NOTE 7. COMMITMENTS AND CONTINGENCIES

Operating Obligations

In connection with the follow-on lease we executed upon our acquisition of Sycamore Road in July 2014, we were required to make certain irrigation improvements on the property to increase overall water availability. As of December 31, 2015, these improvements were substantially complete, and we have expended or accrued approximately $933,000 related to the project. Upon finalizing the total cost of these improvements, as stipulated in the lease agreement, we will earn additional rent on the total cost commensurate with the annual yield on the farmland, which we expect to yield approximately $50,000 of additional rental income per year throughout the remaining lease term. We expect to begin earning this additional rental income during the three months ending March 31, 2016.

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. At the time of acquisition, 125 of the 590 farm acres on the property were subject to drip irrigation. Pursuant to the lease, the tenant had 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 also provides for additional rental income to be earned on the newly-converted acres upon completion of the improvements. Construction of these improvements is currently ongoing and is expected to be completed during the three months ended March 31, 2016, at a total cost of approximately $655,000. As of December 31, 2015, approximately $500,000 of these costs have been incurred by the tenant, and, accordingly, we have reflected this amount in the Real estate, at cost and Accounts payable and accrued expense line items on our Consolidated Balance Sheet. Upon completion of the project, we will be required to reimburse the tenant for the total cost of the improvements and will begin earning additional rental income, which we expect to be approximately $90,000 per year throughout the remaining lease term. We expect to begin earning this additional rental income beginning in the three months ending June 30, 2016.

Upon acquiring Espinosa Road in January 2015, we assumed an eminent domain lawsuit brought by the California Department of Transportation (“CalTrans”) against the previous owner of the property for approximately 4.5 acres of nonfarmable land. CalTrans had offered $160,000 to the previous owner as payment for the 4.5 acres; however, this offer was rejected by the previous owner. We intend to accept this offer of $160,000 as fair compensation for the 4.5 nonfarmable acres, and we expect this matter to be settled by September 30, 2016.

In connection with our acquisition of Parrish Road in March 2015, for which we initially paid approximately $3.2 million, we committed to providing $700,000 as additional compensation and $45,000 as reimbursement for other miscellaneous costs, contingent upon the approval by a local water management district of increases in certain water permits on the property. We expect these permits to be approved during the three months ending March 31, 2016. As this amount is expected to be paid in full within three months, carrying value is deemed to approximate its fair value. In addition, we also committed to providing up to an additional $500,000 of capital to the tenant for certain irrigation improvements and upgrades on the property, for which we will earn additional rent on the total amount of capital committed by us, as stipulated in the lease. As of December 31, 2015, these improvements have been completed at a total cost of $528,815, and, accordingly, we have reflected our commitment of $500,000 in each of the Real estate, at cost and Accounts payable and accrued expense line items on our Consolidated Balance Sheets, while the cost overrun of $28,815, which will not require reimbursement by us, was recorded as a tenant improvement. Upon us reimbursing the tenant for our portion of the total costs, we will begin earning additional rental income, which we expect to be approximately $139,000 per year throughout the remaining lease term. We expect to begin earning this additional rental income beginning in the three months ending June 30, 2016.

In connection with the lease we executed upon our acquisition of Bear Mountain in September 2015, we agreed to fund the development of the property into an almond orchard. The development will include the removal of 274 acres of old grape vineyards, the installation of a new irrigation system, including the drilling of three new wells, and the planting of over 800 acres of new almond trees. The project is estimated to cost approximately $7.8 million and is expected to be completed during the three months ending June 30, 2016. As stipulated in the lease, we will earn additional rent on the total cost of the development project commensurate with the yield on the initial acquisition and based on the timing of related cash disbursement made by us. As of December 31, 2015, we have expended or accrued approximately $362,000 related to this project; however, we are unable to estimate the total amount of additional rent to be earned related to this project at this time

Litigation

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