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 34 farms as of March 31, 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			$	4,816,348			$	4,602,937
West Gonzales		Oxnard, CA			9/15/1998				1				653				502				6/30/2020				12,365,304				23,418,424
West Beach		Watsonville, CA			1/3/2011				3				196				195				12/31/2023				9,165,426				4,483,895
Dalton Lane		Watsonville, CA			7/7/2011				1				72				70				11/1/2015				2,693,926				1,485,638
Keysville Road		Plant City, FL			10/26/2011				2				59				56				6/30/2020				1,241,700				—
Colding Loop		Wimauma, FL			8/9/2012				1				219				181				6/14/2018				4,029,515				—
Trapnell Road		Plant City, FL			9/12/2012				3				124				110				6/30/2017				4,065,630				2,655,000
38th Avenue		Covert, MI			4/5/2013				1				119				89				4/4/2020				1,303,310				709,487
Sequoia Street		Brooks, OR			5/31/2013				1				218				206				5/31/2028				3,137,348				1,640,128
Natividad Road		Salinas, CA			10/21/2013				1				166				166				10/31/2024				7,402,759				3,703,512
20th Avenue		South Haven, MI			11/5/2013				3				151				94				11/4/2018				1,856,169				1,058,146
Broadway Road		Moorpark, CA			12/16/2013				1				60				60				12/15/2023				2,913,225				1,587,220
Oregon Trail		Echo, OR			12/27/2013				1				1,895				1,640				12/31/2023				13,974,147				7,407,024
East Shelton		Willcox, AZ			12/27/2013				1				1,761				1,320				2/29/2024				8,099,226				3,544,790
Collins Road		Clatskanie, OR			5/30/2014				2				200				157				9/30/2024				2,505,615				1,428,498
Spring Valley		Watsonville, CA			6/13/2014				1				145				110				9/30/2022				5,822,169				3,121,532
McIntosh Road		Dover, FL			6/20/2014				2				94				78				6/30/2017				2,572,587				1,599,600
Naumann Road		Oxnard, CA			7/23/2014				1				68				66				7/31/2017				6,840,538				3,645,314
Sycamore Road		Arvin, CA			7/25/2014				1				326				322				10/31/2024				6,413,843				3,068,624
Wauchula Road		Duette, FL			9/29/2014				1				808				590				9/30/2024				13,646,802				8,052,525
Santa Clara Avenue		Oxnard, CA			10/29/2014				2				333				331				7/31/2015				24,357,313				13,226,829
Dufau Road		Oxnard, CA			11/4/2014				1				65				64				11/3/2017				6,105,791				3,675,000
Espinosa Road		Salinas, CA			1/5/2015				1				331				329				10/31/2016				16,817,180				10,178,000
Parrish Road		Duette, FL			3/10/2015				1				419				211				6/30/2025				3,908,243				2,374,680
									34				8,789				7,185							$	166,054,114			$	106,666,803

 

(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 March 31, 2015.

Real Estate

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

 

		March 31, 2015				December 31, 2014
Real estate:
Land and land improvements		$	141,476,576			$	122,999,316
Irrigation systems			15,300,699				12,365,514
Buildings and improvements			11,596,388				11,447,308
Horticulture			1,559,340				1,559,340
Real estate, gross			169,933,003				148,371,478
Accumulated depreciation			(4,943,804	)			(4,431,290	)
Real estate, net		$	164,989,199			$	143,940,188

 

New Real Estate Activity

2015 New Real Estate Activity

During the three months ended March 31, 2015, we acquired two new farms in two 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			$	85,805	(3)		$	778,342
Parrish Road		Duette, FL		3/10/2015			419				1			Strawberries		10.3 years		2 (5 years)			3,913,280	(4)			99,990	(3)			251,832
							750				2									$	20,818,780			$	185,795			$	1,030,174

 

(1)	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 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 $2,625 of direct leasing costs in connection with these acquisitions.

(4)	Excludes $700,000 of contingent consideration owed in connection with this acquisition. See Note 7, “Commitments and Contingencies”, for further discussion on this contingency.

As noted in the table above, both acquisitions during the three months ended March 31, 2015, were accounted for as business combinations in accordance with 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 three months ended March 31, 2015, to be as follows:

 

																										Total
		Land and Land				Buildings and				Irrigation				In-place				Leasing				Customer				Acquisition
Property Name		Improvements				Improvements				System				Leases				Costs (1)				Relationships				Cost
Espinosa Road		$	15,852,466			$	84,478			$	497,401			$	246,472			$	44,519			$	180,789			$	16,906,125
Parrish Road			2,403,064				42,619				1,299,851				54,405				79,449				35,892				3,915,280
		$	18,255,530			$	127,097			$	1,797,252			$	300,877			$	123,968			$	216,681			$	20,821,405

 

(1)

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 properties acquired during the three months ended March 31, 2015, that were accounted for as business combinations under ASC 805 totaled $2,625.

The allocation of the purchase price for the farms acquired during the three months ended March 31, 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 months ended March 31, 2015:

 

		Acquisition				Operating
Property Name		Date				Revenues				Earnings(1)
Espinosa Road			1/5/2015			$	186,216			$	97,058
Parrish Road			3/10/2015				14,216				7,179
						$	200,432			$	104,237

 

(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.

 

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 three months ended March 31, 2015:

 

		Amortization
Intangible Assets		Period (in Years)
In-place leases			1.5
Leasing commissions			4.0
Tenant relationships			2.3
All intangible assets			1.8

Pro-Forma Financials

We acquired two farms during the three months ended March 31, 2015. The following table reflects pro-forma consolidated financial information 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 Three Months Ended March 31,
		2015				2014
		(Unaudited)				(Unaudited)
Operating Data:
Total operating revenue		$	2,682,835			$	1,753,180
Total operating expenses			(1,522,103	)			(1,419,129	)
Other expenses			(956,235	)			(523,968	)
Net income before income taxes			204,497				(189,917	)
Provision for income taxes			—				(6,623	)
Net income		$	204,497			$	(196,540	)
Share and Per-share Data:
Earnings per share of common stock - basic and diluted		$	0.03			$	(0.03	)
Weighted average common shares outstanding - basic and diluted			7,753,717				6,530,264

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.

 

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 March 31, 2015, and December 31, 2014:

 

		March 31, 2015								December 31, 2014
		Lease				Accumulated				Lease				Accumulated
		Intangibles				Amortization				Intangibles				Amortization
In-place leases		$	1,170,083			$	(448,741	)		$	869,207			$	(263,428	)
Leasing costs			480,790				(116,619	)			357,210				(80,617	)
Tenant relationships			718,351				(124,270	)			501,670				(66,467	)
		$	2,369,224			$	(689,630	)		$	1,728,087			$	(410,512	)

 

		Deferred				Accumulated				Deferred				Accumulated
		Rent Asset				(Amortization)				Rent Asset				(Amortization)
		(Liability)				Accretion				(Liability)				Accretion
Above-market lease values (1)		$	65,203			$	(14,422	)		$	65,203			$	(9,027	)
Below-market lease values (2)			(371,707	)			217,337				(371,707	)			162,194
		$	(306,504	)		$	202,915			$	(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.

The estimated aggregate amortization expense to be recorded related to in-place leases, leasing costs and tenant relationships and the estimated net impact on rental income from the amortization of above- and below-market lease values for the remainder of 2015 and each of the five succeeding fiscal years and thereafter is as follows:

 

				Estimated				Estimated Net
				Amortization				Increase (Decrease)
Period				Expense				in Rental Revenue
For the remaining nine months ending December 31,		2015		$	615,234			$	107,289
For the fiscal years ending December 31:		2016			478,400				(17,004	)
		2017			188,494				(8,437	)
		2018			68,122				4,577
		2019			65,410				4,577
		2020			58,549				4,577
		Thereafter			205,385				8,010
				$	1,679,594			$	103,589

 

Lease Expirations

The following table summarizes the lease expirations by year for our properties with leases in place as of March 31, 2015:

 

		Number of				Expiring				% of				Rental Revenue for the				% of Total
		Expiring				Leased				Total				Three Months Ended				Rental
Year		Leases				Acreage				Acreage				March 31, 2015				Revenue
2015 (1)			4				405				4.6	%		$	351,496				13.4	%
2016			1				331				3.8	%			186,216				7.1	%
2017			7				351				4.0	%			235,144				9.0	%
2018			3				370				4.2	%			92,121				3.5	%
2019			0				0				0.0	%			—				0.0	%
2020			4				1,138				12.9	%			743,216				28.3	%
Thereafter			11				6,194				70.5	%			1,014,134				38.7	%
Totals			30				8,789				100.0	%		$	2,622,327				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. The remaining three leases originally scheduled to expire in 2015 were renewed subsequent to March 31, 2015. See Note 9, “Subsequent Events,” for further discussion on these lease renewals.

Future Lease Payments

Future operating lease payments from tenants under all non-cancelable leases, excluding tenant reimbursement of expenses, for the remainder of 2015 and each of the five succeeding fiscal years and thereafter as of March 31, 2015, are as follows:

 

						Tenant Lease
Period						Payments
For the remaining nine months ending December 31,			2015			$	5,977,677
For the fiscal years ending December 31:			2016				9,188,301
			2017				8,122,043
			2018				7,525,864
			2019				7,579,161
			2020				6,322,196
			Thereafter				15,653,602
						$	60,368,844

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, 2015, are approximately $1,075,000. As of March 31, 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 $518,000. 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.

 

Portfolio Diversification and Concentrations

Diversification

The following table summarizes the geographic locations, by state, of our properties with leases in place as of March 31, 2015 and 2014:

 

		As of and For the Three Months Ended March 31, 2015																				As of and For the Three Months Ended March 31, 2014
		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			15				2,722				31.0	%		$	1,839,707				70.2	%			8				1,454				24.2	%		$	1,013,612				67.8	%
Oregon			4				2,313				26.3	%			291,537				11.1	%			2				2,113				35.2	%			238,025				15.9	%
Florida			10				1,723				19.6	%			349,488				13.3	%			6				402				6.7	%			116,982				7.8	%
Arizona			1				1,761				20.0	%			79,916				3.0	%			1				1,761				29.4	%			72,757				4.9	%
Michigan			4				270				3.1	%			61,679				2.4	%			4				270				4.5	%			54,260				3.6	%
			34				8,789				100.0	%		$	2,622,327				100.0	%			21				6,000				100.0	%		$	1,495,636				100.0	%

Concentrations

Credit Risk

All of our farms are leased to unrelated, third-party tenants. Two of our farms are leased to the same tenant, Dole Food Company (“Dole”). As of March 31, 2015, 960 acres were leased to Dole, representing 10.9% of the total acreage we owned. Furthermore, aggregate rental income attributable to Dole accounted for approximately $0.7 million, or 28.1%, of the rental revenue recorded during the three months ended March 31, 2015. Rental income from Dole accounted for 47.2% of the total rental revenue recorded during the three months ended March 31, 2014. In addition, a separate tenant accounted for approximately 11.7% and 12.7% of the total rental revenue recorded during the three months ended March 31, 2015 and 2014, respectively. 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 three months ended March 31, 2015 or 2014.

Geographic Risk

15 of our 34 farms owned as of March 31, 2015, are located in California. As of March 31, 2015, our farmland in California accounted for 2,722 acres, or 31.0% of the total acreage we owned. Furthermore, these farms accounted for approximately $1.8 million, or 70.2%, of the rental revenue recorded during the three months ended March 31, 2015. Rental revenue from our farms in California accounted for 67.8% of the total rental income recorded by us during the three months ended March 31, 2014. However, our farms are spread across 3 of the many different growing regions within California. In addition, our farms in Florida accounted for approximately 13.3% of the rental revenue recorded during the three months ended March 31, 2015, and our farms in Oregon accounted for approximately 11.1% and 15.9% of the rental revenue recorded during the three months ended March 31, 2015 and 2014, respectively. 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 three months ended March 31, 2015 or 2014.