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 21 farms as of December 31, 2013:

 

						Number												Lease
				Date		of				Total				Farmable				Expiration		Net Cost
Property Name		Location		Acquired		Farms				Acres				Acres				Date		Basis(1)				Encumbrances
San Andreas		Watsonville, CA		6/16/1997			1				306				237			12/31/2014		$	4,864,968			$	100,000	(2)
West Gonzales		Oxnard, CA		9/15/1998			1				653				502			6/30/2020			12,420,452				27,900,311
West Beach		Watsonville, CA		1/3/2011			3				198				195			10/31/2014			8,351,475				5,206,014
Dalton Lane		Watsonville, CA		7/7/2011			1				72				70			10/31/2015			2,724,426				1,716,942
Keysville Road		Plant City, FL		10/26/2011			2				59				50			7/1/2016			1,230,758				917,338
Colding Loop		Wimauma, FL		8/9/2012			1				219				181			6/14/2018			4,006,721				2,176,837
Trapnell Road		Plant City, FL		9/12/2012			3				124				110			6/30/2017			4,171,499				2,414,143
38th Avenue		Covert, MI		4/5/2013			1				119				89			4/4/2020			1,352,635				821,680
Sequoia Street		Brooks, OR		5/31/2013			1				209				206			5/31/2028			3,184,260				1,900,900
Natividad Road		Salinas, CA		10/21/2013			1				166				166			10/31/2024			7,475,448				—
20th Avenue		South Haven, MI		11/5/2013			3				150				94			11/4/2018			2,012,711				—
Broadway Road		Moorpark, CA		12/16/2013			1				60				60			12/15/2023			3,020,230				—
Oregon Trail		Echo, OR		12/27/2013			1				1,895				1,640			12/31/2023			14,064,497				—
East Shelton		Willcox, AZ		12/27/2013			1				1,761				1,320			2/29/2024			6,742,167				—
							21				5,991				4,920					$	75,622,247			$	43,154,165

 

(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 December 31, 2013.

(2)	Represents borrowings outstanding on our line of credit as of December 31, 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 December 31, 2013 and 2012:

 

		December 31, 2013				December 31, 2012
Real estate:
Land and land improvements		$	63,944,307			$	30,828,325
Buildings and improvements			2,193,255				1,311,027
Coolers			5,293,796				4,963,243
Irrigation system			6,007,845				2,576,373
Horticulture			1,038,850				—
Real estate, gross			78,478,053				39,678,968
Accumulated depreciation			(3,166,870	)			(2,535,084	)
Real estate, net		$	75,311,183			$	37,143,884

 

New Real Estate Activity

2013 New Real Estate Activity

During the year ended December 31, 2013, we acquired nine farms in seven separate transactions, which are summarized in the table below.

 

Property		Property		Acquisition		Total				Number of				Primary		Lease		Renewal		Total Purchase				Acquisition				Annualized Straight- line
Name		Location		Date		Acreage				Farms				Crop(s)		Term		Options		Price				Expenses(1)				Rent(2)
38th Avenue		Covert, MI		4/5/2013			119				1			Blueberries		7 years		1 (7 years)		$	1,341,000			$	40,133			$	87,286
Sequoia Street		Brooks, OR		5/31/2013			209				1			Blueberries		15 years		3 (5 years each)			3,100,000				106,797				193,617
Natividad Road(3)		Salinas, CA		10/21/2013			166				1			Strawberries & Raspberries		2 years		None			7,325,120				47,851				439,575
20th Avenue		South Haven, MI		11/5/2013			150				3			Blueberries		5 years		1 (5 years)			1,985,000				40,475				129,755
Broadway Road(4)		Moorpark, CA		12/16/2013			60				1			Lemons		10 years		1 (10 years)			3,000,000				23,912				171,958
Oregon Trail		Echo, OR		12/27/2013			1,895				1			Corn, Onions & Potatoes		10 years		3 (5 years each)			13,855,000				209,497				758,480
East Shelton		Willcox, AZ		12/27/2013			1,761				1			Corn & Dry edible beans		10 years		None			6,700,000				42,167				290,284
							4,360				9									$	37,306,120			$	510,832			$	2,070,955

 

(1)

Unless otherwise noted, 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.

(2)	Annualized straight-line amount is based on the minimum rental payments required per the lease and includes the amortization of any above-market and below-market leases recorded.

(3)

This Transaction accounted for as a business combination under ASC 805; therefore, with the exception of costs directly incurred in connection with originating the follow-on lease, costs associated with the acquisition were expensed when incurred. $4,915 of costs were incurred in connection with originating the follow-on lease and were capitalized.

Upon acquisition of the property, we assumed a lease with two years remaining on it. This lease originally provided for one, three-year extension option; however, the right to this option was waived by the tenant. In connection with assuming this lease, we recorded a below-market lease liability of $161,547. In addition, the Company executed a nine-year, follow-on lease with a separate tenant to commence at the expiration of the assumed lease. The follow-on lease includes one, five-year renewal option and provides for prescribed rent escalations over the term of the lease, with annualized, straight-line rents of $413,476.

(4)	Beginning in 2015, this property will be farmed for blueberries and avocados.

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

As noted in the above table, with the exception of Natividad Road, all acquisitions during the year ended December 31, 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. The acquisition of Natividad Road was accounted for as a business combination under ASC 805, as there was a leasing history on the property and a lease in place that we assumed upon acquisition. As such, the fair value of acquired assets and liabilities assumed were determined in accordance with ASC 805.

We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the year ended December 31, 2013, to be as follows:

 

		Land and Land								Irrigation				Site								In-place				Leasing				Below- Market				Total Purchase
Property Name		Improvements				Buildings				System				Improvements				Horticulture(1)				Leases				Commissions(2)				Leases				Price
38th Avenue		$	647,430			$	42,720			$	240,105			$	—			$	447,035			$	—			$	3,842			$	—			$	1,381,132
Sequoia Street			2,493,809				279,372				424,081				—				—				—				9,535				—				3,206,797
Natividad Road(3)			7,186,774				19,199				144,915				—				—				110,753				29,941				(161,547	)			7,330,035
20th Avenue			811,673				281,160				441,415				—				488,604				—				2,623				—				2,025,475
Broadway Road			2,847,948				49,792				22,700				262				103,211				—				—				—				3,023,913
Oregon Trail			12,937,446				—				1,118,325				—				—				—				8,726				—				14,064,497
East Shelton			6,167,902				131,268				441,015				—				—				—				1,982				—				6,742,167
		$	33,092,982			$	803,511			$	2,832,556			$	262			$	1,038,850			$	110,753			$	56,649			$	(161,547	)		$	37,774,016

 

(1)	Horticulture acquired on 38th Avenue and 20th Avenue consists of various types of high-bush variety blueberry bushes. Horticulture acquired on Broadway Road consits of an orchard of lemon trees.

(2)

With the exception of Natividad Road, 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. On Natividad Road, $25,026 of the purchase price was allocated to leasing commissions, and an additional $4,915 of costs directly related to originating the follow-on lease was also capitalized.

(3)	Acquisition accounted for as a business combination under ASC 805.

Below is a summary of the total revenue and earnings recognized on the properties acquired during the year ended December 31, 2013:

 

				For the Year Ended
				December 31, 2013
Property		Acquisition		Rental
Name		Date		Revenue				Earnings (1)
38th Avenue		4/5/2013		$	64,494			$	35,996
Sequoia Street		5/31/2013			112,944				83,262
Natividad Road		10/21/2013			86,510				63,133
20th Avenue		11/5/2013			20,184				6,919
Broadway Road		12/16/2013			7,396				3,713
Oregon Trail		12/27/2013			10,195				10,154
East Shelton		12/27/2013			3,715				3,283
				$	305,438			$	206,460

 

(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.

 

2012 New Real Estate Activity

During the year ended December 31, 2012, we acquired four farms in two separate transactions, which are summarized in the table below:

 

Property		Property				Acquisition		Total				Number of				Primary		Lease		Renewal		Total Purchase				Acquisition				Annualized Straight- line
Name		Location				Date		Acreage				Farms				Crop		Term		Options		Price				Expenses(1)				Rent(2)				Debt Issued
Colding Loop(3)			Wimauma, FL			8/9/2012			219				1			Strawberries		1 year		None		$	3,400,836			$	31,879			$	141,274			$	3,507,000
Trapnell Road			Plant City, FL			9/12/2012			124				3			Strawberries		5 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)	Both transactions accounted for as business combinations under ASC 805; therefore, costs associated with the acquisition were expensed when incurred.

(2)	Annualized straight-line amount is based on the minimum rental payments required per the lease and includes the amortization of any above-market and below-market leases recorded.

(3)

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 year ended December 31, 2012, as follows:

 

																										Below-				Total
Property										Irrigation				Lease				Leasing				Customer				Market				Purchase
Name		Land				Cooler				System				In-place				Commissions				Relationships				Leases				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 year ended December 31, 2012:

 

				For the Year Ended
				December 31, 2012
Property		Acquisition		Rental
Name		Date		Revenue				Earnings (1)
Colding Loop		8/9/2012		$	65,558			$	11,567
Trapnell Road		9/12/2012			72,961				30,686
				$	138,519			$	42,253

 

(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 nine farms during the year ended December 31, 2013, and four farms during the year ended December 31, 2012. The following table reflects pro-forma consolidated statements as if the properties were acquired at the beginning of the previous period. The table below reflects pro-forma financials for all farms acquired, regardless of whether they were treated as asset acquisitions or business combinations.

 

		For the Year Ended December 31,
		2013				2012
Operating Data:
Total operating revenue		$	5,811,314			$	5,701,778
Total operating expenses			(3,220,071	)			(2,245,982	)
Other expenses			(1,048,658	)			(1,167,813	)
Net income before income taxes			1,542,585				2,287,983
Provision for income taxes			(2,039,672	)			(828,066	)
Net (loss) income		$	(497,087	)		$	1,459,917
Share and Per Share Data:
(Loss) earnings per share of common stock - basic and diluted		$	(0.08	)		$	0.26
Weighted average common shares outstanding - basic and diluted			6,428,877				5,543,811

Acquired Intangibles and Liabilities

As mentioned above, there was no purchase price allocated to any intangible assets related to acquisitions treated as asset acquisitions under ASC 360. However, the costs we incurred in connection with setting up new leases on the properties were capitalized over the lives of the respective leases. For those acquisitions treated as business combinations, the purchase price was allocated to the identifiable intangible assets and liabilities in accordance with ASC 805. The weighted-average amortization period, in years, for the intangible assets acquired and liabilities assumed during the years ended December 31, 2013 and 2012, is shown in the table below:

 

Intangible Assets and Liabilities		2013				2012
In-place leases			2.0				3.1
Leasing commissions			6.8				4.7
Customer relationships			—				5.8
Below-market leases			2.0				0.8
All intangible assets and liabilities			2.9				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 its life, 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 $700,000, of which $616,000 has been expended or accrued for as of December 31, 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 its life, 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 $246,000 and $296,000 and will take place over the course of the next year. See Note 8, “Commitments and Contingencies,” for further discussion on this commitment.

On October 21, 2013, we extended the commercial lease with the tenant renting the cooling facility on Trapnell Road for one additional year, extending the expiration date to June 30, 2018. The prescribed rent escalations provided for in the original lease continue through this one-year extension. In addition, we have agreed to incur the costs, up to a maximum of $450,000, of expanding and upgrading the cooling facility on the property. In connection with this expansion and upgrade, upon completion, the tenant will commence paying rent to us on the cooling facility at an annual rate of 8.5% of the expended costs, not to exceed $450,000. This work was completed in January 2014. See Note 8, “Commitments and Contingencies,” for further discussion on this commitment.

Intangible Assets

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

 

		December 31, 2013								December 31, 2012
		Lease				Accumulated				Lease				Accumulated
		Intangibles				Amortization				Intangibles				Amortization
In-place leases		$	397,728			$	(241,697	)		$	286,975			$	(186,843	)
Leasing commissions			146,558				(34,727	)			63,638				(17,627	)
Customer relationships			93,187				(49,985	)			93,187				(31,270	)
		$	637,473			$	(326,409	)		$	443,800			$	(235,740	)

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

 

				Estimated
Period				Amortization Expense
For the fiscal years ending December 31:		2014		$	113,398
		2015			100,497
		2016			34,525
		2017			23,446
		2018			9,898
		Thereafter			29,300
				$	311,064

 

Lease Expirations

The following table summarizes the lease expirations by year for our properties with leases in place as of December 31, 2013:

 

Year		Number of Expiring Leases				Expiring Leased Acreage				% of Total Acreage				Rental Revenue for the Year Ended December 31, 2013				% of Total Rental Revenue
2014(1)			3				504				8.4	%		$	889,955				22.1	%
2015			1				72				1.2	%			142,500				3.5	%
2016			1				59				1.0	%			68,335				1.7	%
2017			1				124				2.1	%			241,811				6.0	%
2018			2				369				6.1	%			164,173				4.1	%
Thereafter			7				4,863				81.2	%			2,520,913				62.6	%
Totals			15				5,991				100.0	%		$	4,027,687				100.0	%

 

(1)	Includes a surface area lease on a portion of one property leased to an oil company that is renewed on a year-to-year basis.

Future Lease Payments

Future operating lease payments from tenants under all non-cancelable leases, excluding tenant reimbursement of expenses, for each of the five succeeding fiscal years and thereafter as of December 31, 2013, are as follows:

 

				Tenant Lease
Period				Payments
For the fiscal years ending December 31:		2014		$	5,452,191
		2015			4,892,633
		2016			4,816,299
		2017			4,747,117
		2018			4,403,951
		Thereafter			14,321,082
				$	38,633,303

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 December 31, 2013, are approximately $410,000.

 

Portfolio Diversification and Concentrations

Diversification

The following table summarizes the geographic locations of our properties with leases in place as of December 31, 2013 and 2012:

 

		As of and For the Year Ended December 31, 2013																				As of and For the Year Ended December 31, 2012
		Number								% of								% of Total				Number								% of								% of Total
		of				Total				Total				Rental				Rental				of				Total				Total				Rental				Rental
State		Farms				Acres				Acres				Revenue				Revenue				Farms				Acres				Acres				Revenue				Revenue
California			8				1,455				24.3	%		$	3,362,020				83.5	%			6				1,229				75.4	%		$	3,183,739				93.9	%
Florida			6				402				6.7	%			454,135				11.3	%			6				402				24.6	%			206,855				6.1	%
Oregon			2				2,104				35.1	%			123,138				3.0	%			0				0				0.0	%			—				0.0	%
Michigan			4				269				4.5	%			84,679				2.1	%			0				0				0.0	%			—				0.0	%
Arizona			1				1,761				29.4	%			3,715				0.1	%			0				0				0.0	%			—				0.0	%
			21				5,991				100.0	%		$	4,027,687				100.0	%			12				1,631				100.0	%		$	3,390,594				100.0	%

Concentrations

Credit Risk

Two of our leases are with a single tenant, Dole Food Company (“Dole”). As of December 31, 2013, 959 acres were leased to Dole, representing 16.0% of the total acreage we owned. Furthermore, these farms accounted for approximately $2.7 million, or 66.2%, of the rental income recorded during the year ended December 31, 2013. Rental income from Dole accounted for 76.3% of the total rental income recorded during the year ended December 31, 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. No other individual tenant represented greater than 6.6% of the total rental income recorded during the year ended December 31, 2013.

Geographic Risk

8 of our 21 farms owned as of December 31, 2013, are located in California. As of December 31, 2013, our farmland in California accounted for 1,455 acres, or 24.3% of the total acreage we owned. Furthermore, these farms accounted for approximately $3.4 million, or 83.5%, of the rental income recorded by us during the year ended December 31, 2013. Rental income from our farms in California accounted for 93.9% of the total rental income recorded by us during the year ended December 31, 2012. Our other farms, located in Arizona, Florida, Michigan and Oregon, were purchased between October 2011 and December 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.