NOTE 7. COMMITMENTS AND CONTINGENCIES

Commitments and Contingencies from Business Operations

In connection with the execution of a new lease on Colding Loop in May 2013, we were required to install new wells and irrigation equipment on 121 of the 181 total farmable acres on the property. The installation of the new wells and irrigation equipment on these acres was completed in January 2014 at a total cost of $616,071. In addition, if the tenant notifies us of their intention to fully utilize the remaining 60 acres of the property, we will be required to install new irrigation equipment to cover the additional 60 acres, which is estimated to cost approximately $83,000. However, should we be required to install this additional irrigation equipment, the lease provides for an increase in the amount of rental income to be received. To further increase the water supply on the property, as of December 31, 2014, we had also applied for an additional water permit for the property, for which $129,700 was placed in an escrow account, and which funds are included in Restricted cash on our Consolidated Balance Sheet as of December 31, 2014. Our application for the new water permit was approved on January 27, 2015, and the funds were released on February 12, 2015. We expect to amend the current lease on the property to provide for additional income; however, no amendment has been executed at this time.

Coinciding with the extension of the lease on West Beach that was executed in September 2013, we entered into an agreement with the then-current tenants on the farm for them to provide oversight on certain capital improvements that will serve to upgrade the irrigation system on the property and protect it against future flooding. Pursuant to the agreement with the then-current tenants, we were required to pay them a one-time fee of $46,000 for their oversight role, which was fully paid as of December 31, 2014. The costs of these improvements, which are expected to be completed during the first half of 2015, are being borne by us. As of December 31, 2014, we have expended or accrued approximately $650,862 related to these improvements, and we expect to incur additional costs of approximately $104,000.

As a result of the fire on West Gonzales in April 2014, as of December 31, 2014, we have paid $320,828 for repairs, the full amount of which was reimbursed through insurance proceeds. We have one additional payment of $35,648 remaining to complete the repairs, which we expect to occur during the first half of 2015, and we have received assurance from the insurance company of full recovery for this amount. In addition, we paid $175,956 to further upgrade the insulation inside the cooler, for which $113,371 was reimbursed through insurance proceeds.

In connection with the follow-on lease we executed upon our acquisition of Sycamore Road in July 2014, we are required to make certain irrigation improvements on the property to increase overall water availability by November 1, 2015. Work on these improvements will begin in early 2015, and we expect the total cost to be $750,000 or less. In addition, we will earn additional rent on the total cost of these improvements, up to a total cost of $750,000, commensurate with the annual yields on the farmland.

In connection with the lease we executed upon our acquisition of Wauchula Road in September 2014, we agreed to fund certain irrigation upgrades at the tenant’s option. Currently, 125 of the 590 farm acres on the property are subject to drip irrigation. Pursuant to the lease, the tenant has the option to construct irrigation improvements necessary to convert all or a portion of the drip-irrigated acres to overhead irrigation and be reimbursed by us, up to a maximum aggregate cost of $1.5 million. The lease provides for additional rental income to be earned on the newly-converted acres upon completion of the irrigation improvements. The tenant has informed us of their intention to construct these improvements, and the work is expected to be completed during 2015.

Litigation

We are not currently subject to any material known or threatened litigation.