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 14 farm properties as of June 30, 2013.

 

Property Name		Location		Date Acquired		Encumbrances				Gross  Cost Basis(1)				Number of Farms				Number of Leases				Farmable Acres				Total Acres				Lease Expiration Date
San Andreas		Watsonville, CA		6/16/1997		$	100,000	(2)		$	4,929,307				1				1				237				306			12/31/2014
West Gonzales		Oxnard, CA		9/15/1998			13,473,792				15,185,928				1				2				501				653			12/31/2013
West Beach		Watsonville, CA		1/3/2011			5,068,800				8,472,073				3				1				195				198			10/31/2013
Dalton Lane		Watsonville, CA		7/7/2011			2,587,853				2,808,000				1				1				70				72			10/31/2015
Keysville Road		Plant City, FL		10/26/2011			1,152,000				1,230,758				2				1				50				59			7/1/2016
Colding Loop		Wimauma, FL		8/9/2012			3,366,720				3,597,421				1				1				181				219			6/14/2018
Trapnell Road		Plant City, FL		9/12/2012			3,840,000				4,000,000				3				1				110				124			6/30/2017
38th Avenue		Covert, MI		4/5/2013			—				1,381,133				1				1				89				119			4/4/2020
Sequoia Street		Brooks, OR		5/31/2013			—				3,201,019				1				1				206				209			5/31/2028
						$	29,589,165			$	44,805,639				14				10				1,639				1,959

 

(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.

(2)	Represents borrowings outstanding on our line of credit with MetLife as of June 30, 2013, under which the San Andreas Farm is pledgd as collateral.

Real Estate

The following table sets forth the components of our investments in tangible real estate assets as of June 30, 2013, and December 31, 2012:

 

		As of June 30, 2013				As of December 31, 2012
Real estate:
Land		$	33,965,058			$	30,828,325
Building			1,640,615				1,311,027
Cooler			4,963,243				4,963,243
Drain system			3,307,591				2,576,373
Horticulture			447,035				—
Real estate, gross			44,323,542				39,678,968
Accumulated depreciation			(2,818,185	)			(2,535,084	)
Real estate, net		$	41,505,357			$	37,143,884

2013 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. There were no properties acquired during the six months ended June 30, 2012.

 

Property Name		Property Location		Acquisition Date				Total Acreage				Number of Farms				Crop Grown		Lease Term		Renewal Options				Total Purchase Price				Acquisition Expenses				Annualized Straight- line Rent(1)
38th Avenue		Covert, MI			4/5/2013				119				1			Blueberries		7 Years			1 (7 years)			$	1,341,000			$	40,133	(2)		$	87,286
Sequoia Street		Brooks, OR			5/31/2013				209				1			Blueberries		15 Years			3 (5 years each)				3,100,000				101,019	(2)			193,617
									328				2											$	4,441,000			$	141,152			$	280,903

 

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

(2)	Transaction accounted for as an asset acquisition instead of a business combination under ASC 805; therefore, related costs associated with the acquisition were capitalized and included as part of the fair value allocation of the identifiable tangible assets acquired.

 

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 three 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 Purchase Price
38th Avenue		$	647,431			$	42,720			$	240,105			$	447,035			$	3,842			$	1,381,133
Sequoia Street			2,489,302				278,868				423,314				—				9,535				3,201,019
		$	3,136,733			$	321,588			$	663,419			$	447,035			$	13,377			$	4,582,152

 

(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; leasing commissions above represent direct costs incurred in connection with originating new leases on the properties.

Acquired Intangibles and Liabilities

As mentioned above, there was no purchase price allocated to any intangible assets related to the two acquisitions made during the six months ended June 30, 2013, as they were both accounted for as asset acquisitions. However, the costs we incurred in connection with setting up new leases on the properties were capitalized over the lives of the respective leases. The weighted-average amortization period, in years, for the intangible assets acquired and liabilities assumed during the six months ended June 30, 2013, is shown in the table below. There were no intangible assets acquired or liabilities assumed during the six months ended June 30, 2012.

 

Intangible Assets and Liabilities		Six Months Ended June 30, 2013
Leasing commissions			13.7
All intangible assets and liabilities			13.7

Existing Real Estate Activity

On May 28, 2013, we executed a lease with a new tenant to occupy Colding Loop, commencing June 15, 2013, as the lease term with the previous tenant on the property expired on June 14, 2013. The new lease term is for five years, through June 2018, and the tenant has one option to extend the lease for an additional five-year term. The lease provides for prescribed rent escalations over the life of the lease, with minimum annualized, GAAP straight-line rental income of $125,400. In connection with this agreement, we are required to install new irrigation equipment on the property, which may cost up to $700,000. See Note 8, “Commitments and Contingencies,” for further discussion on this commitment.

Future Lease Payments

Future operating lease payments from tenants under all non-cancelable leases, excluding tenant reimbursement of expenses, for the remainder of 2013 and each of the five succeeding fiscal years and thereafter as of June 30, 2013, are as follows:

 

Period				Tenant Lease Payments
For the remaining six months ending December 31:		2013		$	1,352,580
For the fiscal years ending December 31:		2014			1,237,200
		2015			791,289
		2016			752,580
		2017			568,986
		2018			280,232
		Thereafter			2,060,236

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, 2013, are approximately $324,000.

Intangible Assets

The following table summarizes the carrying value of intangible assets and the accumulated amortization for each intangible asset class as of June 30, 2013, and December 31, 2012:

 

		June 30, 2013								December 31, 2012
		Lease Intangibles				Accumulated Amortization				Lease Intangibles				Accumulated Amortization
In-place leases		$	286,975			$	(220,717	)		$	286,975			$	(186,843	)
Leasing commissions			101,935				(24,067	)			63,638				(17,627	)
Customer relationships			93,187				(45,214	)			93,187				(31,270	)
		$	482,097			$	(289,998	)		$	443,800			$	(235,740	)

 

The aggregate amortization expense for the remainder of 2013 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:		2013		$	22,852
For the fiscal years ending December 31:		2014			45,787
		2015			43,585
		2016			32,129
		2017			20,519
		2018			7,057
		Thereafter			20,170

Portfolio Diversification and Concentrations

Diversification

The following table summarizes the geographic locations of our properties with leases in place as of June 30, 2013 and 2012:

 

		As of and For the Six Months Ended June 30, 2013																								As of and For the Six Months Ended June 30, 2012
State		Number of Farms				Number of Leases				Total Acres				% of Total Acres				Rental Revenue				% of Total Rental Revenue				Number of Farms				Number of Leases				Total Acres				% of Total Acres				Rental Revenue				% of Total Rental Revenue
California			6				5				1,229				62.7	%		$	1,591,082				85.3	%			6				5				1,229				95.4	%		$	1,591,208				97.9	%
Florida			6				3				402				20.5	%			236,271				12.7	%			2				1				59				4.6	%			34,167				2.1	%
Michigan			1				1				119				6.1	%			20,851				1.1	%			0				0				0				0.0	%			—				0.0	%
Oregon			1				1				209				10.7	%			16,135				0.9	%			0				0				0				0.0	%			—				0.0	%
			14				10				1,959				100.0	%		$	1,864,339				100.0	%			8				6				1,288				100.0	%		$	1,625,375				100.0	%

Concentrations

Credit Risk

Two of our ten leases are with a single tenant, Dole Food Company (“Dole”), which accounted for approximately $1.3 million, or 69.4%, of the rental income recorded during the six months ended June 30, 2013. Rental income from Dole accounted for 79.6% of the total rental income recorded during the six months ended June 30, 2012. 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. However, the parent company of Dole has guaranteed both of the leases. The financial statements of Dole can be found on the U.S. Securities and Exchange Commission’s (the “SEC”) website at www.sec.gov.

Geographic Risk

Six of our fourteen farms are located in California, and these farms accounted for approximately $1.6 million, or 85.3%, of the rental income recorded by us during the six months ended June 30, 2013. Rental income from our farms in California accounted for 97.9% of the total rental income recorded by us during the six months ended June 30, 2012. Our other farms, located in Florida, Michigan and Oregon, were purchased between October 2011 and May 2013. 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.