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 36 farms as of June 30, 2015:

 

Property Name		Location		Date Acquired		Number of Farms				Total Acres				Farm Acres				Lease Expiration Date		Net Cost Basis(1)				Encumbrances
San Andreas		Watsonville, CA		6/16/1997			1				307				238			12/31/2020		$	4,806,449			$	4,072,726
West Gonzales		Oxnard, CA		9/15/1998			1				653				502			6/30/2020			12,309,315				20,720,863
West Beach		Watsonville, CA		1/3/2011			3				196				195			12/31/2023			9,304,059				3,967,397
Dalton Lane		Watsonville, CA		7/7/2011			1				72				70			10/31/2020			2,690,463				1,314,507
Keysville Road		Plant City, FL		10/26/2011			2				59				56			6/30/2020			1,241,322				897,600
Colding Loop		Wimauma, FL		8/9/2012			1				219				181			6/14/2018			4,013,732				2,640,000
Trapnell Road		Plant City, FL		9/12/2012			3				124				110			6/30/2017			4,025,042				2,655,000
38th Avenue		Covert, MI		4/5/2013			1				119				89			4/4/2020			1,293,824				627,762
Sequoia Street		Brooks, OR		5/31/2013			1				218				206			5/31/2028			3,127,897				1,451,202
Natividad Road		Salinas, CA		10/21/2013			1				166				166			10/31/2024			8,189,239				3,276,906
20th Avenue		South Haven, MI		11/5/2013			3				151				94			11/4/2018			1,837,778				936,259
Broadway Road		Moorpark, CA		12/16/2013			1				60				60			12/15/2023			2,891,102				1,404,388
Oregon Trail		Echo, OR		12/27/2013			1				1,895				1,640			12/31/2023			13,955,285				6,553,812
East Shelton		Willcox, AZ		12/27/2013			1				1,761				1,320			2/29/2024			7,972,401				3,136,467
Collins Road		Clatskanie, OR		5/30/2014			2				200				157			9/30/2024			2,478,279				1,263,949
Spring Valley		Watsonville, CA		6/13/2014			1				145				110			9/30/2022			5,807,119				2,761,963
McIntosh Road		Dover, FL		6/20/2014			2				94				78			6/30/2017			2,553,622				1,599,600
Naumann Road		Oxnard, CA		7/23/2014			1				68				66			7/31/2017			6,821,216				3,225,412
Sycamore Road		Arvin, CA		7/25/2014			1				326				322			10/31/2024			6,387,629				2,715,151
Wauchula Road		Duette, FL		9/29/2014			1				808				590			9/30/2024			13,521,618				7,949,287
Santa Clara Avenue		Oxnard, CA		10/29/2014			2				333				331			7/31/2017			24,313,506				11,703,235
Dufau Road		Oxnard, CA		11/4/2014			1				65				64			11/3/2017			6,090,913				3,675,000
Espinosa Road		Salinas, CA		1/5/2015			1				331				329			10/31/2016			16,725,452				10,178,000
Parrish Road		Duette, FL		3/10/2015			1				419				211			6/30/2025			3,867,252				2,374,680
Immokalee Exchange		Immokalee, FL		6/25/2015			2				2,678				1,644			6/30/2020			15,762,300				9,360,000
							36				11,467				8,829					$	181,986,814			$	110,461,166

 

(1)

Consists of the initial acquisition price (including the costs allocated to both tangible and intangible assets acquired and liabilities assumed), plus subsequent improvements and other capitalized costs associated with the properties, and adjusted for depreciation and amortization accumulated through June 30, 2015.

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 June 30, 2015, are approximately $1,442,000. As of June 30, 2015, due to the terms of certain of our leases currently in place, the annualized amount of real estate property taxes for which we are responsible is approximately $595,000. However, effective November 1, 2015, the lease structures on two of our farms will convert from modified gross leases to pure, triple-net leases, reducing the portion of the annual real estate property taxes for which we are responsible by approximately $171,000.

 

Real Estate

The following table sets forth the components of our investments in tangible real estate assets as of June 30, 2015, and December 31, 2014:

 

		June 30, 2015				December 31, 2014
Real estate:
Land and land improvements		$	156,085,513			$	122,999,316
Irrigation systems			16,439,003				12,365,514
Buildings and improvements			10,845,136				10,479,301
Horticulture			1,559,339				1,559,340
Other site improvements			1,044,261				968,007
Real estate, at cost			185,973,252				148,371,478
Accumulated depreciation			(5,482,928	)			(4,431,290	)
Real estate, net		$	180,490,324			$	143,940,188

Real estate depreciation expense on these tangible assets was $539,125 and $1,051,639 for the three and six months ended June 30, 2015, respectively, and $296,946 and $556,509 for the three and six months ended June 30, 2014, respectively.

New Real Estate Activity

2015 New Real Estate Activity

During the six months ended June 30, 2015, we acquired four new farms in three separate transactions, which are summarized in the table below.

 

Property Name		Property Location		Acquisition Date		Total Acreage				Number of Farms				Primary Crop(s)		Lease Term		Renewal Options		Total Purchase Price				Acquisition Costs				Annualized Straight-line Rent(1)
Espinosa Road(2)		Salinas, CA		1/5/2015			331				1			Strawberries		1.8 years		None		$	16,905,500			$	87,512 (3	)		$	778,342
Parrish Road		Duette, FL		3/10/2015			419				1			Strawberries		10.3 years		2 (5 years)			3,913,280				101,610 (3	)			251,832
Immokalee Exchange		Immokalee, FL		6/25/2015			2,678				2			Misc.Vegetables		5.0 years		2 (5 years)			15,757,700				148,960 (3	)			960,104
							3,428				4									$	36,576,480			$	338,082			$	1,990,278

 

(1)	Annualized GAAP amount is based on the minimum rental payments required per the lease and includes the amortization of any above-market and below-market lease values recorded.

(2)	In connection with this acquisition, our Adviser earned a finder’s fee of $320,905, which fee was fully credited back to us by our Adviser during the three months ended March 31, 2015. See Note 4, “Related-Party Transactions” for further discussion on this fee.

(3)	Acquisition accounted for as a business combination under ASC 805. As such, all acquisition-related costs were expensed as incurred, other than direct leasing costs, which were capitalized. In aggregate, we incurred $7,225 of direct leasing costs in connection with these acquisitions.

As noted in the table above, all acquisitions during the six months ended June 30, 2015, were accounted for as business combinations in accordance with Accounting Standards Codification (“ASC”) 805, as there was a prior leasing history on the property. As such, the fair value of all assets acquired and liabilities assumed were determined in accordance with ASC 805, and all acquisition-related costs were expensed as incurred, other than those costs that directly related to reviewing or assigning leases we assumed upon acquisition, which were capitalized as part of leasing costs.

We determined the fair value of acquired assets and liabilities assumed related to the properties acquired during the six months ended June 30, 2015, to be as follows:

 

Property Name		Land and Land Improvements				Buildings and Improvements				Irrigation System				In-place Leases				Leasing Costs				Customer Relationships				Total Purchase Price
Espinosa Road		$	15,852,466			$	84,478			$	497,401			$	246,472			$	43,894			$	180,789			$	16,905,500
Parrish Road			2,403,064				42,619				1,299,851				54,405				77,449				35,892				3,913,280
Immokalee Exhange			14,410,840				273,107				515,879				229,406				148,691				179,777				15,757,700
		$	32,666,370			$	400,204			$	2,313,131			$	530,283			$	270,034			$	396,458			$	36,576,480

 

The allocation of the purchase price for the farms acquired during the six months ended June 30, 2015, is preliminary and may change during the measurement period if we obtain new information regarding the assets acquired or liabilities assumed at the acquisition date.

Below is a summary of the total operating revenues and earnings recognized on the properties acquired during the three and six months ended June 30, 2015:

 

				For the three months ended June 30, 2015								For the six months ended June 30, 2015
Property Name		Acquisition Date		Operating Revenues				Earnings(1)				Operating Revenues				Earnings(1)
Espinosa Road		1/5/2015		$	194,585			$	101,813			$	380,802			$	198,871
Parrish Road		3/10/2015			62,958				21,770				77,174				28,949
Immokalee Exchange		6/25/2015			—				(1,223	)			—				(1,223	)
				$	257,543			$	122,360			$	457,976			$	226,597

 

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

2014 New Real Estate Activity

During the six months ended June 30, 2014, we acquired five farms in three separate transactions, which are summarized in the table below.

 

Property Name		Property Location		Acquisition Date		Total Acreage				Number of Farms				Primary Crop(s)		Lease Term		Renewal Options		Total Purchase Price				Acquisition Costs(1)				Annualized Straight-line Rent(2)
Collins Road		Clatskanie, OR		5/30/2014			200				2			Blueberries		10.3 years		3 (5 years each)		$	2,591,333			$	58,441			$	181,172
Spring Valley		Watsonville, CA		6/13/2014			145				1			Strawberries		2.3 years		None			5,900,000				48,915				270,901
McIntosh Road		Dover, FL		6/20/2014			94				2			Strawberries		3.0 years		None			2,666,000				61,190				136,908
							439				5									$	11,157,333			$	168,546			$	588,981

 

(1)

Each of the properties acquired during the six months ended June 30, 2104, were accounted for as a business combination under ASC 805; therefore, the related costs associated with the acquisitions were expensed in the period incurred. However, $7,175 of these acquisition costs were direct costs incurred related to reviewing and assigning leases we assumed upon acquisition; therefore, we capitalized these costs as part of leasing costs. Further, $19,277 of the acquisition costs related to the closing of McIntosh Road was expensed prior to 2014.

(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.

No new debt was issued related to any of the properties acquired during the six months ended June 30, 2014; however, we funded a portion of the acquisitions with a $3.0 million draw on our line of credit with Metropolitan Life Insurance Company (“MetLife”) during the three months ended June 30, 2014.

As noted in the table above, all acquisitions during the six months ended June 30, 2014, were accounted for as business combinations in accordance with ASC 805, as there was a leasing history on the property or a lease in place that we assumed upon acquisition. As such, the fair value of all assets acquired and liabilities assumed were determined in accordance with ASC 805, and all acquisition-related costs were expensed as incurred.

 

We determined the fair value of acquired assets and liabilities assumed related to the properties acquired during the six months ended June 30, 2014, to be as follows:

 

Property Name		Land and Land Improvements				Buildings				Irrigation System				Site Improvements				Horticulture(1)				In-place Leases				Leasing Costs				Customer Relationships				Above (Below)- Market Leases				Total Purchase Price
Collins Road		$	1,252,387			$	555,667			$	—			$	126,719			$	520,993			$	45,086			$	65,685			$	24,796			$	—			$	2,591,333
Spring Valley			5,576,138				5,781				200,855				—				—				83,487				17,498				66,217				(49,976	)			5,900,000
McIntosh Road			1,970,074				30,745				537,254				2,846				—				34,674				16,766				27,966				45,675				2,666,000
		$	8,798,599			$	592,193			$	738,109			$	129,565			$	520,993			$	163,247			$	99,949			$	118,979			$	(4,301	)		$	11,157,333

 

(1)	Horticulture acquired on Collins Road consists of various types of blueberry bushes.

Below is a summary of the total revenue and earnings recognized on the properties acquired during the three and six months ended June 30, 2014:

 

				For the Three and Six Months Ended June 30, 2014
Property Name		Acquisition Date		Rental Revenue				Earnings (1)
Collins Road		5/30/2014		$	16,072			$	8,278
Spring Valley		6/13/2014			13,545				8,335
McIntosh Road		6/20/2014			4,183				951
				$	33,800			$	17,564

Acquired Intangibles and Liabilities

For acquisitions treated as business combinations, the purchase price was allocated to the identifiable intangible assets and liabilities in accordance with ASC 805. No purchase price was allocated to any intangible assets or liabilities related to acquisitions treated as asset acquisitions under ASC 360; however, the direct costs we incurred in connection with originating new leases or reviewing existing leases were capitalized over the lives of the respective leases. The following table shows the weighted-average amortization period, in years, for the intangible assets acquired and liabilities assumed in connection with the new properties acquired during the six months ended June 30, 2015 and 2014:

 

		Weighted-Average
		Amortization Period (in Years)
Intangible Assets		2015				2014
In-place leases			4.1				4.7
Leasing commissions			6.1				7.8
Tenant relationships			9.5				7.3
Above-market lease values			—				3.0
Below-market lease values			—				2.3
All intangible assets			6.3				5.6

 

Pro-Forma Financials

We acquired four farms during the six months ended June 30, 2015, and 11 farms during the year ended December 31, 2014. The following table reflects pro-forma consolidated financial information as if each farm was acquired at the beginning of the previous fiscal year. In addition, pro-forma earnings have been adjusted to assume that acquisition-related costs related to these farms were incurred at the beginning of the previous fiscal year.

 

		For the Six Months Ended June 30,
		2015				2014
		(Unaudited)				(Unaudited)
Operating Data:
Total operating revenue		$	6,032,056			$	5,868,815
Total operating expenses			(3,237,854	)			(3,627,657	)
Other expenses			(1,927,153	)			(2,155,079	)
Net income before income taxes			867,049				86,079
Provision for income taxes			—				(13,246	)
Net income		$	867,049			$	72,833
Share and Per-share Data:
Earnings per share of common stock - basic and diluted		$	0.10			$	0.01
Weighted average common shares outstanding - basic and diluted			8,872,584				6,578,270

The pro-forma consolidated results are prepared for informational purposes only. They are not necessarily indicative of what our consolidated financial condition or results of operations actually would have been assuming the acquisitions had occurred at the beginning of the respective previous periods, nor do they purport to represent our consolidated financial position or results of operations for future periods.

Significant Existing Real Estate Activity

On February 9, 2015, we terminated the lease with the tenant occupying Keysville Road and, on February 10, 2015, entered into a lease with a new tenant to occupy the property. The new lease is scheduled to expire on June 30, 2020, and provides for rent escalations over its life, with minimum, annualized straight-line rental income of $73,749, representing a 7.9% increase over that of the previous lease. In connection with the termination of the previous lease, during the three months ended March 31, 2015, we wrote off an aggregate amount of $32,497 related to deferred rent asset balances and rental income that had been recorded in prior periods.

On February 23, 2015, we renewed the lease with the tenant occupying Spring Valley, which lease was originally set to expire on September 30, 2016. The lease was renewed for an additional six years, through September 30, 2022, and provides for rent escalations over its life, with minimum annualized, straight-line rental income of $327,904, representing a 32.5% increase over that of the previous lease. The new lease also grants the tenant two options to extend the lease for an additional six years each.

On April 8, 2015, the tenant occupying Santa Clara exercised its option to extend the two existing leases, which were originally set to expire on July 31, 2015. The leases were each extended for an additional two years, through July 31, 2017, and provide for annualized, straight-line rental income of $1,302,783, representing a 5.8% increase over that of the previous leases.

On April 13, 2015, we renewed the lease with the tenant occupying Dalton Lane, which was originally set to expire on October 31, 2015. The lease was renewed for an additional five years, through October 31, 2020, and provides for rent escalations over its life, with annualized, straight-line rental income of $163,989, representing a 16.8% increase over that of the previous lease. The new lease also grants the tenant one option to extend the lease for an additional five years.

 

Involuntary Conversions and Property and Casualty Recovery

In April 2014, two separate fires occurred on two of our properties, partially damaging a structure on each property. One occurred on 20^th Avenue, on which the majority of a residential house was destroyed by a fire, and the other occurred on West Gonzales, damaging a portion of the cooling facility on the property. During the year ended December 31, 2014, we wrote down the carrying values of these properties by an aggregate amount of $232,737, and, in accordance with ASC 605, “Revenue Recognition – Gains and Losses,” we also recorded a corresponding property and casualty loss. We recovered $495,700 of insurance proceeds during the year ended December 31, 2014, and, in accordance with ASC 450, “Contingencies,” we recorded these amounts as an offset to the property and casualty loss recorded earlier in the year, resulting in a net recovery.

During the three months ended June 30, 2015, we received an additional $20,809 of insurance proceeds related to the fire on West Gonzales, and such recovery is included in Property and casualty recovery (loss), net on the accompanying Condensed Consolidated Statements of Operations. In addition, subsequent to June 30, 2015, we received the remaining $76,423 of insurance proceeds related to the fire on West Gonzales, which amount will be recognized during the three months ending September 30, 2015. No further recoveries are expected relating to either of these fires.

Repairs are substantially complete on West Gonzales, and, during the three months ended March 31, 2015, we expended $35,648 in repairs and upgrades to the cooler as a result of the fire. Of this amount, $25,682 was capitalized as a real estate addition, and $9,966 was recorded in repairs and maintenance expense, included in Property operating expense on the accompanying Condensed Consolidated Statements of Operations. Repairs on 20^th Avenue are ongoing and are expected to be completed during the three months ending September 30, 2015, at no cost to us.

Intangible Assets and Liabilities

The following table summarizes the carrying value of lease intangibles and the accumulated amortization for each intangible asset or liability class as of June 30, 2015, and December 31, 2014:

 

		June 30, 2015								December 31, 2014
		Lease Intangibles				Accumulated Amortization				Lease Intangibles				Accumulated Amortization
In-place leases		$	1,399,490			$	(548,041	)		$	869,207			$	(263,428	)
Leasing costs			634,041				(145,105	)			357,210				(80,617	)
Tenant relationships			898,128				(169,162	)			501,670				(66,467	)
		$	2,931,659			$	(862,308	)		$	1,728,087			$	(410,512	)
		Deferred Rent Asset (Liability)				Accumulated (Amortization) Accretion				Deferred Rent Asset (Liability)				Accumulated (Amortization) Accretion
Above-market lease values(1)		$	65,203			$	(19,817	)		$	65,203			$	(9,027	)
Below-market lease values(2)			(371,707	)			269,927				(371,707	)			162,194
		$	(306,504	)		$	250,110			$	(306,504	)		$	153,167

 

(1)	Above-market lease values are included as a part of Other assets in the accompanying Condensed Consolidated Balance Sheets, and the related amortization is recorded as a reduction of rental income.

(2)	Below-market lease values are included as a part of Other liabilities in the accompanying Condensed Consolidated Balance Sheets, and the related accretion is recorded as an increase to rental income.

Total amortization expense related to these lease intangible assets was $172,678 and $451,796 for the three and six months ended June 30, 2015, respectively, and $33,540 and $62,008 for the three and six months ended June 30, 2014, respectively.

Total amortization related to above-market lease values was $5,395 and $10,790, for the three and six months ended June 30, 2015, respectively, and $461 for both the three and six months ended June 30, 2014. Total accretion related to below-market lease values was $52,590 and $107,733 for the three and six months ended June 30, 2015, respectively, and $20,980 and $40,874 for the three and six months ended June 30, 2014, respectively.

 

Portfolio Diversification and Concentrations

Diversification

The following table summarizes the geographic locations, by state, of our properties with leases in place as of June 30, 2015 and 2014:

 

		As of and For the Six Months Ended June 30, 2015																				As of and For the Six Months Ended June 30, 2014
State		Number of Farms				Total Acres				% of Total Acres				Rental Revenue				% of Total Rental Revenue				Number of Farms				Total Acres				% of Total Acres				Rental Revenue				% of Total Rental Revenue
California			15				2,722				23.7	%		$	3,712,894				68.7	%			9				1,599				24.8	%		$	2,051,017				67.1	%
Florida			12				4,401				38.4	%			820,834				15.2	%			8				496				7.7	%			240,304				7.9	%
Oregon			4				2,313				20.2	%			583,763				10.8	%			4				2,313				35.9	%			492,121				16.1	%
Arizona			1				1,761				15.4	%			161,935				3.0	%			1				1,761				27.4	%			145,328				4.7	%
Michigan			4				270				2.3	%			123,357				2.3	%			4				270				4.2	%			128,157				4.2	%
			36				11,467				100.0	%		$	5,402,783				100.0	%			26				6,439				100.0	%		$	3,056,927				100.0	%

Concentrations

Credit Risk

Our farms are leased to 30 different third-party tenants. Two of our farms are leased to the same tenant, Dole Food Company (“Dole”). Aggregate rental income attributable to Dole accounted for approximately $1.5 million, or 27.3%, of the rental revenue recorded during the six months ended June 30, 2015, as compared to 46.5% of the total rental revenue recorded during the six months ended June 30, 2014. In addition, a separate tenant accounted for approximately 11.7% of the total rental revenue recorded during the six months ended June 30, 2015. If either tenant fails to make rental payments or elects to terminate their lease, and the land cannot be re-leased on satisfactory terms, there would likely be a material adverse effect on our financial performance and ability to continue operations. No other individual tenant represented greater than 10.0% of the total rental revenue recorded during the six months ended June 30, 2015.

Geographic Risk

15 of our 36 farms owned as of June 30, 2015, are located in California, and 12 farms are located in Florida. As of June 30, 2015, our farmland in California accounted for 2,722 acres, or 23.7% of the total acreage we owned. Furthermore, these farms accounted for approximately $3.7 million, or 68.7%, of the rental revenue recorded during the six months ended June 30, 2015. However, our farms are spread across three of the many different growing regions within California. As of June 30, 2015, our farmland in Florida accounted for 4,401 acres, or 38.4% of the total acreage we owned, and these farms accounted for approximately $0.8 million, or 15.2%, of the rental revenue recorded during the six months ended June 30, 2015. In addition, our farms in Oregon accounted for approximately 10.8% of the rental revenue recorded during the six months ended June 30, 2015. Though we seek to continue to further diversify geographically, as may be desirable or feasible, 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. No other single state accounted for more than 10.0% of the total rental revenue recorded during the six months ended June 30, 2015.

Active Purchase and Sale Agreements

On June 17, 2015, we entered into an agreement to purchase 841 acres of farmland in California (the “841-Acre California Property”) for approximately $18.9 million. The 841-Acre California Property is currently vineyard farmland; however, we expect to develop the property with almond trees if acquired. The prospective purchase of the 841-Acre California Property is expected to close during the three months ending September 30, 2015, subject to customary conditions and termination rights for transactions of this type, including a due diligence inspection period. However, there can be no assurance that this prospective acquisition will be consummated by that time, on the terms currently anticipated, or at all.