our taxable years ended on or before December 31, 2010. In addition, if we were determined, as the result of a tax audit or otherwise, to have an unpaid corporate income tax liability for any taxable years during which we were classified as a C corporation for federal income tax purposes, we would be responsible for paying such tax liability notwithstanding our subsequent qualification as a REIT.

 

Risks Relating to this Offering and the Market for our Common Stock

 

The market price and trading volume of our common stock may be volatile following this offering.

 

Even if an active trading market develops for our common stock after this offering, the market price of our common stock may be highly volatile and subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above the initial public offering price. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

 

 

 

Shares of common stock eligible for future sale may have adverse effects on our share price.

 

We cannot predict the effect, if any, of future sales of common stock, or the availability of shares for future sales, on the market price of our common stock. Sales of substantial amounts of common stock (including shares of common stock issuable upon the conversion of units of our Operating Partnership that we may issue from time to time) and the sale of up to           shares of common stock held by our current stockholder, or the perception that these sales could occur, may adversely affect prevailing market prices for our common stock.

 

An increase in market interest rates may have an adverse effect on the market price of our common stock.

 

One of the factors that investors may consider in deciding whether to buy or sell our common stock is our distribution rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher distribution yield on our common stock or seek securities paying higher dividends or interest. The market price of our common stock likely will be based primarily on the earnings that we derive from rental income with respect to our properties and our related distributions to stockholders, and not from the underlying appraised value of the properties themselves. As a result, interest rate fluctuations and capital market conditions are likely to affect the market price of our common stock, and such effects could be significant. For instance, if interest rates rise without an increase in our distribution rate, the market price of our common stock could decrease because potential investors may require a higher distribution yield on our common stock as market rates on interest-bearing securities, such as bonds, rise.

 

Other Risks

 

We have identified material weaknesses in our internal controls over financial reporting, which resulted in our need to revise our previously issued financial statements.

 

In connection with reporting the financial results for the period ended June 30, 2010, we identified a control deficiency that has been classified as a material weakness in our internal control over financial reporting. A material weakness is a control deficiency that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by employees in the normal course of their assigned functions. The control deficiency identified was that management did not maintain adequate internal controls to assess the financial reporting and disclosure implications of the federal and state tax consequences of certain transactions and arrangements and therefore had not properly recognized certain tax

liabilities or income tax receivables, which resulted in accounting errors in our previously issued financial statements. The identification of this material weakness may cause investors to lose confidence in us and our stock may be negatively affected.

 

The standards that must be met for management to assess the internal control over financial reporting are relatively new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing the activities necessary to make future assessments of our internal control over financial reporting and completing the implementation of any necessary improvements. Future assessments may require us to incur substantial costs and may require a significant amount of time and attention of management, which could seriously harm our business, financial condition and results of operations. If we are unable to assess our internal control over financial reporting as effective in the future, investors may lose confidence in us and our stock may be negatively affected.

 

We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, future events, financial condition or performance, expectations, competitive environment, availability of resources, regulation, liquidity, results of operations, strategies, plans and objectives. These forward-looking statements include, without limitation, statements concerning projections, predictions, expectations, estimates, or forecasts as to our business, financial and operational results, and future economic performance; and statements of management’s goals and objectives and other similar expressions concerning matters that are not historical facts. When we use the words “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” or similar expressions, as well as statements in future tense, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Statements regarding the following subjects are forward-looking by their nature:

 

 

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information available to us at the time those statements are made or management’s good faith belief as of that time with respect to future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common stock, along with the following factors that could cause actual results to vary from our forward-looking statements:

 

 

 

Forward-looking statements speak only as of the date the statements are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

We estimate that the net proceeds to us from this offering will be approximately $157.0 million, assuming an initial public offering price of $15.00 per share, which is the midpoint of the offering price range on the cover of this prospectus ($182.4 million if the underwriters exercise their over-allotment option in full), after deducting the underwriting discount and estimated offering expenses payable by us. We expect to use the net proceeds of this offering to buy agricultural and other real estate for lease to tenants, to make loans secured by real estate and to make payments to our Adviser pursuant to our advisory agreement. As of the date of this prospectus, we do not have commitments to purchase any properties. We will invest the net proceeds in accordance with our investment objectives and policies. See “Investment Policies and Policies with Respect to Certain Activities” for additional information regarding our investment objectives and policies. We will not receive any proceeds from the sale of shares by the selling stockholder.

 

We estimate that it will take approximately 12 months for us to substantially invest the net proceeds of this offering, depending on the availability of appropriate opportunities and market conditions. Pending such investment, we will primarily invest the net proceeds in securities that are not REIT-qualified investments as well as REIT-qualified investments such as money market instruments, short-term repurchase agreements or other cash equivalents. The non-REIT-qualified investments are expected to provide a current return that will be greater than the REIT-qualified investments. We may also temporarily invest in securities that qualify as “real estate assets” under the REIT provisions of the Code, such as mortgage-backed securities. There can be no assurance that we will be able to achieve our targeted investment pace. See “Investment Policies and Policies with Respect to Certain Activities — Additional Investment Considerations — Temporary Investments” for additional information about temporary investments we may make while waiting to make real estate investments.

 

A tabular presentation of our estimated use of the proceeds to us from this offering (assuming no exercise of the underwriters’ over-allotment option) is set forth below:

 

 

 

 

The initial annual distribution rate will be equal to     % of the initial public offering price. The distribution will be paid monthly. We intend to distribute substantially all of our taxable income each year (which does not ordinarily equal net income as calculated in accordance with generally accepted accounting principles in the United States of America) to our stockholders so as to comply with the REIT provisions of the Code. We intend to make monthly distributions to our stockholders beginning within 120 days after we complete this offering. Our distribution policy is subject to revision at the discretion of our Board of Directors. Our Board of Directors will determine the amount of any distributions and such amount will depend on our capital needs, our taxable earnings, our financial condition, our annual distribution requirements to maintain REIT status and such other factors as our Board of Directors deems relevant.

 

Distributions to our stockholders will generally be subject to tax as ordinary income, although we may designate a portion of such distributions as capital gain and a portion may constitute a tax-free return of capital. Since most of the land we expect to own will be farmland, we do not anticipate that there will be any significant depreciation in the calculation of our taxable income and, therefore, we believe that our taxable income is likely to approximate our funds from operations, or FFO. As a result, we do not believe that it is likely that a material amount of our distributions to stockholders will constitute a return of capital. We will furnish to each of our stockholders annually a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, capital gains or return of capital. We have adopted a dividend reinvestment plan that allows holders of our common stock to have their distributions reinvested automatically in additional shares of our common stock. For more information, see “Dividend Reinvestment Plan.”

 

To qualify as a REIT, we may not have, at the end of any taxable year, any undistributed earnings and profits accumulated in any non-REIT taxable year. Our non-REIT earnings and profits include any earnings and profits we accumulated before the effective date of our REIT election, which is expected to be January 1, 2011. As of the date of this prospectus, we estimate our non-REIT earnings and profits to be approximately $10.6 million. We intend to distribute, to stockholders of record after the completion of this offering, sufficient earnings and profits before December 31, 2011 to eliminate any non-REIT earnings and profits, which distributions will be in addition to the regular annual distributions described above.

 

The following table sets forth our cash and cash equivalents and our capitalization as of June 30, 2010 on:

 

 

 

This table should be read in conjunction with “Use of Proceeds,” “Selected Consolidated Financial Data,” “Description of Capital Stock,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the notes thereto included elsewhere in this prospectus.

 

 

Dilution is the amount by which the offering price paid by the purchasers of the shares of common stock sold in the offering exceeds the net tangible book value per share of common stock after the offering. Net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding at that date.

 

Our net tangible book value as of June 30, 2010 was $7.7 million, or $2.80 per share. After giving effect to the receipt of approximately $157.0 million of estimated net proceeds from our sale of shares of common stock in this offering at an assumed offering price of $15.00 per share, which is the midpoint of the range listed on the cover page of this prospectus, as adjusted net tangible book value as of June 30, 2010 would have been $164.7 million, or $11.69 per share. This represents an immediate increase in net tangible book value of $8.89 per share to existing stockholders and an immediate dilution of $3.32 per share to new investors purchasing shares of common stock in the offering. The following table illustrates this substantial and immediate per share dilution to new investors.

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the range listed on the cover page of this prospectus, would increase (decrease) our as adjusted net tangible book value by $10.6 million, the as adjusted net tangible book value per share by $1.00 per share and the dilution per share to new investors in this offering by $3.57, or $1.63 if the underwriters exercise their option to purchase additional shares in full, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

 

The following table summarizes, as of June 30, 2010:

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the range listed on the cover page of this prospectus, would increase (decrease) total consideration paid by new investors and the average price per share by $10.6 million and $1.00, respectively, assuming the number of

shares offered by us, as set forth on the cover page of this prospectus, remains the same and without deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

 

The foregoing table does not reflect the sales by the existing stockholder in connection with the sales made by him in this offering. Sales by the selling stockholder in this offering will reduce the number of shares held by existing stockholders to 2,000,000 shares, or 14.2% of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to 12,100,000 shares, or 85.8% of the total number of shares of our common stock outstanding after this offering. In addition, if the underwriters exercise their option to purchase additional shares in full, the shares held by the existing stockholder after this offering would be reduced to 12.6% of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors would increase to 13,915,000 or 87.4% of the total number of shares of our common stock outstanding after this offering.

 

You should read the following selected consolidated financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the related notes included in this prospectus.

 

The selected consolidated financial data as of December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007 are derived from our revised audited consolidated financial statements included in this prospectus. The selected consolidated financial data as of December 31, 2007, 2006 and 2005 and for the years ended December 31, 2006 and 2005 are derived from our revised audited consolidated financial statements that are not included in this prospectus. The selected consolidated financial data as of and for the six months ended June 30 2010 and 2009 are derived from our unaudited consolidated financial statements included in this prospectus. Our results of operations are not necessarily indicative of results of operations that should be expected in any future periods.

 

 

 

 

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including those set forth under the heading “Risk Factors” and elsewhere in this prospectus. The following discussions should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

Overview

 

We were incorporated under the general corporation laws of the State of California in 1997 primarily for the purpose of operating strawberry farms through our subsidiary Coastal Berry Company, LLC, or Coastal Berry, a company that that provided growing, packaging, marketing and distribution of fresh berries and other agricultural products. We operated Coastal Berry as our primary business until 2004 when it was sold to Dole Food Company, or Dole Foods.

 

In 2004, we reincorporated in the State of Delaware and we reoriented our operations and began to implement a strategy of leasing agricultural land for farming. We own two large farms in California which we lease to Dole Fresh Vegetables, Inc., or Dole Fresh, and we intend to use the net proceeds from this offering to invest in and own more farmland. We expect that most of our future tenants will be small and medium-sized farming operations. We also will use some of the proceeds of this offer to make mortgage loans on farms and farm-related properties.

 

We will conduct substantially all of our investment activities through, and all of our properties will be held directly or indirectly by our Operating Partnership. We will control our Operating Partnership as its sole general partner and we will also initially own all limited partnership units, or Units, of our Operating Partnership. We expect our Operating Partnership to issue Units from time to time, following the completion of this offering, in exchange for agricultural real property. By structuring our acquisitions in this manner, the sellers of the real estate will generally be able to defer the realization of gains until they redeem the Units. Limited partners who hold Units in our Operating Partnership will be entitled to redeem these units for cash or, at our election, shares of our common stock on a one-for-one basis at any time after the first anniversary of the completion of this offering.

 

Whenever we issue common stock for cash, we will be obligated to contribute any net proceeds we receive from the sale of the stock to our Operating Partnership and our Operating Partnership will, in turn, be obligated to issue an equivalent number of Units to us. Our Operating Partnership will distribute the income it generates from its operations to us and its limited partners on a pro rata basis. At present we do not have any limited partners of our Operating Partnership. We will, in turn, distribute the amounts we receive from our Operating Partnership to our stockholders in the form of monthly cash distributions. We intend to qualify as a REIT for federal tax purposes beginning with the year ending December 31, 2011, whereby we would not be required to pay federal and state income taxes on the distributions we make to our stockholders other than any distribution made to eliminate our earnings and profits for periods prior to our REIT election. However, we do have a taxable REIT subsidiary and if it has any business it will have to pay federal and state income taxes. We will also be subject to regular income tax on our income prior to the effective date of our REIT election, which is expected to be January 1, 2011.

 

Our strategy is to purchase farmland and farm-related properties and lease these properties to farmers for use in farming operations. We will likely also make mortgage loans secured by farmland. We expect to earn income from rent received on land and from collecting interest payments from mortgagors.

 

Leases

 

We anticipate that our typical lease will have a term of one to two years and will be payable annually at a fixed rate with one half due at the beginning of the each year and the other half due at midyear for each lease year. The lease would require that the tenant pay taxes, insurance, water costs and other operating costs. Some leases may have longer terms (e.g., for five or ten years) but have escalation clauses as to the amounts payable by the tenants. The escalation clause may be a fixed amount each year or be variable based on standard cost of living figures. In

addition, some long-term leases may require a regular survey of comparable land rents, with an adjustment to reflect the current rents.

 

Mortgages

 

We expect that the typical mortgage we offer will be for a fixed interest rate, over a term of five years, and require interest-only payments and no amortization of the principal until maturity. The mortgage will be set up to have the senior claim on the property, but will not require the owner to guarantee the mortgage personally.

 

Advisory and Administration Agreements

 

Since 2004, we have been externally managed pursuant to a contractual investment advisory arrangement with our Adviser, under which our Adviser has directly employed all of our personnel and paid its payroll, benefits, and general expenses directly. Prior to January 1, 2010, this agreement also covered the administrative services we received from our Administrator, which until January 1, 2010, was a wholly owned subsidiary of our Adviser. Since January 1, 2010, we have received administrative services pursuant to a separate administration agreement with our Administrator. Upon completion of this offering, we will enter into an amended and restated investment advisory agreement with our Adviser and an amended and restated administration agreement with our Administrator.

 

Current Advisory Agreement and Administration Agreement

 

Under the terms of the existing Advisory Agreement, we are responsible for all expenses incurred for our direct benefit. Examples of these expenses include, legal, accounting, interest on short-term debt and mortgages, tax preparation, directors and officers insurance, stock transfer services, shareholder related fees, consulting and related fees. During the years ended December 31, 2009, 2008, and 2007, the total amount of these expenses that we incurred was approximately $275,187, $238,201 and $151,525, respectively. All of these charges are incurred directly by us rather than by our Adviser for our benefit. Accordingly, we did not make any reimbursements to our Adviser for these amounts.

 

In addition, we are also responsible for all fees charged by third parties that are directly related to our business, which may include real estate brokerage fees, mortgage placement fees, lease-up fees and transaction structuring fees (although we may be able to pass some or all of such fees on to our tenants and borrowers). In the event that any of these expenses are incurred on our behalf by our Adviser, we are required to reimburse our Adviser on a dollar-for-dollar basis for all such amounts. During the years ended December 31, 2009, 2008, and 2007, we did not incur any such fees during these periods. Accordingly, we did not make any reimbursements to our Adviser for these amounts. The actual amount of such fees that we incur in the future will depend largely upon the aggregate costs of the properties we acquire, the aggregate amount of mortgage loans we make, and the extent to which we are able to shift the burden of such fees to our tenants and borrowers. Accordingly, the amount of these fees that we will pay in the future is not determinable at this time. We do not presently expect that our Adviser will incur any of these fees on our behalf.

 

Under our existing Advisory Agreement, we were required to reimburse our Adviser for our pro rata share of our Adviser’s payroll and benefits expenses on an employee-by-employee basis, based on the percentage of each employee’s time devoted to our matters. Until January 1, 2010, this obligation also extended to administrative services provided to us by our Administrator, which until January 1, 2010 was a wholly owned subsidiary of our Adviser. During the years ended December 31, 2009, 2008, and 2007, these expenses were approximately $19,995, $13,228, and $22,529, respectively.

 

Under our existing Advisory Agreement, we are also required to reimburse our Adviser for our pro rata portion of all other expenses of our Adviser not reimbursed under the arrangements described above, which we refer to as overhead expenses, equal to the total overhead expenses of our Adviser, multiplied by the ratio of hours worked by our Adviser’s (and until January 1, 2010, our Administrator’s) employees on our projects to the total hours worked by our Adviser’s (and until January 1, 2010, our Administrator’s) employees. However, we are only required to reimburse our Adviser for our portion of its overhead expenses if the amount of payroll and benefits we reimburse to our Adviser is less than 2.0% of our average invested assets for the year. Additionally, we are only required to reimburse our Adviser for overhead expenses up to the point that reimbursed overhead expenses and payroll and

benefits expenses, on a combined basis, equal 2.0% of our average invested assets for the year. Our Adviser bills us on a monthly basis for these amounts. Our Adviser is required to reimburse us annually for the amount by which amounts billed to and paid by us exceed this 2.0% limit during a given year. To date, these amounts have never exceeded the 2.0% limit, and we have never received reimbursement. During the years ended December 31, 2009, 2008, and 2007, we reimbursed to our Adviser approximately $5,293, $4,315, and $7,699, respectively, of overhead expenses.

 

Since January 1, 2010, we have been required to reimburse our Administrator for our pro rata portion of its payroll and benefits expenses on an employee-by-employee basis, based on the percentage of each employee’s time devoted to our matters. We are also required to reimburse our Administrator for our pro rata portion of its overhead expenses, equal to the total overhead expenses of our Administrator, multiplied by the ratio of hours worked by our Administrator’s employees on our projects to the total hours worked by our Administrator’s employees.

 

The Amended Advisory and Administration Agreements

 

As with the existing Advisory Agreement, under the terms of the Amended Advisory Agreement, we will be responsible for all expenses incurred for our direct benefit. Examples of these expenses include, legal, accounting, interest on short-term debt and mortgages, tax preparation, directors and officers insurance, stock transfer services, shareholder related fees, consulting and related fees. In addition, we will continue to be responsible for all fees charged by third parties that are directly related to our business, which may include real estate brokerage fees, mortgage placement fees, lease-up fees and transaction structuring fees (although we may be able to pass some or all of such fees on to our tenants and borrowers). In the event that any of these expenses are incurred on our behalf by our Adviser, we will be required to reimburse our Adviser on a dollar-for-dollar basis for all such amounts.

 

The Amended Advisory Agreement will provide for an annual base management fee equal to 2.0% of our total stockholders’ equity, less the recorded value of any preferred stock, and an incentive fee based on funds from operations, or FFO. For purposes of calculating the incentive fee, FFO will include any realized capital gains and capital losses, less any dividends paid on preferred stock, but FFO will not include any unrealized capital gains or losses. The incentive fee will reward our Adviser if our quarterly FFO, before giving effect to any incentive fee, exceeds 1.75%, or 7% annualized, (the “hurdle rate”) of total stockholders’ equity, less the recorded value of any preferred stock. Our Adviser will receive 100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% of our pre-incentive fee FFO. Our Adviser will also receive an incentive fee of 20% of the amount of our pre-incentive fee FFO that exceeds 2.1875%.

 

Under the Amended Administration Agreement, we will pay separately for our allocable portion of the Administrator’s overhead expenses in performing its obligations, including rent, and our allocable portion of the salaries and benefits expenses of our chief financial officer, chief compliance officer, treasurer, internal counsel, investor relations officer and their respective staffs.

 

Critical Accounting Policies

 

The preparation of our financial statements in accordance with generally accepted accounting principles in the United States of America, or GAAP, requires management to make judgments that are subjective in nature in order to make certain estimates and assumptions. Management relies on its experience, collects historical data and current market data, and analyzes this information in order to arrive at what it believes to be reasonable estimates. Under different conditions or assumptions, materially different amounts could be reported related to the accounting policies described below. In addition, application of these accounting policies involves the exercise of judgment on the use of assumptions as to future uncertainties and, as a result, actual results could materially differ from these estimates. A summary of all of our significant accounting policies is provided in Note 1 to our consolidated financial statements included elsewhere in this prospectus. Below is a summary of accounting polices involving estimates and assumptions that require complex, subjective or significant judgments in their application and that materially affect our results of operations.

Asset Impairment Evaluation

 

We will periodically review the carrying value of each property to determine if circumstances that indicate impairment in the carrying value of an investment exist or that depreciation periods should be modified. In determining if impairment exists, management will consider such factors as our tenants’ payment history, the financial condition of our tenants, including calculating the current leverage ratios of tenants, the likelihood of lease renewal, business conditions in the industry in which our tenants operate and whether the carrying value of our real estate has decreased. If any of the factors above support the possibility of impairment, we will prepare a projection of the undiscounted future cash flows, without interest charges, of the specific property and determine if the investment in such property is recoverable. In preparing the projection of undiscounted future cash flows, we will estimate the hold periods of the properties and cap rates using information we obtain from market comparability studies and other comparable sources. If impairment is indicated, the carrying value of the property will be written down to its estimated fair value based on our best estimate of the property’s discounted future cash flows. Any material changes to the estimates and assumptions used in this analysis could have a significant impact on our results of operations, as the changes would impact our determination of whether impairment is deemed to have occurred and the amount of impairment loss we would recognize.

 

Investments in Real Estate

 

We will record investments in real estate at cost and we will capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. In a triple net lease, the tenant generally provides repairs and maintenance. However, to the extent that we undertake repairs or maintenance, we will expense these costs of repairs and maintenance as incurred. We will compute depreciation using the straight-line method over the estimated useful life of 39 years for buildings and improvements, and 5 to 10 years for equipment. The estimated useful life of our buildings and improvements is 20 years. Real estate depreciation expense on these assets was $313,847, $315,545 and $315,664 for the years ended December 31, 2009, 2008, and 2007, respectively. Since most of our real estate will be farmland, we expect that the impact of the items above on our financial statements will be minimal.

 

We will be required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments will have a direct impact on our net income because, if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis. Since most of our real estate will be farmland it is likely that the impact of these assessments will have little effect on our financial statements.

 

We have adopted FASB Accounting Standards Codification, or ASC, Topic 360-10, “Impairment or Disposal of Long-Lived Assets,” or ASC 360-10, which establishes a single accounting model for the impairment or disposal of long-lived assets including discontinued operations. ASC 360-10 requires that the operations related to properties that have been sold or that we intend to sell be presented as discontinued operations in the statement of operations for all periods presented, and properties we intend to sell be designated as “held for sale” on our balance sheet.

 

Purchase Price Allocation

 

We will record above-market and below-market in-place lease values for owned properties based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. We will amortize the capitalized above-market lease values as a reduction of rental income over the remaining non-cancelable terms of the respective leases. We will amortize the capitalized below-market lease values (presented in the accompanying balance sheet as value of assumed lease obligations) as an increase to rental income over the initial term and any fixed-rate renewal periods in the respective leases. Since our mortgage strategy will to a large degree involve sale-leaseback transactions with newly originated leases at market rates, we do not expect that the above-market and below-market in-place lease values will be significant for many of the transactions we will ultimately enter into.

We will measure the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. Management’s estimates of value are expected to be made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors to be considered by management in its analysis will include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. We will also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, management will also include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which we expect to primarily range from six to eighteen months, depending on specific local market conditions.

 

Management will also estimate costs to execute similar leases including leasing commissions, legal and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction.

 

The total amount of other intangible assets acquired will be further allocated to in-place lease values and customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.

 

We will amortize the value of in-place leases to expense over the initial term of the respective leases, which we primarily expect to range from ten to twenty years. The value of customer relationship intangibles will be amortized to expense over the initial term and any renewal periods in the respective leases, but in no event will the amortization period for intangible assets exceed the remaining depreciable life of the asset. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles would be charged to expense.

 

Income Taxes

 

Our financial results generally will not reflect provisions for current or deferred income taxes for taxable years after 2010. Management believes that we will operate in a manner that will allow us to be taxed as a REIT and, as a result, we do not expect to pay substantial corporate-level income taxes for taxable years after 2010. Many of the requirements for REIT qualification, however, are highly technical and complex. If we were to fail to meet these requirements, we would be subject to federal income tax which could have a material adverse impact on our results of operations and amounts available for distributions to our stockholders. Our taxable REIT subsidiary will pay taxes on its income, if any.

 

In connection with intercompany transfers of the Watsonville and Oxnard Farms in 2002 and of the Watsonville farm again in 2004, we created taxable gains for both federal and state purposes. These taxable gains are generally based on the excess of the fair market value of the property over the tax basis of the property. These intercompany taxable gains are indefinitely deferred until a triggering event occurs, generally when the transferee or the transferor leave the consolidated group as defined by the relevant tax law or the property is sold to a third party. While there are taxable gains to the transferring entity, the receiving entity’s tax basis is the fair market value at the date of transfer. Thus a deferred tax liability is created related to the taxable gain to the transferring entity but an offsetting deferred tax asset is created representing the basis difference created by the new tax basis of the receiving entity. As a result, the deferred tax assets and liabilities offset one another and there is no net impact to us. In accordance with ASC 740 and ASC 810, no tax impact is recognized in the consolidated financial statements as a result of intra-entity transfers of assets.

 

As a result of the transfers above, the related deferred tax assets and liabilities total approximately $2.3 million as of December 31, 2009. With respect to the federal amount of $2.1 million, this amount will become payable when we make a REIT election and as a REIT, we will no longer be able to obtain the benefit of the related deferred tax asset. As a result, we will reverse the deferred tax asset when we have completed all significant actions necessary to qualify as a REIT and are committed to a course of action for this to occur. We currently expect this to occur in the

fourth quarter of 2010 however, there can be no assurance that this will occur. The REIT election does not have the same impact on the state tax amount of approximately $200,000, therefore these will continue to be deferred.

 

In addition, at the time of transfer of the Watsonville farm in February 2004 from SC Land, a deferred intercompany stock account, or DISA, was created at the state income tax level. The DISA is calculated based upon the fair market value of the property at the time of distribution and the resulting tax liability was approximately $98,000. SC Land was formally liquidated in June 2010, however we have concluded that SC Land was de facto liquidated in May 2009, when it transferred its remaining existing asset to the parent company, since the business operations of SC Land were effectively terminated as of that date. The state income taxes of $98,000 related to the DISA became payable at the time of the de facto liquidation in May 2009.

 

In addition, we transferred the Oxnard farm in May 2009 from SC Land Inc into the parent company. As stated in the paragraph above, SC Land was de facto liquidated in May 2009 and as a result, we will not be subject to a similar tax on the transfer as discussed in the paragraphs above related to the 2002 and 2004 transfers.

 

In addition, under California state law, Gladstone Land and our Adviser are presumed to be unitary entities and therefore required to report their income on a combined basis, as David Gladstone is the sole shareholder of both entities. The combined reporting application will result in refunds related to previous income tax years. The combined refunds from 2005 through 2009 are estimated to be approximately $126,000. Management has decided to pursue these refunds.

 

Revision of Historical Financial Statements

 

As discussed in Note 2 to the financial statements, certain tax accounting matters were identified during 2010 that required revisions of our financial statements for the years ended December 31, 2009, 2008 and 2007. Management’s discussions and analysis reflects the impact of the items in Note 2 in the discussion of the changes in comparative results of operations and cash flows.

 

Results of Operations

 

Comparison of Six Months Ended June 30, 2010 and 2009

 

A comparison of our operating results for the six months ended June 30, 2010 and June 30, 2009 is below:

 

Operating Revenues

 

Rental income remained flat for six months ended June 30, 2010, as compared to the six months ended June 30, 2009. There were no changes to the terms of the two operating leases during the year, and thus our revenues did not change.

 

Operating Expenses

 

Depreciation and amortization expenses remained flat for the six months ended June 30, 2010, as compared to the six months ended June 30, 2009. There were no additions or disposals of fixed assets during the year, and thus depreciation expense did not change.

 

The management advisory fee increased for the six months ended June 30, 2010, as compared to the six months ended June 30, 2009, primarily as a result of the increased number of hours our Adviser’s employees spent on our matters related to the preparation of the registration statement related to this offering. The management advisory fee consists of the reimbursement of expenses, including direct allocation of employee salaries and benefits, as well as general overhead expense, to our Adviser in accordance with the terms of the advisory agreement.

 

Professional fees, consisting primarily of legal and accounting fees, decreased during the six months ended June 30, 2010, as compared to the six months ended June 30, 2009, primarily as a result of the increased amount of legal fees incurred during the quarter ended March 31, 2009 from discussions with the State of California regarding water regulations and clean up costs from environmental impact studies. Insurance expense consists of the premiums paid for directors and officers insurance coupled with liability insurance premiums. Insurance expense increased for the six months ended June 30, 2010, as compared to the six months ended June 30, 2009, because of an increase in the premiums paid for our commercial excess liability policy.

 

General and administrative expense increased for the six months ended June 30, 2010, as compared to the six months ended June 30, 2009, due to an increase in dues and subscriptions.

 

Other Income and Expense

 

Interest income from temporary investments increased during the six months ended June 30, 2010, as compared to the six months ended June 30, 2009. The increase was primarily a result of the increase in our average cash balances during the six months ended June 30, 2010.

 

Interest expense decreased for the six months ended June 30, 2010, as compared to the six months ended June 30, 2009. This was a result of the decrease in the outstanding principal balance on our mortgage note due to amortizing principal payments made throughout the year, which results in a decrease in the amount of interest payable each month.

 

Net Income

 

Net income increased for the six months ended June 30, 2010, as compared to the six months ended June 30, 2009. This increase was primarily a result of a decrease in professional fees and interest expense, partially offset by an increase in management advisory fees.

Comparison of Years Ended December 31, 2009 and 2008

 

A comparison of our operating results for the years ended December 31, 2009 and December 31, 2008 is below:

 

 

Operating Revenues

 

Rental income remained flat for the year ended December 31, 2009, as compared to the year ended December 31, 2008. There were no changes to the terms of the two operating leases during 2009, and thus our revenues did not change.

 

Operating Expenses

 

Depreciation and amortization expenses remained relatively flat during the year ended December 31, 2009, as compared to the year ended December 31, 2008. There were no additions or disposals of fixed assets during 2009, and thus depreciation expense did not significantly change.

 

The management advisory fee for the year ended December 31, 2009 increased, as compared to the year ended December 31, 2008, primarily as a result of the increased number of hours our Adviser’s employees spent on our matters related to the research and preparation of this registration statement. The management advisory fee consists of the reimbursement of expenses, including direct allocation of employee salaries and benefits, as well as general overhead expense, to our Adviser in accordance with the terms of the advisory agreement.

 

Professional fees, consisting primarily of legal and accounting fees, increased during the year ended December 31, 2009, as compared to the year ended December 31, 2008, primarily as a result of the increased

amount of legal fees incurred from discussions with the State of California regarding water regulations and clean up costs from environmental impact studies.

 

Taxes and licenses decreased during the year ended December 31, 2009, as compared to the year ended December 31, 2008, primarily as a result of interest and penalties due to the State of California for tax returns filed during 2004, which were paid in 2008.

 

Insurance expense consists of the premiums paid for directors and officers insurance coupled with liability insurance premiums. Insurance expense increased for the year ended December 31, 2009, as compared to the year ended December 31, 2008, because of an increase in the premiums paid for our commercial excess liability policy.

 

General and administrative expense decreased for the year ended December 31, 2009, as compared to the year ended December 31, 2008, because of repairs and maintenance incurred during 2008 that was not incurred during 2009.

 

Other Income and Expense

 

Interest income from temporary investments decreased during the year ended December 31, 2009, as compared to the year ended December 31, 2008. The decrease was primarily a result of the decrease in our average cash balances during the year ended December 31, 2009, coupled with a decrease in the average rate of interest earned on our money market accounts during 2009.

 

Interest income on employee loans decreased during the year ended December 31, 2009, as compared to the year ended December 31, 2008. This decrease was because the employee loan was paid in full in December 2008.

 

Interest expense decreased for the year ended December 31, 2009, as compared to the year ended December 31, 2008. This was a result of the decrease in the outstanding principal balance on our mortgage note due to amortizing principal payments made throughout 2008 and 2009, which results in a decrease in the amount of interest payable each month.

 

Net Income

 

Net income decreased for the year ended December 31, 2009, as compared to the year ended December 31, 2008. This decrease was primarily a result of increased professional fees, and insurance expense, coupled with a decrease in interest income as discussed above.

Comparison of Years Ended December 31, 2008 and 2007

 

A comparison of our operating results for the years ended December 31, 2008 and December 31, 2007 is below:

 

 

Operating Revenues

 

Rental income remained flat for the year ended December 31, 2008, as compared to the year ended December 31, 2007. There were no changes to the terms of the two operating leases during 2008, and thus our revenues did not change.

 

Operating Expenses

 

Depreciation and amortization expenses remained flat during the year ended December 31, 2008, as compared to the year ended December 31, 2007. There were no additions or disposals of fixed assets during 2008, and thus depreciation expense did not significantly change.

 

The management advisory fee for the year ended December 31, 2008 decreased, as compared to the year ended December 31, 2007, primarily as a result of the decreased number of hours our Adviser’s employees spent on our matters, coupled with a decrease in overhead expenses incurred by our Adviser for our benefit. There were more employee hours spent on the audit during 2007. The management advisory fee consists of the reimbursement of expenses, including direct allocation of employee salaries and benefits, as well as general overhead expense, to our Adviser in accordance with the terms of the advisory agreement.

Professional fees, consisting primarily of legal and accounting fees, increased during the year ended December 31, 2008, as compared to the year ended December 31, 2007, primarily as a result of fees incurred for an earnings and profit study of Gladstone Land completed in 2008.

 

Taxes and licenses increased during the year ended December 31, 2008, as compared to the year ended December 31, 2007, primarily as a result of interest and penalties due to the State of California for tax returns filed during 2004. There are no more prior year tax issues outstanding and we are current on all of our tax filings.

 

Insurance expense consists of the premiums paid for directors and officers insurance coupled with liability insurance premiums. Insurance expense increased for the year ended December 31, 2008, as compared to the year ended December 31, 2007, because of an increase in the premiums paid for our commercial excess liability policy.

 

General and administrative expense increased for the year ended December 31, 2008, as compared to the year ended December 31, 2007, because of an increase in repairs and maintenance of a well, located on the San Andreas property, incurred during 2008.

 

Other Income and Expense

 

Interest income from temporary investments decreased during the year ended December 31, 2008, as compared to the year ended December 31, 2007. The decrease was primarily a result of a decrease in the average rate of interest earned on our money market accounts during 2008, coupled with the decrease in our average cash balances during the year ended December 31, 2008, as there was a dividend declared and paid in December 2008 of $4.8 million.

 

Interest income on the note receivable with our Adviser decreased during the year ended December 31, 2008, as compared to the year ended December 31, 2007. This decrease was because there was no balance outstanding on the note receivable for the duration of 2008.

 

Interest income on employee loans decreased during the year ended December 31, 2008, as compared to the year ended December 31, 2007. This decrease was primarily because the interest rate on the note is based on the prime rate, and this rate decreased substantially during 2008. In addition, the employee loans were paid in full in December 2008.

 

Other income decreased during the year ended December 31, 2008, as compared to the year ended December 31, 2007, primarily because of a settlement payment on a land easement that we received in 2007, which was not received in 2008.

 

Interest expense decreased for the year ended December 31, 2008, as compared to the year ended December 31, 2007. This was a result of the decrease in the outstanding principal balance on our mortgage note due to amortizing principal payments made throughout 2007 and 2008, which results in a decrease in the amount of interest payable each month.

 

Net Income

 

Net income decreased for the year ended December 31, 2008, as compared to the year ended December 31, 2007. This decrease was primarily a result of increased taxes and licenses, professional fees, general and administrative expense and insurance expense, coupled with a decrease in interest income as discussed above.

 

Financial Condition, Liquidity and Capital Resources

 

We are dependent upon the net proceeds received from this offering to conduct our proposed activities. We intend to use the capital we acquire in this offering and the proceeds of any indebtedness that we may incur in the future, to purchase farms and farm-related properties as well as to make mortgage loans. We currently are considering the purchase of           properties. However, because we have not entered into letters of intent or definitive agreements to purchase any of these properties, and because we have not yet completed our due diligence investigation of any of these properties, we may not be successful in acquiring any of these properties. For information concerning the anticipated use of the net proceeds from this offering, see “Use of Proceeds” and “Properties Under Consideration.”

Our sources of funds will primarily be the net proceeds of this offering, operating cash flows and borrowings. Immediately after this offering (assuming no exercise of the underwriters’ over-allotment option), we expect to have cash resources in excess of $159.3 million, based on an assumed public offering price of $15.00 per share, which is the midpoint of the price range on the cover of this prospectus, and $11.5 million of indebtedness as of June 30, 2010. We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise additional funds within the next twelve months.

 

Operating Activities

 

Net cash provided by operating activities during the years ended December 31, 2009, 2008 and 2007 was approximately $780,000, $1.2 million and $1.2 million, respectively. The decrease in net cash provided by operating activities during December 31, 2009 was primarily a result of an increase in total operating expenses during 2009 coupled with a decrease in interest income, partially offset by a decrease in interest expense and our provision for income taxes. Net cash provided by operating activities during the six months ended June 30, 2010 and 2009 was approximately $620,000 and $384,000, respectively. The increase in net cash provided by operating activities during June 30, 2010 was primarily a result of the timing of rent payments received during 2009 and 2010. A majority of cash from operating activities is generated from the rental payments we receive from our tenants. We utilize this cash to fund our property-level operating expenses and use the excess cash primarily for debt and interest payments on our mortgage note payable, management fees to our Adviser, income taxes and other entity level expenses.

 

Investing Activities

 

Net cash provided by investing activities during the years ended December 31, 2009, 2008 and 2007 was approximately $0, $2.3 million and $350,000, respectively. The cash provided from investing activities in 2008 resulted from the repayment of an outstanding employee loan of $2.8 million, partially offset by the issuance of an employee loan of $0.5 million. Cash provided by investing activities in 2007 was a result of the net repayment of the note receivable from our Adviser. There was no cash used in investing activities during the six months ended June 30, 2010 and 2009.

 

Financing Activities

 

Net cash used in financing activities for the years ended December 31, 2009, 2008 and 2007 was approximately $1.4 million, $4.6 million and $0.4 million which primarily consisted of principal repayments on mortgage notes payable and distributions paid to our stockholders. Net cash used in financing activities for the six months ended June 30, 2010 and 2009 was approximately $212,000 and $198,000, respectively, which consisted of principal repayments on mortgage notes payable.

 

The following table presents a summary of our significant contractual obligations as of December 31, 2009: