Real Estate and Lease Intangibles

Our investments in real estate consist of farmland and improvements made to the farmland, consisting of buildings; irrigation and drain systems; coolers, which are storage facilities used for cooling crops; warehouses used for storing, assembling and packing boxes; and horticulture acquired in connection with the land purchase, which currently consists of blueberry bushes and almond, avocado and lemon trees. We record investments in real estate at cost and capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. We expense costs of repairs and maintenance as such costs are incurred. We compute depreciation using the straight-line method over the shorter of the estimated useful life or 39 years for buildings and improvements, the shorter of the estimated useful life or 25 years for horticulture acquired in connection with the purchase of farmland, 5 to 10 years for equipment and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements.

Certain of our acquisitions involve sale-leaseback transactions with newly-originated leases, which we account for as asset acquisitions under Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment.” In the case of an asset acquisition, we will capitalize the transaction costs incurred in connection with the acquisition. Other of our acquisitions involve the acquisition of farmland that is already being operated as rental property and has a lease in place that we assume at the time of acquisition, which we will generally consider to be a business combination under ASC 805, “Business Combinations.” When an acquisition is considered a business combination, ASC 805 requires that the purchase price of real estate be allocated to (i) the tangible assets acquired and liabilities assumed, consisting of land, buildings, improvements, horticulture and long-term debt, and (ii) identifiable intangible assets and liabilities, typically the values of above- and below-market leases, in-place lease values, unamortized lease origination costs and tenant relationships, based in each case on their fair values. ASC 805 also requires that all costs related to the acquisition be expensed as incurred, rather than capitalized into the cost of the acquisition.

Whether our acquisitions are treated as an asset acquisition under ASC 360 or a business combination under ASC 805, the fair value of the purchase price is allocated among the assets acquired and any liabilities assumed. Management’s estimates of fair value are made using methods similar to those used by independent appraisers, such as a sales comparison approach, a cost approach and either an income capitalization approach or discounted cash flow analysis. Factors considered by management in its analysis include an estimate of carrying costs during hypothetical, expected lease-up periods, taking into consideration current market conditions and costs to execute similar leases. We also consider information obtained about each property as a result of our pre-acquisition due diligence and marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired and liabilities assumed. In estimating carrying costs, management also includes lost reimbursement of real estate taxes, insurance and other operating expenses, as well as estimates of lost rental income at market rates during the hypothetical, expected lease-up periods, which typically range from 1 to 24 months, depending on specific local market conditions. Management also estimates costs to execute similar leases, including leasing commissions, legal and other related expenses, to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction. While management believes these estimates to be reasonable based on the information available at the time of acquisition, the preliminary purchase price allocation may be adjusted if management obtains more information regarding the valuations of the assets acquired or liabilities assumed.

We allocate purchase price to the fair value of the tangible assets and liabilities of an acquired property by valuing the property as if it were vacant. The “as-if-vacant” value is allocated to land, buildings, improvements and horticulture, based on management’s determination of the fair values of such assets and liabilities. Real estate depreciation expense on these tangible assets was $2,271,766, $1,384,960 and $631,786 for the years ended December 31, 2015, 2014 and 2013, respectively.

We record above- and below-market lease values for acquired properties based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place lease agreements, and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining, non-cancelable term of the lease. When determining the non-cancelable term of the lease, we evaluate whether fixed-rate or below-market renewal options, if any, should be included.

The fair value of capitalized above-market lease values, included as part of Other assets in the accompanying Consolidated Balance Sheets, is amortized as a reduction of rental income on a straight-line basis over the remaining, non-cancelable terms of the respective leases, including that of any fixed-price or below-market renewal options. As of December 31, 2015 and 2014, the aggregate gross amount of above-market lease values was $19,528 and $65,203, respectively, and the total accumulated amortization related to these values was $7,540 and $9,027, respectively. For the years ended December 31, 2015 and 2014, total amortization related to above-market lease values was $16,934 and $9,027, respectively. We had not recorded any above-market lease values prior to 2014. In addition, in September 2015, we removed $45,675 of above-market lease values due to the termination of a lease that was assumed in connection with a farm acquired in June 2014, and the unamortized balance of this asset, which was $27,254, was immediately charged against rental income. The fair value of capitalized below-market lease values, included as part of Other liabilities in the accompanying Consolidated Balance Sheets, is amortized as an increase to rental income on a straight-line basis over the remaining, non-cancelable terms of the respective leases, including that of any fixed-price or below-market renewal options. As of December 31, 2015 and 2014, the aggregate gross amount of below-market lease values was $49,976 and $371,707, respectively, and the total accumulated amortization related to these values was $19,080 and $162,194, respectively. For the years ended December 31, 2015, 2014 and 2013, total accretion related to below-market lease values was $178,617, $146,534 and $68,617, respectively. During 2015, due to expirations of certain leases, we removed $321,731 of fully-amortized below-market lease values.

In certain instances, we will also record deferred revenue in connection with properties acquired as part of an asset acquisition when additional consideration, such as offering a below-market lease to the seller on a sale-leaseback transaction, is given to the seller of a property when the agreed-upon cash purchase price is significantly below the aggregate fair value of all identifiable tangible assets acquired or liabilities assumed. In transactions such as this, the amount of deferred revenue recorded will be determined in a manner similar to that described above for below-market lease values. The fair value of capitalized deferred revenue, included as part of Other liabilities in the accompanying Consolidated Balance Sheets, is amortized as an increase to rental income on a straight-line basis over the remaining, non-cancelable terms of the respective leases, including that of any fixed-price or below-market renewal options. As of December 31, 2015, the aggregate gross amount of such deferred revenue was $152,603, and the total accumulated amortization was $4,125. For the year ended December 31, 2015, total accretion related to such deferred revenue was $4,125. We had not recorded any deferred revenue in connection with properties acquired as part of an asset acquisition prior to 2015.

The total amount of the remaining intangible assets acquired, which consists of in-place lease values, unamortized lease origination costs and tenant relationship values, are allocated based on management’s evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of our existing business relationships with the tenant, prospects for developing additional business with the tenant, the tenant’s credit quality and our expectations of lease renewals (including those existing under the terms of the current lease agreement), among other factors.

The value of in-place leases and unamortized lease origination costs are amortized to amortization expense on a straight-line basis over the remaining, non-cancelable terms of the respective leases, which currently range from 2 to 10 years. The value of tenant relationship intangibles, which is the benefit to us resulting from the likelihood of an existing tenant renewing its lease at the existing property or entering into a lease at a different property we own, is amortized to amortization expense over the remaining lease term and any anticipated renewal periods in the respective leases.

Should a tenant terminate its lease, the unamortized portion of the above- or below-market lease values, deferred revenue, in-place lease values, lease origination costs and tenant relationship values would be charged to the appropriate income or expense account.

The total amount recorded as amortization expense related to these intangible assets, including amounts charged to amortization expense due to early lease terminations, was $841,726, $350,684 and $90,669 for the years ended December 31, 2015, 2014 and 2013, respectively. In September 2015, we removed $34,155 of intangible assets due to the termination of a lease that was assumed in connection with a farm acquired in June 2014, and the unamortized balance of these assets, which was $20,255, was immediately charged to amortization expense. In September 2014, we removed $46,526 of intangible assets due to the termination of a lease that was assumed in connection with a farm acquired in June 2014, and the unamortized balance of these assets, which was $43,328, was immediately charged to amortization expense.

Tenant Improvements

From time to time, our tenants may pay for improvements on certain of our properties with the ownership of the improvements remaining with us, in which case we will record the cost of such improvements as an asset, tenant improvements, along with a corresponding liability, deferred rent liability, on our balance sheet. When we are determined to be the owner of the tenant improvements, such improvements will be depreciated, and the related deferred rent liability will be amortized as an addition to rental income, each over the shorter of the useful life of the respective improvement or the remaining term of the existing lease in place. If the tenant is determined to be the owner of the tenant improvements, any tenant improvements funded by us are treated as a lease incentive and amortized as a reduction of rental income over the remaining term of the existing lease in place. In determining whether the tenant or the Company is the owner of such improvements, several factors will be considered, including, but not limited to: (i) whether the tenant or landlord retains legal title to the improvements upon expiration of the lease; (ii) whether the lease stipulates how such improvements should be treated; (iii) the uniqueness of the improvements (i.e., whether the improvements were made to meet the specific needs or for the benefit of the tenant leasing the property, or if the improvements generally increased the value or extended the useful life of the asset improved upon); (iv) the expected useful life of the improvements relative to the remaining length of the lease; (v) whether the tenant improvements are expected to have significant residual value at the end of the lease term; and (vi) whether the tenant or the Company constructs or directs construction of the improvements. The determination of who owns the improvements can be subject to significant judgment.

As of December 31, 2015, and December 31, 2014, we recorded aggregate gross tenant improvements of $1,302,009 and $585,947, respectively, and accumulated depreciation related to these improvements was $118,989 and $56,760, respectively. During the years ended December 31, 2015 and 2014, $62,229 and $56,760, respectively, was recorded as both depreciation expense and an addition to rental income. No tenant improvements were recorded prior to 2014. To date, we have not recorded any lease incentives.

Restricted Cash

As of December 31, 2014, restricted cash consisted of $3,041 of accrued interest owed on funds held in escrow related to the acquisition of a property in December 2013 and $129,700 that was earmarked for the purchase of a water permit on one of our farms. These funds were released during the three months ended March 31, 2015, and we did not have any restricted cash as of December 31, 2015.

Other Assets and Other Liabilities

Other assets consist of deferred rent assets, short-term investments, prepaid expenses, deferred offering costs, deposits on potential real estate acquisitions, above-market lease values and other miscellaneous receivables. Other liabilities consist of rents received in advance, deferred rent liabilities, below-market lease values and funds held in escrow.

Other Income

We record non-operating and unusual or infrequent income as Other income on our Consolidated Statements of Operations. Other income recorded for the years ended December 31, 2015, 2014 and 2013 was primarily from interest earned on short-term investments, income tax refunds from the State of California and, for 2015 only, interest patronage received on certain of our long-term borrowings.

Gain on sale of real estate

We recognize gains (or losses) on sales of real estate upon the closing of a transaction (be it an outright sale of a property or the sale of a perpetual, right-of-way easement on all or a portion of a property) with the purchaser. Gains are recognized using the full accrual method when the collectability of the sales price is reasonably assured, we are not obligated to perform additional activities that may be considered significant, the initial investment from the buyer is sufficient and other profit recognition criteria have been satisfied. Gains on sales of real estate may be deferred in whole or in part until the requirements for gain recognition have been met.

Reclassifications

Certain line items on the Consolidated Balance Sheet as of December 31, 2014, and the Consolidated Statements of Operations for the years ended December 31, 2014 and 2013 have been reclassified to conform to the current period’s presentation. These reclassifications had no impact on previously-reported stockholders’ equity or net income (loss).

Comprehensive Income (Loss)

For the years ended December 31, 2015, 2014 and 2013, net income (loss) equaled comprehensive income (loss); therefore, a separate statement of comprehensive income (loss) is not included in the accompanying Consolidated Financial Statements.

Recently-Issued Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”), which amends or supersedes the scope and consolidation guidance under existing GAAP. The new standard changes the way a reporting entity evaluates whether (a) limited partnerships and similar entities should be consolidated, (b) fees paid to decision makers or service providers are variable interests in a variable interest entity (“VIE”), and (c) variable interests in a VIE held by related parties require the reporting entity to consolidate the VIE. ASU 2015-02 also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. ASU 2015-02 is effective for annual and interim reporting periods beginning after December 15, 2015, with early adoption permitted. We intend to adopt this pronouncement during the three months ending March 31, 2016, and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard.

In April 2015, the FASB issued ASU No. 2015-03, “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which simplifies the presentation of debt issuance costs. ASU 2015-03 is effective for annual and interim reporting periods beginning after December 15, 2015, with early adoption permitted. We intend to adopt this pronouncement during the three months ending March 31, 2016, and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard.

In August 2015, the FASB issued ASU No. 2015-15, “Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” (“ASU 2015-15”), which codifies an SEC staff announcement that entities are permitted to defer and present debt issuance costs related to line of credit arrangements as assets. ASU 2015-15 was effective immediately. We have assessed the impact of ASU 2015-15 and identified no material impact on our financial position, results of operations or cash flows from adopting this standard.

In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”), which pertains to entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an adjustment to provisional amounts recognized. The guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Any adjustments should be calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. We intend to adopt this pronouncement during the three months ending March 31, 2016, and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard.