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 March 31, 2014:

 

										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				307				237				12/31/2014			$	4,855,100			$	100,000	(2)
West Gonzales			Oxnard, CA				9/15/1998				1				653				502				6/30/2020				12,339,049				26,784,299
West Beach			Watsonville, CA				1/3/2011				3				196				195				12/31/2023				8,383,970				4,997,773
Dalton Lane			Watsonville, CA				7/7/2011				1				72				70				10/31/2015				2,718,326				1,648,264
Keysville Road			Plant City, FL				10/26/2011				2				59				50				7/1/2016				1,230,758				880,644
Colding Loop			Wimauma, FL				8/9/2012				1				219				181				6/14/2018				3,980,623				2,089,764
Trapnell Road			Plant City, FL				9/12/2012				3				124				110				6/30/2017				4,227,983				2,317,577
38th Avenue			Covert, MI				4/5/2013				1				119				89				4/4/2020				1,343,135				788,813
Sequoia Street			Brooks, OR				5/31/2013				1				218				206				5/31/2028				3,176,000				1,824,864
Natividad Road			Salinas, CA				10/21/2013				1				166				166				10/31/2024				7,456,086				—
20th Avenue			South Haven, MI				11/5/2013				3				151				94				11/4/2018				1,994,669				—
Broadway Road			Moorpark, CA				12/16/2013				1				60				60				12/15/2023				3,001,717				—
Oregon Trail			Echo, OR				12/27/2013				1				1,895				1,640				12/31/2023				14,049,596				—
East Shelton			Willcox, AZ				12/27/2013				1				1,761				1,320				2/29/2024				7,222,449				—
											21				6,000				4,920							$	75,979,461			$	41,431,998

 

(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 March 31, 2014.

(2)	Represents borrowings outstanding on our line of credit as of March 31, 2014, 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 March 31, 2014, and December 31, 2013:

 

		March 31, 2014				December 31, 2013
Real estate:
Land and land improvements		$	63,993,859			$	63,944,307
Buildings and improvements			2,193,604				2,193,255
Coolers			5,388,051				5,293,796
Irrigation system			6,506,836				6,007,845
Horticulture			1,038,974				1,038,850
Real estate, gross			79,121,324				78,478,053
Accumulated depreciation			(3,426,433	)			(3,166,870	)
Real estate, net		$	75,694,891			$	75,311,183

Existing Real Estate Activity

On January 20, 2014, we completed the work for the expansion and upgrade of the cooling facility on Trapnell Road, for which we agreed to incur the costs, up to a maximum of $450,000. We expended a total of $446,108 in connection with this project, and, in accordance with the lease amendment executed on October 21, 2013, we will earn additional rental income on the costs incurred related to this project at an initial annual rate of 8.5%, with prescribed rental escalations provided for in the lease.

 

On March 27, 2014, we executed a lease with a new tenant to occupy West Beach that commences on November 1, 2014, as the lease term with the current tenants on the property will expire on October 31, 2014. The new lease term is for nine years, through December 31, 2023, and provides for prescribed rent escalations over its life, with minimum annualized GAAP straight-line rental income of $540,469, representing a 21% increase over that of the current lease.

Intangible Assets

The following table summarizes the carrying value of intangible assets and the accumulated amortization for each intangible asset class as of March 31, 2014, and December 31, 2013:

 

		March 31, 2014								December 31, 2013
		Lease Intangibles				Accumulated Amortization				Lease Intangibles				Accumulated Amortization
In-place leases		$	397,728			$	(260,098	)		$	397,728			$	(241,697	)
Leasing commissions			148,532				(42,409	)			146,558				(34,727	)
Customer relationships			93,187				(52,370	)			93,187				(49,985	)
		$	639,447			$	(354,877	)		$	637,473			$	(326,409	)

The aggregate amortization expense for the remainder of 2014 and each of the five succeeding fiscal years and thereafter is as follows:

 

Period						Estimated Amortization Expense
For the remaining nine months ending December 31:			2014			$	85,423
For the fiscal years ending December 31:			2015				100,920
			2016				34,948
			2017				23,869
			2018				10,110
			2019				7,150
			Thereafter				22,150
						$	284,570

Lease Expirations

The following table summarizes the lease expirations by year for our properties with leases in place as of March 31, 2014:

 

Year		Number of Expiring Leases				Expiring Leased Acreage				% of Total Acreage				Rental Revenue for the Three Months Ended March 31, 2014				% of Total Rental Revenue
2014(1)			2				307				5.1	%		$	115,574				7.7	%
2015			1				72				1.2	%			35,625				2.4	%
2016			1				59				1.0	%			17,084				1.1	%
2017			1				124				2.1	%			68,548				4.6	%
2018			2				370				6.1	%			63,789				4.3	%
2019			0				0				0.0	%			—				0.0	%
Thereafter			8				5,068				84.5	%			1,195,016				79.9	%
Totals			15				6,000				100.0	%		$	1,495,636				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 the remainder of 2014 and each of the five succeeding fiscal years and thereafter as of March 31, 2014, are as follows:

 

Period						Tenant Lease Payments
For the remaining nine months ending December 31:			2014			$	4,474,612
For the fiscal years ending December 31:			2015				5,425,610
			2016				5,362,569
			2017				5,265,339
			2018				4,935,315
			2019				4,928,252
			Thereafter				12,053,723
						$	42,445,420

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 March 31, 2014, are approximately $447,000.

Portfolio Diversification and Concentrations

Diversification

The following table summarizes the geographic locations of our properties with leases in place as of March 31, 2014 and 2013:

 

		As of and For the Three Months Ended March 31, 2014																				As of and For the Three Months Ended March 31, 2013
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			8				1,454				24.2	%		$	1,013,612				67.8	%			6				1,228				75.3	%		$	795,541				87.0	%
Oregon			2				2,113				35.2	%			238,025				15.9	%			0				0				0.0	%			—				0.0	%
Florida			6				402				6.7	%			116,982				7.8	%			6				402				24.7	%			119,042				13.0	%
Arizona			1				1,761				29.4	%			72,757				4.9	%			0				0				0.0	%			—				0.0	%
Michigan			4				270				4.5	%			54,260				3.6	%			0				0				0.0	%			—				0.0	%
			21				6,000				100.0	%		$	1,495,636				100.0	%			12				1,630				100.0	%		$	914,583				100.0	%

Concentrations

Credit Risk

Two of our farms are leased to a single tenant, Dole Food Company (“Dole”). As of March 31, 2014, 960 acres were leased to Dole, representing 16.0% of the total acreage we owned. Furthermore, these farms accounted for approximately $0.7 million, or 47.2%, of the rental income recorded during the three months ended March 31, 2014. Rental income from Dole accounted for 70.8% of the total rental income recorded during the three months ended March 31, 2013. 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 20.0% of the total rental income recorded during the three months ended March 31, 2014 or 2013.

 

Geographic Risk

8 of our 21 farms owned as of March 31, 2014, are located in California. As of March 31, 2014, our farmland in California accounted for 1,454 acres, or 24.2% of the total acreage we owned. Furthermore, these farms accounted for approximately $1.0 million, or 67.8%, of the rental income recorded during the three months ended March 31, 2014. Rental income from our farms in California accounted for 87.0 % of the total rental income recorded by us during the three months ended March 31, 2013. Our other farms, located in Arizona, Florida, Michigan and Oregon, were purchased between October 2011 and December 2013. Though we seek to continue to further diversify geographically, 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.