NOTE 3. REAL ESTATE AND INTANGIBLE ASSETS

All of our properties are wholly-owned on a fee-simple basis. The following table provides certain summary information about our 14 farms as of September 30, 2013:

 

Property Name		Location		Date Acquired		Encumbrances				Net Cost Basis(1)				Number of Farms				Number of Leases				Farmable Acres				Total Acres				Lease Expiration Date
San Andreas		Watsonville, CA		6/16/1997		$	100,000	(2)		$	4,874,836				1				1				237				306				12/31/2014
West Gonzales		Oxnard, CA		9/15/1998			13,473,792				12,501,855				1				2				501				653				6/30/2020
West Beach		Watsonville, CA		1/3/2011			5,068,800				8,328,475				3				1				195				198				10/31/2014
Dalton Lane		Watsonville, CA		7/7/2011			2,587,853				2,730,527				1				1				70				72				10/31/2015
Keysville Road		Plant City, FL		10/26/2011			1,152,000				1,230,758				2				1				50				59				7/1/2016
Colding Loop		Wimauma, FL		8/9/2012			3,366,720				3,992,932				1				1				181				219				6/14/2018
Trapnell Road		Plant City, FL		9/12/2012			3,840,000				3,854,554				3				1				110				124				6/30/2017
38th Avenue		Covert, MI		4/5/2013			—				1,362,134				1				1				89				119				4/4/2020
Sequoia Street		Brooks, OR		5/31/2013			—				3,193,919				1				1				206				209				5/31/2028
						$	29,589,165			$	42,069,990				14				10				1,639				1,959

 

(1)	Consists of the initial acquisition price (including the costs allocated to both tangible and intangible assets) plus subsequent improvements and other capitalized costs associated with the properties and adjusted for depreciation and amortization accumulated through September 30, 2013.

(2)	Represents borrowings outstanding on our line of credit as of September 30, 2013, under which San Andreas is pledgd as collateral.

Real Estate

The following table sets forth the components of our investments in tangible real estate assets as of September 30, 2013, and December 31, 2012:

 

		As of				As of
		September 30, 2013				December 31, 2012
Real estate:
Land		$	33,969,564			$	30,828,325
Building			1,641,120				1,311,027
Cooler			4,963,243				4,963,243
Drain system			3,845,514				2,576,373
Horticulture			447,035				—
Real estate, gross			44,866,476				39,678,968
Accumulated depreciation			(2,978,718	)			(2,535,084	)
Real estate, net		$	41,887,758			$	37,143,884

 

New Real Estate Activity

2013 New Real Estate Activity

During the nine months ended September 30, 2013, we acquired two farms in two separate transactions, which are summarized in the table below.

 

Property Name		Property Location		Acquisition Date		Total Acreage				Number of Farms				Primary Crop		Lease Term		Renewal Options		Total Purchase Price				Acquisition Expenses				Annualized Straight-line Rent(1)
38th Avenue		Covert, MI		4/5/2013			119				1			Blueberries		7 Years		1 (7 years)		$	1,341,000			$	40,133	(2)		$	87,286
Sequoia Street		Brooks, OR		5/31/2013			209				1			Blueberries		15 Years		3 (5 years each)			3,100,000				106,797	(2)			193,617
							328				2									$	4,441,000			$	146,930			$	280,903

 

(1)	Annualized straight-line amount is based on the minimum rental payments required per the lease.

(2)	Transaction accounted for as an asset acquisition under ASC 360 instead of a business combination under ASC 805; therefore, related costs associated with the acquisition were capitalized and included as part of the fair value allocation of the identifiable tangible assets acquired.

Both of the acquisitions in the table above were purchased using proceeds from our January 2013 IPO; thus, no additional debt was issued to finance either transaction.

As noted in the above table, both acquisitions during the nine months ended September 30, 2013, were accounted for as asset acquisitions in accordance with ASC 360, as there was not a lease in place on the property that we assumed upon acquisition. Accordingly, all acquisition-related costs were capitalized and allocated pro-ratably to the fair value of all identifiable tangible assets. In addition, none of the purchase price was allocated to intangible assets; however, the costs we incurred in connection with originating the new leases on the properties were capitalized.

We determined the fair value of acquired assets and liabilities assumed related to the properties acquired during the nine months ended September 30, 2013, to be as follows:

 

Property Name		Land				Building				Drain System				Horticulture(1)				Leasing Commissions(2)				Total Purchase Price
38th Avenue		$	647,431			$	42,720			$	240,105			$	447,035			$	3,842			$	1,381,133
Sequoia Street			2,493,809				279,372				424,081				—				9,535				3,206,797
		$	3,141,240			$	322,092			$	664,186			$	447,035			$	13,377			$	4,587,930

 

(1)	Horticulture acquired on 38th Avenue consists of various types of high-bush variety blueberry bushes.

(2)	None of the purchase price was allocated to any intangibles; leasing commissions above represent direct costs incurred in connection with originating new leases on the properties.

2012 New Real Estate Activity

During the nine months ended September 30, 2012, we acquired four farms in two separate transactions, which are summarized in the table below:

 

Property Name		Property Location				Acquisition Date				Total Acreage				Number of Farms				Primary Crop				Lease Term		Renewal Options		Total Purchase Price				Acquisition Expenses				Annualized Straight- line Rent(1)				Debt Issued
Colding Loop			Wimauma, FL				8/9/2012				219				1				Strawberries			0.9 Years(2)		None(2)		$	3,400,836			$	31,879			$	141,274	(2)		$	3,507,000
Trapnell Road			Plant City, FL				9/12/2012				124				3				Strawberries			4.8 Years		1 (5 Years)			4,000,000				82,412				241,630				4,000,000
											343				4											$	7,400,836			$	114,291			$	382,904			$	7,507,000

 

(1)	Annualized straight-line amount is based on the minimum rental payments required per the lease.

(2)

The original lease that was assumed upon acquisition of Colding Loop expired on June 14, 2013; thus, the rental income reflected in the table above is the straight-line rent recognized over remaining ten-month term of the lease, which translated to $166,205 on an annual basis. On May 28, 2013, we executed a new, five-year lease on Colding Loop, commencing June 15, 2013. The new lease has one five-year renewal option and provides for minimum annualized straight-line rent of $125,400.

 

In accordance with ASC 805, we determined the fair value of acquired assets and liabilities assumed related to the properties acquired during the nine months ended September 30, 2012, as follows:

 

Property Name		Land				Cooler				Drain System				Lease In-place				Leasing Commissions				Customer Relationships				Below- Market Leases				Total Purchase Price
Colding Loop		$	2,513,696			$	—			$	909,490			$	43,989			$	1,676			$	30,793			$	(98,808	)		$	3,400,836
Trapnell Road			2,198,728				686,578				970,761				60,627				45,543				37,763				—				4,000,000
		$	4,712,424			$	686,578			$	1,880,251			$	104,616			$	47,219			$	68,556			$	(98,808	)		$	7,400,836

Below is a summary of the total revenue and earnings recognized on the properties acquired during the nine months ended September 30, 2012:

 

				For the Three and Nine Months Ended September 30, 2012
Property Location		Acquisition Date		Rental Revenue				Earnings (1)
Colding Loop		8/9/2012		$	24,007			$	5,838
Trapnell Road		9/12/2012			12,554				6,192

 

(1)	Earnings are calculated as net income less interest expense, if debt was issued to acquire the property, income taxes and any acquisition-related costs that are required to be expensed if the acquisition is treated as a business combination under ASC 805.

Pro-Forma Financials

We acquired two farms during the nine months ended September 30, 2013, both of which were treated as asset acquisitions under ASC 360, and four farms during the nine months ended September 30, 2012, all of which were treated as business combinations under ASC 805. For those acquisitions treated as business combinations, the following table reflects pro-forma condensed consolidated statements as if the assets were acquired at the beginning of the previous period. The table below does not reflect pro-forma financials for the two farms acquired during the nine months ended September 30, 2013, that were treated as asset acquisitions.

 

		For the Nine Months Ended September 30,
		2013				2012
Operating Data:
Total operating revenue		$	2,841,846			$	2,712,548
Total operating expenses			(1,784,688	)			(1,182,885	)
Other expenses			(777,585	)			(873,454	)
Net income before income taxes			279,573				656,209
Provision for income taxes			(195,280	)			(292,350	)
Net income		$	84,293			$	363,859
Share and Per Share Data:
Weighted average common shares outstanding—basic and diluted			6,108,165				2,750,000
Earnings per share of common stock—basic and diluted		$	0.01			$	0.13

 

Acquired Intangibles and Liabilities

As mentioned above, there was no purchase price allocated to any intangible assets related to the two acquisitions made during the nine months ended September 30, 2013, as they were both accounted for as asset acquisitions. However, the costs we incurred in connection with setting up new leases on the properties were capitalized over the lives of the respective leases. The weighted-average amortization period, in years, for the intangible assets acquired and liabilities assumed during the nine months ended September 30, 2013 and 2012, is shown in the table below:

 

Intangible Assets and Liabilities		2013				2012
In-place leases			—				3.1
Leasing commissions			12.7				4.7
Customer relationships			—				5.8
Below-market leases			—				0.8
All intangible assets and liabilities			12.7				3.2

Existing Real Estate Activity

On May 28, 2013, we executed a lease with a new tenant to occupy Colding Loop that commenced on June 15, 2013, as the lease term with the previous tenant on the property expired on June 14, 2013. The new lease term is for five years, through June 2018, and the tenant has one option to extend the lease for an additional five-year term. The lease provides for prescribed rent escalations over the life of the lease, with minimum annualized, GAAP straight-line rental income of $125,400. In connection with this agreement, we are required to install new irrigation equipment on part of the property, and we may be required to install additional irrigation equipment on the total acreage of the property. We estimate commitments in connection with this agreement may cost up to $900,000, of which $573,000 has been expended or accrued for as of September 30, 2013. See Note 8, “Commitments and Contingencies,” for further discussion on this commitment.

On August 30, 2013, we extended the lease with the tenant occupying West Gonzales, which was originally set to expire in December 2013. The lease was extended for an additional 6.5 years, through June 2020, and provides for prescribed rent escalations over the life of the lease, with annualized, GAAP straight-line rental income of approximately $2.4 million, representing an 11.2% increase over that of the previous lease.

On September 11, 2013, we extended the lease with the tenant occupying West Beach, which was originally set to expire in October 2013. The lease was extended for an additional year, through October 2014, and provides for GAAP straight-line rental income of approximately $448,000, representing a 5.7% increase over that of the previous lease. In connection with this extension, we have agreed to incur the costs of upgrading the drainage system on the property, which we estimate will cost between $250,000 and $300,000 and will take place over the course of the next year. See Note 8, “Commitments and Contingencies,” for further discussion on this commitment.

Future Lease Payments

Future operating lease payments from tenants under all non-cancelable leases, excluding tenant reimbursement of expenses, for the remainder of 2013 and each of the five succeeding fiscal years and thereafter as of September 30, 2013, are as follows:

 

				Tenant Lease
Period				Payments
For the remaining three months ending December 31:		2013		$	880,645
For the fiscal years ending December 31:		2014			3,796,267
		2015			3,166,142
		2016			3,142,955
		2017			2,975,351
		2018			2,703,066
		Thereafter			5,728,667

 

In accordance with the lease terms, substantially all operating expenses are required to be paid by the tenant; however, we would be required to pay real estate property taxes on the respective parcels of land in the event the tenants fail to pay them. The aggregate annual real estate property taxes for all parcels of land owned by us as of September 30, 2013, are approximately $321,000.

Intangible Assets

The following table summarizes the carrying value of intangible assets and the accumulated amortization for each intangible asset class as of September 30, 2013, and December 31, 2012:

 

		September 30, 2013								December 31, 2012
		Lease Intangibles				Accumulated Amortization				Lease Intangibles				Accumulated Amortization
In-place leases		$	286,975			$	(225,556	)		$	286,975			$	(186,843	)
Leasing commissions			103,285				(28,060	)			63,638				(17,627	)
Customer relationships			93,187				(47,599	)			93,187				(31,270	)
		$	483,447			$	(301,215	)		$	443,800			$	(235,740	)

The aggregate amortization expense for the remainder of 2013 and each of the five succeeding fiscal years and thereafter is as follows:

 

				Estimated
Period				Amortization Expense
For the remaining three months ending December 31:		2013		$	11,251
For the fiscal years ending December 31:		2014			45,494
		2015			43,783
		2016			32,776
		2017			21,207
		2018			7,255
		Thereafter			20,466

Portfolio Diversification and Concentrations

Diversification

The following table summarizes the geographic locations of our properties with leases in place as of September 30, 2013 and 2012:

 

		As of and For the Nine Months Ended September 30, 2013																								As of and For the Nine Months Ended September 30, 2012
State		Number of Farms				Number of Leases				Total Acres				% of Total Acres				Rental Revenue				% of Total Rental Revenue				Number of Farms				Number of Leases				Total Acres				% of Total Acres				Rental Revenue				% of Total Rental Revenue
California			6				5				1,229				62.7	%		$	2,408,110				84.2	%			6				5				1,229				75.4	%		$	2,386,024				96.5	%
Florida			6				3				402				20.5	%			345,113				12.1	%			6				3				402				24.6	%			87,813				3.5	%
Michigan			1				1				119				6.1	%			42,673				1.5	%			0				0				0				0.0	%			—				0.0	%
Oregon			1				1				209				10.7	%			64,539				2.2	%			0				0				0				0.0	%			—				0.0	%
			14				10				1,959				100.0	%		$	2,860,435				100.0	%			12				8				1,631				100.0	%		$	2,473,837				100.0	%

 

Concentrations

Credit Risk

Two of our ten leases are with a single tenant, Dole Food Company (“Dole”). As of September 30, 2013, 959 acres was leased to Dole, representing 49.0% of the total acreage we owned. Furthermore, these farms accounted for approximately $2.0 million, or 68.6%, of the rental income recorded during the nine months ended September 30, 2013. Rental income from Dole accounted for 78.5% of the total rental income recorded during the nine months ended September 30, 2012. If Dole fails to make rental payments or elects to terminate any of its leases, and the land cannot be re-leased on satisfactory terms, there would be a material adverse effect on our financial performance and ability to continue operations. However, the parent company of Dole has guaranteed the required rental payments for both of the leases. The financial statements of Dole can be found on the U.S. Securities and Exchange Commission’s (the “SEC”) website at www.sec.gov. No other individual tenant represented greater than 7.8% of the total rental income recorded during the nine months ended September 30, 2013.

Geographic Risk

Six of our fourteen farms owned as of September 30, 2013, are located in California. As of September 30, 2013, our farmland in California accounted for 1,229 acres, or 62.7% of the total acreage we owned. Furthermore, these farms accounted for approximately $2.4 million, or 84.2%, of the rental income recorded by us during the nine months ended September 30, 2013. Rental income from our farms in California accounted for 96.5% of the total rental income recorded by us during the nine months ended September 30, 2012. Our other farms, located in Florida, Michigan and Oregon, were purchased between October 2011 and May 2013. Should an unexpected natural disaster occur where our properties are located, there could be a material adverse effect on our financial performance and ability to continue operations.