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 26 farms as of June 30, 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				12/31/2020			$	4,846,052			$	3,804,117
West Gonzales		Oxnard, CA		9/15/1998			1				653				502				6/30/2020				12,104,670				19,354,256
West Beach		Watsonville, CA		1/3/2011			3				196				195				12/31/2023				8,406,970				3,705,734
Dalton Lane		Watsonville, CA		7/7/2011			1				72				70				10/31/2015				2,712,226				1,227,811
Keysville Road		Plant City, FL		10/26/2011			2				59				50				7/1/2016				1,230,757				—
Colding Loop		Wimauma, FL		8/9/2012			1				219				181				6/14/2018				3,952,995				—
Trapnell Road		Plant City, FL		9/12/2012			3				124				110				6/30/2017				4,187,395				—
38th Avenue		Covert, MI		4/5/2013			1				119				89				4/4/2020				1,502,132				586,359
Sequoia Street		Brooks, OR		5/31/2013			1				218				206				5/31/2028				3,166,337				1,355,490
Natividad Road		Salinas, CA		10/21/2013			1				166				166				10/31/2024				7,436,725				3,060,783
20th Avenue		South Haven, MI		11/5/2013			3				151				94				11/4/2018				1,898,408				874,510
Broadway Road		Moorpark, CA		12/16/2013			1				60				60				12/15/2023				2,979,594				1,311,764
Oregon Trail		Echo, OR		12/27/2013			1				1,895				1,640				12/31/2023				14,030,734				6,121,567
East Shelton		Willcox, AZ		12/27/2013			1				1,761				1,320				2/29/2024				7,839,407				2,929,607
Collins Road		Clatskanie, OR		5/30/2014			2				200				157				9/30/2024				2,590,516				—
Spring Valley		Watsonville, CA		6/13/2014			1				145				110				9/30/2016				5,945,266				—
McIntosh Road		Dover, FL		6/20/2014			2				94				78				6/30/2017				2,618,537				—
							26				6,439				5,265							$	87,448,721			$	44,331,998

 

(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 June 30, 2014.

Real Estate

The following table sets forth the components of our investments in tangible real estate assets as of June 30, 2014, and December 31, 2013:

 

		June 30, 2014				December 31, 2013
Real estate:
Land and land improvements		$	72,814,550			$	63,944,307
Buildings and improvements			3,008,848				2,193,255
Coolers			5,098,330				5,293,796
Irrigation system			7,913,735				6,007,845
Horticulture			1,559,340				1,038,850
Real estate, gross			90,394,803				78,478,053
Accumulated depreciation			(3,587,682	)			(3,166,870	)
Real estate, net		$	86,807,121			$	75,311,183

 

New Real Estate Activity

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 draw on our new line of credit with MetLife.

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 Commissions(2)				Customer Relationships				Above (Below)- Market Leases				Total Acquisition Cost
Collins Road		$	1,252,387			$	555,667			$	—			$	126,719			$	520,993			$	45,086			$	71,085			$	24,796			$	—			$	2,596,733
Spring Valley			5,576,138				5,781				200,855				—				—				83,487				17,998				66,217				(49,976	)			5,900,500
McIntosh Road			1,970,074				30,745				537,254				2,846				—				34,674				18,041				27,966				45,675				2,667,275
		$	8,798,599			$	592,193			$	738,109			$	129,565			$	520,993			$	163,247			$	107,124			$	118,979			$	(4,301	)		$	11,164,508

 

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

(2)

Leasing commissions represent the allocable portion of the purchase price, as well as direct costs that were incurred related to reviewing and assigning leases we assumed upon acquisition. Direct leasing costs incurred in connection with the properties acquired during the six months ended June 30, 2014, totaled $7,175.

 

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

 

(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.

2013 New Real Estate Activity

During the six months ended June 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				Crop Grown		Lease Term		Renewal Options		Total Purchase Price				Acquisition Costs(1)				Annualized Straight- line Rent(2)
38th Avenue			Covert, MI				4/5/2013				119				1			Blueberries		7.0 years		1 (7 years)		$	1,341,000			$	38,200			$	87,286
Sequoia Street			Brooks, OR				5/31/2013				218				1			Blueberries		15.0 years		3 (5 years each)			3,100,000				108,210				193,617
											337				2									$	4,441,000			$	146,410			$	280,903

 

(1)

Each of the properties acquired during the six months ended June 30, 2013, were accounted for as an asset acquisition under ASC 360; therefore, the related costs associated with the acquisitions were capitalized and included as part of the fair value allocation of the tangible assets acquired. In addition, $13,377 of these costs were capitalized as direct leasing costs we incurred as part of these acquisitions.

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

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

As noted in the above table, both acquisitions during the six months ended June 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 six months ended June 30, 2013, to be as follows:

 

Property Name		Land				Building				Drain System				Horticulture(1)				Leasing Commissions (2)				Total Acquisition Cost
38th Avenue		$	647,431			$	42,720			$	240,105			$	447,035			$	3,842			$	1,381,133
Sequoia Street			2,494,911				279,496				424,268				—				9,535				3,208,210
		$	3,142,342			$	322,216			$	664,373			$	447,035			$	13,377			$	4,589,343

 

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

(2)	None of the purchase price was allocated to any intangibles; however, we incurred $13,377 of direct leasing costs in connection with the properties acquired during the six months ended June 30, 2013.

Below is a summary of the total revenue and earnings recognized on the properties acquired during the six months ended June 30, 2013:

 

						For the Three and Six Months Ended June 30, 2013
Property Location		Acquisition Date				Rental Revenue				Earnings (1)
38th Avenue			4/5/2013			$	20,851			$	11,297
Sequoia Street			5/31/2013				16,135				12,058
						$	36,986			$	23,355

 

(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.

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 related to acquisitions treated as asset acquisitions under ASC 360. However, the costs we incurred in connection with setting up new leases or reviewing existing leases on the properties 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 during the six months ended June 30, 2014 and 2013:

 

Intangible Assets and Liabilities		2014				2013
In-place leases			4.7				—
Leasing commissions			7.8				12.7
Customer relationships			7.3				—
Above-market leases			3.0				—
Below-market leases			2.3				—
All intangible assets and liabilities			5.6				12.7

Pro-Forma Financials

We acquired five farms during the six months ended June 30, 2014, and two farms during the six months ended June 30, 2013. 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 Six Months Ended June 30,
		2014				2013
		(Unaudited)				(Unaudited)
Operating Data:
Total operating revenue		$	3,317,410			$	2,277,080
Total operating expenses			(2,268,698	)			(1,299,947	)
Other expenses			(1,052,043	)			(563,454	)
Net income before income taxes			(3,331	)			413,680
Provision for income taxes			(13,246	)			(237,817	)
Net (loss) income		$	(16,577	)		$	175,863
Share and Per Share Data:
(Loss) earnings per share of common stock - basic and diluted		$	—			$	0.03
Weighted average common shares outstanding - basic and diluted			6,530,264				5,967,538

Significant 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 20.7% increase over that of the current lease.

On June 17, 2014, we extended the lease with the tenant occupying San Andreas, which was originally set to expire in December 2014. The lease was extended for an additional six years, through December 2020, and provides for rent escalations over its life, with annualized, GAAP straight-line rental income of $566,592, representing a 31.3% increase over that of the previous lease.

Property and Casualty Losses

During 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. We estimated the carrying value of the portion of the residential house damaged by the fire to be approximately $94,000. The second fire occurred on West Gonzales and damaged a portion of the cooling facility on the property. The carrying value of the portion of the cooler damaged by the fire was estimated to be approximately $156,000. Thus, we have written down the carrying value of these properties on the accompanying Condensed Consolidated Balance Sheets by these respective amounts. Further, in accordance with ASC 605, we have also recorded a corresponding Property and casualty loss line item on the Condensed Consolidated Statements of Operations.

Both assets were insured, either by the tenant or by us, at the time of the fires, and partial recovery of these costs is considered probable. However, we are still in the process of assessing the amount expected to be recovered, as well as the collectability of such amounts; thus, no offset to the loss has been recorded yet.

 

Intangible Assets

The following table summarizes the carrying value of lease intangible assets and the accumulated amortization for each intangible asset class as of June 30, 2014, and December 31, 2013:

 

		June 30, 2014								December 31, 2013
		Lease Intangibles				Accumulated Amortization				Lease Intangibles				Accumulated Amortization
In-place leases		$	560,975			$	(280,852	)		$	397,728			$	(241,697	)
Leasing Costs			256,876				(51,144	)			146,558				(34,727	)
Customer relationships			212,166				(56,421	)			93,187				(49,985	)
		$	1,030,017			$	(388,417	)		$	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 six months ending December 31:			2014			$	113,054
For the fiscal years ending December 31:			2015				212,901
			2016				129,307
			2017				49,328
			2018				22,504
			2019				19,497
			Thereafter				95,009
						$	641,600

Lease Expirations

The following table summarizes the lease expirations by year for our properties with leases in place as of June 30, 2014:

 

Year		Number of Expiring Leases				Expiring Leased Acreage				% of Total Acreage				Rental Revenue for the Six Months Ended June 30, 2014				% of Total Rental Revenue
2014 (1)			1				0				0.0	%		$	15,320				0.5	%
2015			1				72				1.1	%			71,250				2.3	%
2016			2				204				3.2	%			47,713				1.6	%
2017			2				218				3.4	%			143,436				4.7	%
2018			2				370				5.7	%			127,578				4.2	%
2019			0				0				0.0	%			—				0.0	%
Thereafter			10				5,575				86.6	%			2,651,630				86.7	%
Totals			18				6,439				100.0	%		$	3,056,927				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 June 30, 2014, are as follows:

 

Period						Tenant Lease Payments
For the remaining six months ending December 31:			2014			$	3,224,774
For the fiscal years ending December 31:			2015				6,539,854
			2016				6,430,992
			2017				6,005,651
			2018				5,689,606
			2019				5,696,871
			Thereafter				13,471,123
						$	47,058,871

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, 2014, are approximately $550,000.

Portfolio Diversification and Concentrations

Diversification

The following table summarizes the geographic locations of our properties with leases in place as of June 30, 2014 and 2013:

 

		As of and For the Six Months Ended June 30, 2014																				As of and For the Six Months Ended June 30, 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			9				1,599				24.8	%		$	2,051,017				67.1	%			6				1,228				62.4	%		$	1,591,082				85.3	%
Oregon			4				2,313				35.9	%			492,121				16.1	%			1				218				11.1	%			16,135				0.9	%
Florida			8				496				7.7	%			240,304				7.9	%			6				402				20.4	%			236,271				12.7	%
Arizona			1				1,761				27.4	%			145,328				4.7	%			0				0				0.0	%			—				0.0	%
Michigan			4				270				4.2	%			128,157				4.2	%			1				119				6.1	%			20,851				1.1	%
			26				6,439				100.0	%		$	3,056,927				100.0	%			14				1,967				100.0	%		$	1,864,339				100.0	%

Concentrations

Credit Risk

Two of our farms are leased to a single tenant, Dole Food Company (“Dole”). As of June 30, 2014, 960 acres were leased to Dole, representing 14.9% of the total acreage we owned. Furthermore, aggregate rental income attributable to Dole accounted for approximately $1.4 million, or 46.5%, of the rental income recorded during the six months ended June 30, 2014. Rental income from Dole accounted for 69.4% of the total rental income recorded during the six months ended June 30, 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 six months ended June 30, 2014 or 2013.

 

Geographic Risk

9 of our 26 farms owned as of June 30, 2014, are located in California. As of June 30, 2014, our farmland in California accounted for 1,599 acres, or 24.8% of the total acreage we owned. Furthermore, these farms accounted for approximately $2.1 million, or 67.1%, of the rental income recorded during the six months ended June 30, 2014. Rental income from our farms in California accounted for 85.3% of the total rental income recorded by us during the six months ended June 30, 2013. Our other farms, located in Arizona, Florida, Michigan and Oregon, were purchased between October 2011 and June 2014. 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. No other single state accounted for more than 20.0% of the total rental income recorded during the six months ended June 30, 2014 or 2013.