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 46 farms as of March 31, 2016:

 

						Number						Lease
				Date		of		Total		Farm		Expiration		Net Cost
Property Name		Location		Acquired		Farms		Acres		Acres		Date		Basis(1)				Encumbrances(2)
San Andreas		Watsonville, CA		6/16/1997		1		307		238		12/31/2020		$	4,776,750			$	4,816,404
West Gonzales		Oxnard, CA		9/15/1998		1		653		502		6/30/2020			12,142,787				24,504,485
West Beach		Watsonville, CA		1/3/2011		3		196		195		12/31/2023			9,292,113				4,691,842
Dalton Lane		Watsonville, CA		7/7/2011		1		72		70		10/31/2020			2,681,288				1,554,536
Keysville Road		Plant City, FL		10/26/2011		2		61		56		6/30/2020			1,240,187				897,600
Colding Loop		Wimauma, FL		8/9/2012		1		219		181		6/14/2018			3,929,122				2,640,000
Trapnell Road		Plant City, FL		9/12/2012		3		124		110		6/30/2017			3,903,277				2,522,250
38th Avenue		Covert, MI		4/5/2013		1		119		89		4/4/2020			1,265,366				742,391
Sequoia Street		Brooks, OR		5/31/2013		1		218		206		5/31/2028			3,100,817				1,716,191
Natividad Road		Salinas, CA		10/21/2013		1		166		166		10/31/2024			8,846,432				3,875,268
20th Avenue		South Haven, MI		11/5/2013		3		151		94		11/4/2018			1,871,211				1,107,219
Broadway Road		Moorpark, CA		12/16/2013		1		60		46		12/15/2023			2,878,356				1,660,829
Oregon Trail		Echo, OR		12/27/2013		1		1,895		1,640		12/31/2023			13,898,699				7,750,535
East Shelton		Willcox, AZ		12/27/2013		1		1,761		1,320		2/29/2024			7,827,371				3,709,185
Collins Road		Clatskanie, OR		5/30/2014		2		200		157		9/30/2024			2,396,272				1,494,746
Spring Valley		Watsonville, CA		6/13/2014		1		145		110		9/30/2022			5,761,971				3,266,297
McIntosh Road		Dover, FL		6/20/2014		2		94		78		6/30/2019(3)			2,464,544				1,519,620
Naumann Road		Oxnard, CA		7/23/2014		1		68		66		7/31/2017			6,799,261				3,814,369
Sycamore Road		Arvin, CA		7/25/2014		1		326		322		10/31/2024			6,868,186				3,210,936
Wauchula Road		Duette, FL		9/29/2014		1		808		590		9/30/2024			13,713,300				7,639,575
Santa Clara Avenue		Oxnard, CA		10/29/2014		2		333		331		7/31/2017			24,206,436				13,840,241
Dufau Road		Oxnard, CA		11/4/2014		1		65		64		11/3/2017			6,046,279				3,675,000
Espinosa Road		Salinas, CA		1/5/2015		1		331		329		10/31/2016			16,450,268				10,178,000
Parrish Road		Duette, FL		3/10/2015		1		419		412		6/30/2025			4,235,980				2,374,680
Immokalee Exchange		Immokalee, FL		6/25/2015		2		2,678		1,644		6/30/2020			15,585,280				9,360,000
Holt County		Stuart, NE		8/20/2015		1		1,276		1,052		12/31/2018			5,460,180				3,301,000
Rock County		Bassett, NE		8/20/2015		1		1,283		1,049		12/31/2018			5,450,906				3,301,000
Bear Mountain		Arvin, CA		9/3/2015		3		854		841		1/9/2031			22,656,128				8,514,720
Corbitt Road		Immokalee, FL		11/2/2015		1		691		390		12/31/2021			3,800,181				3,760,000
Reagan Road		Willcox, AZ		12/22/2015		1		1,239		875		12/31/2025			5,708,898				3,807,000
Gunbarrel Road		Alamosa, CO		3/3/2016		3		6,191		4,730		2/28/2021			25,637,561				15,531,000
						46		23,003		17,953				$	250,895,407			$	160,776,919

 

(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 accumulated depreciation and amortization. Includes Investments in real estate, net and Lease intangibles, net; plus net above-market lease values included in Other assets; and less net below- market lease values, deferred revenue and unamortized tenant improvements included in Other liabilities, each as shown on the accompanying Condensed Consolidated Balance Sheet.

(2)	Excludes approximately $1.0 million of deferred financing costs related to mortgage notes and bonds payable included in Mortgage notes and bonds payable, net on the accompanying Condensed Consolidated Balance Sheet .

(3)	There are two leases in place on this property, one expiring on June 30, 2017, and the other expiring on June 30, 2019.

 

Real Estate

The following table sets forth the components of our investments in tangible real estate assets as of March 31, 2016, and December 31, 2015:

 

		March 31, 2016				December 31, 2015
Real estate:
Land and land improvements		$	210,667,822			$	192,020,381
Irrigation systems			26,678,519				21,849,508
Buildings			14,623,118				11,184,647
Horticulture			1,490,695				1,490,695
Other improvements			3,957,643				1,872,606
Real estate, at cost			257,417,797				228,417,837
Accumulated depreciation			(7,434,397	)			(6,634,412	)
Real estate, net		$	249,983,400			$	221,783,425

Real estate depreciation expense on these tangible assets was $799,985 and $512,513 for the three months ended March 31, 2016 and 2015, respectively.

Intangible Assets and Liabilities

The following table summarizes the carrying values of lease intangible assets and the related accumulated amortization as of March 31, 2016, and December 31, 2015:

 

		March 31, 2016				December 31, 2015
Lease intangibles:
In-place leases		$	1,607,932			$	1,225,955
Leasing costs			934,245				677,112
Tenant relationships			886,743				886,743
Lease intangibles, at cost			3,428,920				2,789,810
Accumulated amortization			(1,202,994	)			(1,026,269	)
Lease intangibles, net		$	2,225,926			$	1,763,541

Total amortization expense related to these lease intangible assets was $176,725 and $279,119 for the three months ended March 31, 2016 and 2015, respectively.

The following table summarizes the carrying values of certain lease intangible assets or liabilities included in Other assets and Other liabilities, respectively, on the accompanying Condensed Consolidated Balance Sheets and the related accumulated amortization or accretion, respectively, as of March 31, 2016, and December 31, 2015.

 

		As of March 31, 2016								As of December 31, 2015
		Deferred				Accumulated				Deferred				Accumulated
		Rent Asset				(Amortization)				Rent Asset				(Amortization)
Intangible Asset or Liability		(Liability)				Accretion				(Liability)				Accretion
Above-market lease values(1)		$	19,528			$	(9,167	)		$	19,528			$	(7,540	)
Below-market lease values and deferred revenue(2)			(202,579	)			30,536				(202,579	)			23,205
		$	(183,051	)		$	21,369			$	(183,051	)		$	15,665

 

(1)	Above-market lease values are included as 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 and deferred revenue 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.

Total amortization related to above-market lease values and deferred revenue was $1,627 and $5,395 for the three months ended March 31, 2016 and 2015, respectively. Total accretion related to below-market lease values and deferred revenue was $7,331 and $55,143 for the three months ended March 31, 2016 and 2015, respectively.

New Real Estate Activity

Certain acquisitions during the periods presented 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. For acquisitions accounted for as asset acquisitions under ASC 360, all acquisition-related costs were capitalized and included as part of the fair value allocation of the identifiable tangible assets acquired, other than those costs that directly related to originating new leases we executed upon acquisition, which were capitalized as part of leasing costs.

In addition, total consideration for acquisitions may include a combination of cash and equity securities, such as limited partnership interests in the Operating Partnership (“OP Units”). When OP Units are issued in connection with acquisitions, we determine the fair value of the OP Units issued based on the number of units issued multiplied by the closing price of the Company’s common stock on the date of acquisition.

2016 New Real Estate Activity

During the three months ended March 31, 2016, we acquired three new farms in one transaction, which is summarized in the table below.

 

Number

Total

Annualized

Property

Property

Acquisition

Total

of

Primary

Lease

Renewal

Purchase

Acquisition

Straight-line

Long-term

Name

Location

Date

Acreage

Farms

Crop(s)

Term

Options

Price

Costs

Cash Rent(1)

Debt Issued

Gunbarrel Road (2)

Alamosa, CO

3/3/2016

6,191

3

Potatoes

5 years

1 (5 years)

$

25,735,815

$

88,889

(3)

$

1,590,614

$

15,531,000

 

(1)	Annualized straight-line amount is based on the minimum cash rental payments guaranteed under the lease.

(2)	As partial consideration for the acquisition of this property, we issued 745,879 OP Units, constituting an aggregate fair value of approximately $6.5 million as of the acquisition date.

(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 $4,670 of direct leasing costs in connection with this acquisition.

We determined the fair value of assets acquired and liabilities assumed related to the property acquired during the three months ended March 31, 2016, to be as follows:

 

																										Total
		Land and Land								Irrigation				Other				In-place				Leasing				Purchase
Property Name		Improvements				Buildings				Systems				Improvements				Leases				Costs				Price
Gunbarrel Road		$	16,755,814			$	3,438,291			$	2,830,738			$	2,079,102			$	381,977			$	249,893			$	25,735,815

The allocation of the purchase price for the property acquired during the three months ended March 31, 2016, 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 property acquired during the three months ended March 31, 2016:

 

Acquisition

Operating

Property Name

Date

Revenues

Earnings(1)

Gunbarrel Road

3/3/2016

$

123,999

$

21,075

 

(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.

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.

 

								Number								Total								Annualized
Property		Property		Acquisition		Total		of		Primary		Lease		Renewal		Purchase				Acquisition				Straight-line				Long-term
Name		Location		Date		Acreage		Farms		Crop(s)		Term		Options		Price				Costs				Cash Rent(1)				Debt Issued
Espinosa Road(2)		Salinas, CA		1/5/2015		331		1		Strawberries		1.8 years		None		$	16,905,500			$	89,885	(3)		$	778,342			$	10,178,000
Parrish Road		Duette, FL		3/10/2015		419		1		Strawberries		10.3 years		2 (5 years)			3,913,280				103,610	(3)			251,832				2,374,680
						750		2								$	20,818,780			$	193,495			$	1,030,174			$	12,552,680

 

(1)	Annualized straight-line amount is based on the minimum cash rental payments guaranteed under the lease.

(2)	In connection with this acquisition, our Adviser earned a finder’s fee of $320,905, which the Adviser fully credited back to us 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.

We determined the fair value of assets acquired 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				Tenant				Purchase
Property Name		Improvements				Improvements				System				Leases				Costs				Relationships				Price
Espinosa Road		$	15,852,466			$	84,478			$	497,401			$	246,472			$	43,895			$	180,788			$	16,905,500
Parrish Road			2,403,064				42,619				1,299,851				54,405				77,449				35,892				3,913,280
		$	18,255,530			$	127,097			$	1,797,252			$	300,877			$	121,344			$	216,680			$	20,818,780

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

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, 2016 and 2015:

 

		Weighted-Average
		Amortization Period (in Years)
Intangible Assets and Liabilities		2016				2015
In-place leases			5.1				3.4
Leasing costs			5.1				7.2
Tenant relationships			—				4.9
All intangible assets and liabilities			5.1				4.6

Pro-Forma Financials

We acquired three farms during the three months ended March 31, 2016, and two farms during the three months ended March 31, 2015. The following table reflects pro-forma consolidated financial information as if each farm was acquired on January 1 of the respective prior fiscal year. In addition, pro-forma earnings have been adjusted to assume that acquisition-related costs related to these farms were incurred at the beginning of the previous fiscal year.

 

		For the Three Months Ended March 31,
		2016				2015
		(Unaudited)				(Unaudited)
Operating Data:
Total operating revenue		$	3,761,746			$	3,080,488
Net income attributable to the company		$	156,241			$	37,637
Share and Per-share Data:
Earnings per share of common stock – basic and diluted		$	0.01			$	0.00
Weighted-average common shares outstanding – basic and diluted			10,738,820				7,880,328

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 1, 2016, we completed certain irrigation improvements on Sycamore Road to increase overall water availability at a total cost of $993,319. As stipulated in the lease agreement with our tenant, we will earn additional rent on the total cost commensurate with the annual yield on the farmland, which will result in additional straight-line rental income of $53,550 per year throughout the remaining lease term.

 

On February 8, 2016, we renewed the lease with the tenant occupying one of our McIntosh Road farms, which was set to expire on June 30, 2016. The lease was renewed for an additional three years, through June 30, 2019, with annualized, straight-line rental income of $63,000, representing a 17.9% increase over that of the previous lease.

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, 2016 and 2015:

 

		As of and For the Three Months Ended March 31, 2016																		As of and For the Three Months Ended March 31, 2015
		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		18			3,576				15.6	%		$	2,140,166				58.2	%			15				2,722				31.0	%		$	1,839,707				70.2	%
Florida		13			5,094				22.1	%			743,087				20.2	%			10				1,723				19.6	%			349,488				13.3	%
Oregon		4			2,313				10.1	%			292,481				7.9	%			4				2,313				26.3	%			291,537				11.1	%
Arizona		2			3,000				13.0	%			172,461				4.7	%			1				1,761				20.0	%			79,916				3.0	%
Nebraska		2			2,559				11.1	%			144,907				3.9	%			—				—				0.0	%			—				0.0	%
Colorado		3			6,191				26.9	%			124,000				3.4	%			—				—				0.0	%			—				0.0	%
Michigan		4			270				1.2	%			62,372				1.7	%			4				270				3.1	%			61,679				2.4	%
		46			23,003				100.0	%		$	3,679,474				100.0	%			34				8,789				100.0	%		$	2,622,327				100.0	%

Concentrations

Credit Risk

As of March 31, 2016, our farms were leased to 34 different, third-party tenants, with certain tenants leasing more than one farm. Dole Food Company (“Dole”) leases two of our farms, and aggregate rental revenue attributable to Dole accounted for approximately $0.7 million, or 20%, of the rental revenue recorded during the three months ended March 31, 2016. If Dole fails to make rental payments or elects to terminate its lease, and the land cannot be re-leased on satisfactory terms, there could 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, 2016.

Geographic Risk

18 of our 46 farms owned as of March 31, 2016, are located in California, and 13 farms are located in Florida. As of March 31, 2016, our farmland in California accounted for 3,576 acres, or 15.6% of the total acreage we owned. Furthermore, these farms accounted for approximately $2.1 million, or 58.2%, of the rental revenue recorded during the three months ended March 31, 2016. However, these farms are spread across three of the many different growing regions within California. As of March 31, 2016, our farmland in Florida accounted for 5,094 acres, or 22.1% of the total acreage we owned, and these farms accounted for approximately $0.7 million, or 20.2%, of the rental revenue recorded during the three months ended March 31, 2016. 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, 2016.